Inventory Control in the Industrial Sector

Only knowing the inventory carry cost allows you to make inventory strategies and plans. The incremental expense of keeping higher average levels of inventory is known as the inventory carry cost.

You may calculate how much you can save by multiplying the ICC or inventory carry cost percentage by the average inventory reduction.

We discovered that in the industrial sector, sales and marketing personnel, as well as inventory planners, frequently mistakenly believe that the cost of storing inventory is the cost of borrowing money.

It'd be lovely if it were true, but it's never the case. Why is it that the cost of retaining inventory in the industrial goods sector is frequently more than 25% and even up to 33%? So, behind me, you can see the components of the cost:

Cost components include:

Capital Costs
Cost of storage space
Costs of Service
The Costs of Risk

And you must examine each one thoroughly.

The Capital Costs

The borrowing cost of money, the average weighted cost of capital, or the hurdle rate are all options.

The hurdle rate is the rate of return that investors could earn if they put their money somewhere else.

Now you're in the mining, oil, or construction business, where investors anticipate and receive a high return, often considerably more than bank returns.

In general, the company's owners and shareholders will want to employ the hurdle correctly, which is usually around 15%, so you can see where this is headed.

Consider the cost of storage space

These are more difficult to value, and in the industrial sector, we frequently find expenses of more than 10%, and for good cause.

Storage facilities are sometimes required to be connected to service and sales locations, which might result in more locations in higher-cost regions than if the number of locations was solely determined by supply chain issues.

In a way, there is a business strategy purpose for picking a storage facility that is quite expensive.

Costs of service

The service fees could be greater than 2% of the total. What we observe here is that many industrial enterprises lack the most sophisticated and efficient procurement systems and processes, as well as centralized procurement, making placing orders for materials rather costly.

Consider the costs of inventory risk

Because obsolescence charges are included, this bucket of expenditures might be fairly significant. Three or four percent or more isn't out of the ordinary.

It frequently has to do with design revisions, super sessions, and changes in client preferences in industrial organizations.

And these can be difficult to avoid and control. The final result is that inventory carry costs are expected to exceed 25%. But figure out what yours is, share it with the rest of the company, and base your inventory selections on it.

The next issue we frequently encounter in industrial organizations is high product complexity, which is a result of significant regional disparities in the products that markets require.

Why are the tyres necessary in Western Australia so different from those required in New South Wales and then again in Queensland?

There are a variety of causes behind this. Sometimes it's the climate, other times it's the soil or rocks, regional legislation, or just predation that's at work.

The product standard is sometimes determined by the customer's engineers, and each location has its own set of engineers.

However, whatever the reason, there can be a significant amount of product complexity that must be managed in some way.

We've encountered more than a few firms where fewer than 10% of their product lines are offered across all of their state locations, and more than half of their product lines are sold in just one store.

As a result, inventory must be handled regionally; one size does not fit all.

Although the tools, rules, and processes used in the business are likely to be similar across all areas, the same tools, policies, and procedures must be capable of tolerating considerable regional differences.

It also implies that the danger of obsolescence is raised, and you don't receive the advantage of shifting the slow movers to a market where they will sell.

In addition, there are generally a lot of slow movers in industrial enterprises, which might be a problem.

Slow movers might be necessary offerings that are critical to a customer's operations and so must be halted, or they can be lines that move regularly but have a very high value and perhaps a very high margin, or they can just be SLOBS, slow and unimportant to your organization.

What's vital here is to figure out which lines are quick or normal, which are slow but critical, which are sluggish but valuable, and which are slobs.

When you combine this information with an ABC categorization, you can begin to design inventory strategies that are both commercially sound and customer-focused.

What about the tools that will be used? What methods and policies can you utilize to better manage our carry cost, product complexity, geographical variances, and sluggish movers?

There are several, but I'd like to offer these three as some of the most effective, as follows:

1. Classify your inventory at the store level using the standard ABC system as well as the line's criticality.

You can then design strong inventory policies that address availability, different levels for different lines, stock levels, the appropriate level to meet the availability aim, and, most crucially, supply terms.

You can decide what is stocked, what is indent, what is manual order only, what is held, what is direct ship, and so on.

2. Actively control product complexity and the rate of obsolescence that comes with it.

There are a few tools that are particularly important to industrial services; for example, consider developing a program that facilitates product replacement and recognizes line face in and face out.

Also, if you write down the value of the very slow movers, you can substantially reduce it. We've seen goods that can't be recycled but only turn once every generation.

Their true worth could be as little as a dollar. Work out the optimum levels for key slow movers, as well as the best technical solutions to accomplish so. Finally, and perhaps most importantly:

3. Disseminate the plan throughout your supply chain.

If you want it to work, everyone involved in supply and demand, including sales and marketing, engineering and product development, finance, and logistics, must understand and support the plans.

Industrial inventory is different, but not in a bad way; in fact, it's intriguing. It's also a huge cost driver, a major risk issue, and a competitive advantage.

So have a good look around; you might be amazed at what you find and the chances that are accessible to you.