3 Ways Excess Stock Can Put The Brakes On Your Profits
If you’re rolling a new hybrid CUV off the assembly line or chrome-plating exhaust tips for the aftermarket, the automotive industry runs on parts. In 25 years of working with manufacturers and distributors, we know that demand planning and inventory optimization are evergreen topics in the auto industry. Reducing excess stock can be a major speed bump because it requires coordinating management, finance and supply chain teams, and this is double true if you’re ordering from a spreadsheet.
While there are a few specific segments of the auto industry where excess inventory is unavoidable, it’s incredibly rare to find a business where no reduction in stock is possible. Instead, for the vast majority of organizations excess stock is typically involuntary and unwanted. But what are the tell-tale signs that excess stock is putting the brakes on your business’ performance?
Here are three of the most common symptoms of excess stock –
1) There Is A Pile-Up In the Warehouse
For many auto industry companies, excess stock is physically visible. In fact, this can often be the very first thing employees see when they arrive at work. Put simply, the warehouse is not big enough.
Working in the auto industry leaves companies prone to excess stock that can pile up due to the number of and variety parts needed. They are more likely to deal with –
• Large product assortments
• Irregular demand patterns
• Slow moving parts
• High service level requirements
• Product suppression/substitutes
Irregular demand patterns and slow-moving parts require different forecasting and inventory models than used by common inventory and forecasting systems. Additionally, as new model years are released, being able to utilize historical demand appropriately is important.
If allowed to persist, the issue can become so severe that businesses require outside storage or even investment into new facilities. A further consequence is that the warehouse processes appear cluttered and lack serenity.
2) Excess Stock is Guzzling Working Capital
The discomfort of carrying excess stock is often felt by the finance department. One method used by financial managers to analyze inventories is through liquidity, i.e. evaluating the company’s ability to honor obligations using the money currently in the bank plus monies to be received, but not including the sales of current inventory.
Having too much capital tied up in stock often leaves businesses illiquid, forcing them to increase their reliance on debt. If excess stock is hampering liquidity, the financial manager often insists that inventory be reduced.
By the time you’re in this situation, it is often too late to perform a thorough inventory analysis to see which parts should be reduced. Optimizing stock isn’t just lowering levels of inventory, it’s having the right part in the right place at the right time. Reducing stock in a way that doesn’t adhere to an overall inventory strategy ultimately results in quick changes that achieve the short-term effect of lowering stock, but run the risk of lowering customer service through stock-outs.
3) Unsafe Levels of Safety Stock
When looking for the source of excess stock, inventory policies are a good place to check. After all, even if a company hits their sales forecast, poorly aligned policies can still result in crippling excess stock.
The policy associated with safety stock is one of the main causes of excess stock. A good working definition of safety stock is “a level of extra stock that is maintained to mitigate risk of stock-outs due to uncertainties in supply and demand.”
For example, if a company expects to sell 100 units of a specific type of headlight, you can choose to keep 110 units in stock to absorb any fluctuations in demand. These additional 10 units are the safety stock.
The big question is how to calculate safety stock. A typical way is to use the standard deviation of historical demand, usually over the past 12 months. This works well for items with little variation. However, for items with positive /negative growth, seasonal trends, and irregular or sporadic demand this method can be unreliable.
For example, imagine that you have an item that has an average demand of 141 units/ month and a standard deviation of 91. You want a service level of 95% (z = 1.645), and the item’s lead time is 15 days. Using a simple formula for standard deviation, the safety stock would be 106 units.
The flaws in this method become clear when the sales forecast points to 95 units, and the recommended safety stock is calculated to be 106 units, for a total of 201 units. Holding nearly 2 months of demand for an item in inventory isn’t ideal, but many companies do so because they lack the resources to avoid calculating each item separately.
Curbing Excess Stock
Individual inventory analysis of each item can keep safety stock levels where they need to be. However, many auto industry businesses offer thousands of SKUs, so safety stocks are not reviewed often enough. We have seen many businesses that evaluate safety stock every six months or annually, which often leads to costly inefficiencies.
This is one of the main reasons why there are large volumes of auto industry inventory that do not turn.
How can you curb excess stock issues? In the space of a week, an X-Ray Analysis from Slimstock will outline the makeup of your inventory and help you to understand:
• The value of excess stock within your business
• What percentage of this excess could be reduced (and what percentage will inevitably need to be written off)
• What causes the excess stock in the first place
• How to correct these issues in order to reduce the excess stock and prevent it from resurfacing
Slimstock has over 950 customers worldwide, and our inventory experts have performed thousands of detailed analyses for businesses throughout the automotive industry and others.
In 25 years of operation we have achieved a 96% customer retention rate. Let us help you tame your warehouse today!
If your not ready to call us today, check out our article on trimming your excess inventory.
Download this article as a PDF to have these insights available whenever you need them!