Controlling Inventory Creates More Efficient Company

One measure of the overall efficiency of an organization is its inventory turns. Inventory turns are made up by adding together the inventory needed for the three main cycles: supply cycle, manufacturing cycle, and sales cycle.

The inventory included in these numbers represents raw materials, work in progress, and finished goods.

If a company has high inventories they will have low inventory turns.

A high inventory of raw materials may represent a problem with a supplier, including a long lead time when you reorder materials or batch sizes or minimum orders that are very large.

When a company has a high work in progress inventory it usually signals manufacturing inefficiencies. Some of the common problems include large batch sizes, bottlenecks or constraints, or long or unreliable manufacturing processes.

Marketing and sales inefficiencies are often to blame for high finished goods inventories. Common problems seen in this area include slow demand for the product or an inconsistent demand.

Fighting Process Inefficiencies
What can business management do to compensate for all these inefficiencies along the pipeline? Many companies simply choose to recoup their costs by raising the prices of their products. Even a brief survey of the stock market will illustrate that many companies are willing to settle for less and even making these reduced expectations part of the corporate goals.

A study of a few companies’ financial statements will show you that companies with low inventory turns will have high margins, while those with high inventory turns will have low margins. One example of an industry with quick inventory turnover is supermarkets. They have products that spoil and need to be sold within a couple of days. On the other hand, many high tech companies need to import components from Asia. They will have higher margins but lower inventory turns.

Many companies have decided to raise their standards and change this paradigm in the face of stiff competition which drives down margins. The only way to really compete with lower margins is to have higher inventory turns. Companies that are unable to adapt will soon be out of business. Of course the best scenario is to create a business model where you can have both high inventory turns and high margins.

Great Leadership Companies
The best companies out there are unwilling to lower their standards. They work hard to reduce waste and eliminate defects in their products. These great companies are always working to improve the way that they do business. This constant improvement will almost surely raise their inventory turns and make it harder for their competition to survive.

One great example of an industry leader with this type of attitude is Dell Computers, which has had a consistent focus on their supply chain. One of the most profitable airlines out there is Southwest Airlines, which has made fast turn around of their planes a hallmark of their business model. You are sure to find other examples if you perform a stock screen for companies with higher than average margins and higher than average inventory turns.

True leaders will not allow their companies to settle for less. Great leaders have strong visions and are always on the lookout for successful process improvement programs that include solid strategies and clear goals and objectives.