ADDRESSING SIGNIFICANT PAIN POINTS IN THE AUTOMOTIVE INDUSTRY

The most common inventory management challenges reported in the automotive industry are:

• The unpredictability of slow-moving items and the inventory strategy to cope with it.

• Managing the Product Life Cycle of products with declining sales

• Managing the forecast accuracy of large assortments

• Establishing a reliable base of demand to use for forecasting

• Making fact-based decisions with reliable data during emotional discussions with Sales and Operations

SKU PROLIFERATION

Customers expect suppliers to be able to provide anything and everything at a moment’s notice. In response to this demand, many businesses have exploded their assortment strategy to encompass thousands of different SKUs. The problem is, how much do you know about the items within your ever-expanding assortment?

Do you know which items offer the highest return or which are most important to your customers? Equally, do you know which items are costing you the most money?

While offering millions of different products undoubtedly provides customers with plenty of choices, keeping up with these exploding ranges can prove a constant battle. After all, it’s no secret that, typically, 80% of a business’s turnover is generated by just 20% of the assortment. Consequently, by holding such a large variety, many companies are unnecessarily investing considerable resources into items that offer limited value to the business or the customer. To ensure that assortment decisions are made in line with both the expectations of the customer as well as the demands of the wider industry, businesses must ensure that the assortment strategy is a clear reflection of the business’s goals as well as the expectations of the customer.

LEAD TIME ACCURACY

How does lead time accuracy affect our inventory level? How does it affect your ordering pattern? It can be challenging to identify normal and abnormal lead-times and figure out how to factor abnormal lead-times in. It’s essential to find a balance between both in the long term.

In most situations, the supplier determines the lead times. However, the question that needs to be asked is: how can your suppliers reduce lead-times? In some cases, this may be a case of renegotiating the terms of the supplier contract. However, where this is not possible, more strategic action must be taken. Also, when you are holding far too much inventory with short lead times, it requires a more detailed investigation.  Perhaps there is a rebate opportunity based on order volume or an existing service level agreement with a customer in the place.

Reviewing customer consumption patterns and aligning them with a fulfilment plan will reduce unnecessary demand spikes. Also, carry out a cost-benefit analysis to determine whether any supplier rebate is worth the additional inventory holding costs.

In the automotive industry, there are also seasonal and regional factors in logistics that impact the lead-time. During winter, major companies even make adjustments on replenishment within the organization on account of the weather pattern in Canada. Predicting mid-max and monitoring operations during severe weather has a big say.

A big challenge in determining lead-time is visibility. The communication of information between one spectrum to another has a significant determination on the management of lead-time.

Many different inventory reduction strategies can help deliver impressive results. However, prioritizing excess inventory issues associated with lead times can offer a high starting point for inventory optimization. In addition to highlighting where excess stock exists within your assortment, this analysis can provide invaluable insight into the effectiveness of your buying processes!

SERVICE LEVEL

Do you think that service levels are a powerful instrument that has the potential to impact both your profit margins and overall business performance? Do they really have an influence on your margin? And can a well thought out service level be a valuable asset in and of itself?

Service level is an operational translation of the maximum profit you want to generate.

When defining a service level, a number of components must be taken into consideration including turnover, capacity, customer demand, and cost. First, these components and their relations should be defined on an article level. For example, knowing that the cost component has an exponential character, an appropriate service level at the article level can show benefits upstream by resulting in a large margin boost at an assortment level.

In addition to this, the insight into your assortment’s margin performance can also lead to further opportunities to increase margins over time. The right determination of your service level can also provide insights into how much your internal processes and their capacity can be improved and aligned to your organizational goals.

With regard to the perspective of a service level, we mainly mean the way the cost and turnover components are approached. We should look at the relevant process input for each article. Superficial quantitative criteria like a turnover (ABC analysis) and the cost of safety stock inventory should also be taken into consideration.

However, we have to accept that there are also other, less quantifiable criteria in play. The quantification of the appropriate service level is a company-dependent exercise, in which we should be able to determine the process input per article.