For companies inventory management is essential as their exists economic downturns and upturns. These trends in the economy can drastically effect company cost as holding onto inventory can become expensive. Demand is often a difficult thing to get correct. We see many companies looking to sell and reduce inventory as soon as predicted demand for goods do not pan out the way they suspected. Often times the ridding of inventory is a difficult task as the liquidity to react quickly historically is not there. Inventory can be stolen, it can become obsolete and it could be sold but many companies are now starting to believe dedicating money to inventory is a high risk with a high cost. What are the alternatives as the companies need to keep up with the demand by their clients as the cost of a shortage is even greater? Through problem solving initiatives like Six Sigma companies are more fit to react to customer demands. Theses investments in a higher level of inventory management rather than in inventory can be more competitive and eventually get more bang for the buck. Companies, in order to remain competitive, have to reevaluate where their resources are being focused and the use of technology is a resource that would be very beneficial in their future. The Ford Motor Company reportedly saved $600 million by the implementation of a Six Sigma management system. In 1999 Ford started to train their top level management then the officer group, and then the leadership group. After a year and half Ford has reportedly spent $6 million in training their several levels of management in Six Sigma. Ford rates the level of training by way of colored belts like that of a karate dojo:
Green Belt: “They receive one week of training that includes a basic understanding of how Six Sigma works and an overview of the Black Belt tools. Green Belts learn to help Black Belts do projects faster. Green Belt training allows the people who are affected by the Six Sigma projects to be able to continue to monitor and control the improvement and to do their jobs better”
Black Belt: Process full time for two year. The training includes, “define-measure-analyze-improve-control cycle” , “mapping, cause-and-effect diagrams, failure mode and effects analysis, design of experiments, and mistake proofing”
Master Black Belts- Handpicked by upper management; describes duties are.. “My core job responsibility is to help Black Belts with the tools, eliminate road blocks and support them during the various phases of their projects”
Project Champion- Work alongside master black belts and provides them with necessary resources to complete tasks.
This sort of implementation depends on the companies dedication to customer service and by senior leadership. With such a large company as Ford Motor Company making a commitment to new, nimble approaches to inventory management there can be an example for companies of all sizes that there are very good alternatives to the negatives that come with projecting demand the traditional way.
How often do you believe companies tend to under estimate the demand in the market?
Do you feel that smaller companies have the chance to save proportionally the same level of capital a company like Ford did using something like Six Sigma?
3 thoughts on “Inventory too hot to hold”
First off I just found it super interesting how ford classifies each level of training as if they are training in karate. It is also a very smart system that has obviously proven to be successful. To answer the question about how often companies under estimate the demand, I would have to say that they probably tend to over estimate the demand more often than not. Of course every company big and small wants to stay conservative with their estimates, but every company is also very biased towards themselves and probably believes the market will demand their product much more than it actually does. It is incredible that Ford was able to save so much but I believe that it is much harder for smaller companies to save proportionally the same level.
I enjoyed reading this article for many reasons. First off, we just began learning about the importance of inventory management in class. Before this class I had a warped idea of inventory thinking about every company being a huge warehouse that just takes what they need with a never ending supply. The reality of it is that holding inventory is expensive, but having a shortage is just as bad. Losing out on sales because you do not have the inventory to sell upsets customers and makes your business look bad. In a perfect world, you could hold on to inventory forever until it can be sold, but that is just not the case. Inventory management is super important to the existence of a company.
I appreciate the comment that inventory is difficult for small businesses. Since I work out of my house, there are definite limits to the amount of inventory I can store and afford at one time. I have discovered that instead of large wholesale amounts of staples like stabilizers, batting and fabrics, I can use discounts offered by memberships in the American Sewing Guild or American Quilter’s Society and shop when needed items are on sale to avoid over paying for needed materials for the items I make. Like all sewists, I keep a stash of fabrics and threads readily available at all times, but I bill my customers by the 1/4 yard, or bobbin of thread even though I buy items in different quanities than each project may need. This allows me to take advantage of quantity discounts as I can manage, but not have to run to the retail store for every project. Since most of my items are custom made, this also gives the client the choice to choose their own fabrics or use what I have on hand. While this is not ideal, all sales tax is paid at the store and my business becomes a service company and not a retail store, which also changes how I manage the accounting for state sales tax as well. For those who have small companies that sell items at craft fairs or flea markets, do not forget that you can buy your items at a retail store in a business to business purchase using your business id number and then charge sales tax upon sale. I was shocked how many people bought items for resale use and paid sales tax on these items when they purchased supplies and then charged sales tax again upon sale which eats into your profits or drives up the cost of the items you sell.