Inventory demons, they are a lurking

Everyone–ok, most all supply chain professionals, every productizaton engineer worth her or his calipers, and a fair number of business folks–know that inventory costs money, that one should minimize inventory, or better yet let someone else own it.  But there are some hidden demons lurking beneath the ripple free surface of that pond.

For example, let us think a little about a favorite trick–let someone else own the inventory, aka supplier managed inventory or some such.  This in general seems like the perfect solution except that those who will accept this tend to also want some fine print in their contract basically saying “if the inventory I own for you becomes excess or obsolete then you own it, dude.”  Understandable, and during fair weather this is a pain unfelt.  But come a storm, then besides the root cause problems–market demand downturn or whatever–you now have a sudden, unplanned cash hit to pay for that E&O inventory.  Furthermore, if trouble is over the horizon and said inventory is not on your books, there is a tendency to manage it less aggressively.  As long as it’s someone else’s money / inventory, there is less incentive to think about it / worry about it / take steps to mitigate the said risk.  Out of sight, out of mind.  Until a fell wind blows. And E&O is not the only demon here–similar issues pop up if you have the good fortune to have an upside but your supplier managed inventory is minimized or their lead times are stretched. 

The answer here is not to avoid supplier managed inventory but to remember that you need a partner who is as aggressive–or as unaggressive–as you are. That partner should be on the same page as you in terms of managing inventory and risk, and you need to keep in mind how much you have not only on your own floor, but also in your partner’s warehouse and in their pipe.  Cause that demon may yet rise from fiery depths and boil your idyllic pond into a hellacious plume of toxic steam.

Chuck

1 Comment

  • Rob Olney

    Chuck, I couldn’t agree more with your comments.

    We had a very good competitor here in New England that was not on the same page as his customer. In the end, they had $1M+ in finished goods inventory that was not moving and the interest payment alone severely strained cash. Last year the company closed their doors because the owners didn’t want to spend their retirement savings on the interest payment. Their customer lost a great supplier and the new supplier not only re-negotiated the price, but the inventory levels.

    At my company, ETM Manufacturing, we work our tails off to set-up balanced manufacturing cells that meet the demands of the customer, but sometimes inventory is required. Whenever there is inventory, there is carrying cost and the customer pays for it one way or another. The work Zebulon does will certainly help the entire supply chain.

    I wish you continued success in 2011. – Rob

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