Over the years, I have met with many businesses in the automotive aftermarket sector with demand planning and inventory optimisation always being a hot topic for discussion. For many of these businesses, excess stock is both a major speed bump and something which causes headaches for management, finance and supply chain teams alike.
While there are a few specific segments of the automotive aftermarket where excess inventory is an unavoidable part of their business model, there are very few examples of businesses where no reduction in excess inventory could be achieved at all.
In the vast majority of organisations, regardless of the reasons that caused the excess stock, it is typically involuntary and unwanted. But what are the tell-tale signs that excess stock is putting the brakes on your business’ performance?
Based on my experience of working with businesses in the automotive aftermarket, I have highlighted the most frequent ‘symptoms’ that indicate excess stock is present. These are classified into 3 different scenarios that I explore below:
Scenario 1: there is a pile-up in the warehouse
In many automotive aftermarket businesses, excess stock is physically visible. In fact, this is often the very first thing that is noticeable on arrival!
Put simply, the warehouse is not big enough to cope with all of the excess stock and the products end up accumulating in areas which are not really suitable for storing big bulky automotive parts.
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.
Scenario 2: The excess stock is guzzling the working capital
The discomfort of carrying excess stock is often felt by the finance department. Financial managers have several ways to analyse inventories; one of these is liquidity i.e. the ability of the company to honour their obligations with the money that is in the bank plus the monies that are to be received (in essence, not including the sales of the inventory held). In the automotive aftermarket, this can often leave the business in a position where it lacks cash. Consequently, this can force businesses to increase their reliance on debt.
Upon identifying this situation, the financial manager often insists that inventory be reduced in order to free up working capital. However, despite the presence of excess stock, the finance team within an organisation often have no jurisdiction over the stock and are thus reliant on the solutions proposed by the supply chain team.
Scenario 3: Inventory is becoming vintage… or rather, obsolete
One way to understand the current state of inventories is to divide it into 2 parts. The first part is the ‘balance of the past.’ In essence, this is the net difference between planned and actual sales. The second part of the inventories is based on demand forecasts and inventory policies. This is the inventory that is required in order to fulfil future demand.
When looking for the source of excess stock, inventory policies are a good place to start. 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. As highlighted by Wikipedia, 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, i.e. these additional 10 units are the ‘safety stock’.
The big question is how companies calculate the safety stock: crudely speaking, it is determined by 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, irregular and sporadic demand this rule causes many errors.
Imagine that you have an item that behaves like the one on the chart below with an average demand of 141 units (per month) and a standard deviation of 91.
The company wants to have a service level of 95% (z = 1.645) and the lead time is 15 days.
Using a simplified formula available on Wikipedia, the safety stock would be 106 units.
That is, even if the sales forecast points to 95 units, the safety stock can be stated as 106 units. As you can see, this would result in the holding of nearly 2 months of demand for this item.
Understanding the situation by analysing an item separately is simple. Given that many automotive aftermarket businesses offer thousands of SKUs, safety stocks are simply not reviewed often enough. From my experience of working with many automotive aftermarket businesses, safety stock may end up being reviewed every six months or, in some cases, annually.
This is one of the main reasons why there are large volumes of automotive aftermarket inventory that do not turn.
How can you curb excess stock issues? A simple diagnosis could accelerate your performance!
Adopting a good diagnosis can 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.
At the time of writing this article, I have performed over 250 inventory analyses for businesses operating in the automotive aftermarket as well other industries. In the space of a week, an ‘x-ray’ analysis outlining the makeup of the inventory can be performed and provide understanding as to the current situation. This will also provide insight into the main areas that require focus.
As the success of an automotive aftermarket business is often based on their ability to obtain operational excellence; there has never been more focus placed on inventories and the subsequent optimisation. This to me shows that automotive businesses are moving towards greater maturity in the management and integration between the supply chain and finance areas.
How should the automotive aftermarket approach excess stock? Your thoughts...
Excess stock in the automotive aftermarket is something that I frequently come across. What steps have you taken to reduce excess stock? Complete the form below to share your experience.
