Like a machine, a business has many parts that perform specific functions. For a business to operate efficiently, the parts must work together in a synchronized fashion. If this doesn’t happen, inefficiency will weaken the business’s ability to be competitive.
Some of the obvious reasons for poor synchronization are a lack of resource integration, poor communication, and the use of inaccurate data. Poor synchronization can also happen because of conflicting performance metrics, which measure how well the different parts of a business are performing.
These performance metrics are often designed without considering their effect on the inventories of a business. For example, marketing may want to test new variations of a product and will want extra inventory with which to test. Some new products may become successful, but many will not and will take up inventory space. Marketing’s performance metric in this case is the introduction of new and profitable product lines.
The sales department will want a large inventory of every product in case they succeed at landing a big new client. Finding new clients is often an unpredictable thing. To cope with this unpredictability, inventory must be well stocked. When the sales department finds new clients and delivers on its promise of quick order fulfillment, it is doing a good job.
If a business has manufacturing operations, a good production manager gets rewarded for high efficiency production runs. To get the cost per unit down, products must be made in large batches. These large batches end up in the inventory. To get these long production runs and to be able to start production at a moment’s notice, the production manager also maintains a large inventory of the required raw materials.
Upper management may wish to minimize large capital expenditures and therefore will prefer to keep old manufacturing machines that are prone to breaking down. This forces the production manager to make extra buffer stock to cover production down time when maintenance has to be done on a broken down machine. On paper at least, upper management looks like it’s doing a good job.
The above examples are all of departments doing a good job according to their own performance metrics. What they are doing in reality is creating large and costly inventories. This problem is the result of each department looking at its own set of objectives without considering their impact on the company as a whole.
Misalignment of metrics is one of the most important and difficult problems to fix. Because the problem is often company wide, the solution must be instituted from the top company levels down.
If you have questions or inquiries about solving your parts inventory management difficulties, please contact Acumen Information Systems.