Fabian Viel and Pascal van den Berg, two Material Managers at Nooteboom, a Dutch manufacturer of trailers for heavy road transport. We asked them to describe an average working day, their main tasks, their experience with Slim4 and their aspirations for the future.
What is your role?
Fabian: "As Material Managers, we are responsible for optimising planning and ensuring that the whole procurement process is as efficient as possible. As part of this role, we both co-ordinate a portfolio of suppliers with which we place orders. Our main focus is to streamline the supply chain of raw materials and spare parts.
Pascal: "Based on the bill of materials of a new trailer, we review each new component and decide which supplier fits best. Our decision is based on a range of factors including product quality, standard lead times and the processes in place. Our aim is to prevent future issues, minimise product defects and shortages that can ultimately disrupt production. "
What does your working day look like?
Fabian: "We have a total of 190,000 different part numbers divided across several categories. The diversity and volume of our article base is too large to evaluate on a daily basis. For this reason, we have to spread it out over several weekdays, with selections based on supplier or product type. On Tuesdays and Thursdays for example, we order tyres, on Friday we order hydraulic spare parts and so on. The advantage of having such a strict weekly schedule in place is that it brings peace to the rest of our organisation as well as to our suppliers. Internally, we can align our own processes while suppliers can better manage their own manufacturing plans.”"We always start the day by exporting the production orders from our Microsoft Dynamics NAV ERP system, to our supply chain planning system, Slim4. From there, the purchase advice for that day’s group of articles are calculated, taking into account service levels, order quantity discounts, lead times and consolidation of future demand."
Pascal: "It's then our task to check the order advice from Slim4. The goal is to minimise this workload by incorporating automated business rules. For example, Slim4 automatically checks if there are any end-of-life products among the orders, or more non-stock items to be ordered than what is strictly necessary for production.
"In addition to this, we are also responsible for managing rush orders and resolving delivery problems. Both our ERP system and Slim4 alert us to these issues. “
What's your main challenge?
Fabian: "In order to ensure that we are able to manufacture our trailers efficiently, the main goal of our work is to ensure that the right materials are always available at the right time. Furthermore, we have to achieve this with the highest possible stock turn.”
Pascal: “The procurement process should be as efficient as possible. Therefore, it is important that we focus our time on optimising the process instead of putting out fires."
What's the impact of Slim4?
Pascal: "Without Slim4, we would have to rely entirely on the purchase plan suggested by the MRP from within our ERP. However, this would cause stock costs to soar.
The MRP system mainly calculates what you need for production and thereby assumes a 100% service level. But for a lot of materials, this is not necessary. For example, if you have a light bulb that you can easily pick up from anywhere so to say, a service level of 80 or 90% is probably sufficient. In Slim4, it is possible to accurately establish the correct trade-off between material requirements and inventory costs”
Fabian: "Without Slim4, planning our materials requirements would be a hugely time consuming process. We would have to retrace and verify all materials every single day. However, Slim4 allows us to focus on just the exceptions.”
What is your ambition for the future?
Pascal: "My challenge is to get to know Slim4 better and to find new ways to optimise the purchasing processes. I have no doubt that achieving this goal will make for an exciting job for years to come.”
Fabian: "The same goes for me: this is my first job so I have a lot to learn here. With regards to Slim4, I want to learn as much as possible as I have no doubt it will provide great potential in the future. My ultimate ambition is to work for a year in China. As part of my study, I’ve already spent half a year in the country and that made a big impression on me."
Din 1983, Drive Products a furnizat echipamente montate pe camioane pentru vehicule comerciale din Canada. Înlocuind instrumentele de planificare existente cu software-ul Slimstock, Slim4, au realizat imediat că inventarul ar putea fi redus în continuare cu 6 milioane de dolari, iar finalul nu este la vedere.
Drive Products este liderul integrator al țării pentru vehicule comerciale. Pe lângă aprovizionarea echipamentelor montate pe camioane, compania este specializată în servicii de instalare și reparații. Inventarul conține 412.600 SKU-uri, care include orice, de la plugurile de zăpadă până la soluții de transport în vrac, remorcare și recuperare, până la echipamentele pentru camioane. Explică Mike King, managerul corporativ al operațiunilor lanțului de furnizare; „Dacă poate fi atașat la un camion, Drive Products îl vinde cel mai probabil.”
Slimstock înlocuiește competiția
Datorită mai multor achiziții, sortimentul de inventar de la Drive Products a crescut rapid, bazându-se pe suport pentru software-ul lor învechit transformând managementul stocurilor într-o sarcină complexă. Pentru a scăpa de excesul de inventar și a-l reechilibra în rețeaua lor de distribuție, Drive Products a decis să integreze Slimstock, Slim4 în ERP-ul lor Great Plains și să înlocuiască soluția de planificare învechită. „Soluția noastră anterioară a fost destul de greoaie de folosit”, spune King. „Am avut în vedere modernizarea cu același furnizor, dar experiența cu sprijinul lor nu a fost pozitivă. Înlocuirea acestuia cu software-ul Slimstock a fost o alegere bună pentru noi. Depășește cu mult viteza, precizia și performanța soluției noastre anterioare. Suportul de la Slimstock a fost remarcabil și în comparație. ”Implementarea s-a finalizat bine sub buget și Slim4 a evidențiat imediat 2 milioane de dolari în exces pentru recomandările de achiziție din soluția de planificare anterioară.
O perspectivă mai clară în cererea neregulată
Vremea din Canada are o influență extraordinară asupra vânzărilor Drive Products. Slim4 recunoaște automat sezonalitatea și se bazează pe predicții; vă putem asigura vânzările că produsele potrivite vor fi disponibile la nevoie. „Datorită unei prognoze mai stabile, avem mai puține expedieri scurte de la furnizori”, spune King. El adaugă, „Slim4 izolează rapid excepțiile și ne avertizează asupra tendințelor. Acum am o perspectivă mult mai clară asupra cererii neregulate. Slim4 oferă o vizibilitate mai mare decât am avut până acum. ”
Inventarul a fost redus cu mai mult de 6 milioane $
Anterior, articolele A constituiau o mare parte din stocul de produse Drive, dar numai de 4,8 ori pe an. Cu ajutorul Slim4, valoarea inventarului a fost redusă cu aproape 6 milioane de dolari, iar volumul de acțiuni s-a dublat pe multe articole. „Reducerea inventarului este la fel de ușoară ca a trage câteva pârghii acum”, spune King. El adauga; „Am mai centralizat procesul de planificare, care a îmbunătățit drastic eficiența. Anterior ne-au luat trei zile pentru a determina cerințele de achiziție pentru o singură locație. Acum este nevoie de o zi pentru a cumpăra întreaga companie și pot gestiona totul dintr-o singură locație ”, explică King. „Acum am mai mult control asupra stocului. Putem vedea unde ne-am terminat, inventarierea reechilibrării pentru începutul sezonului și oprirea achizițiilor din sezon înainte să ne afecteze bilanțul. ”King prevede un viitor luminos. „Nu am prea multe minute libere în ziua mea”, spune regele; „Dar Slim4 este rapid. Este o soluție eficientă care a influențat pozitiv performanța activității noastre. "
Extreme volatility in demand, spiralling product ranges and increasingly lengthy lead times were all hot topics at this year’s Automechanika Birmingham event. However, in today’s uncertain business environment, maintaining the consistently high levels of availability that consumers demand, was undoubtedly seen as one of the most pressing challenges businesses across the automotive industry face.
The automotive industry is cut-throat at the best of times. However, according to the Guardian, automotive businesses are now at a tipping point. With an evolving political climate as a result of Brexit, rapid advancement of new technologies and a huge shift in car ownership, how can businesses attain the level of supply chain flexibility required to overcome the speed bumps that lie ahead?
Richard Evans, Managing Director at Slimstock UK, explains: “To keep up with ever-evolving customer demand and stay ahead of the competition, it is vital that businesses take steps to improve the efficiency of their supply chain operations now.”
Through the strategic re-alignment of their supply chain, automotive businesses can maximise availability, increase margins and mitigate risk: all whilst injecting invaluable working capital back into the business. Ultimately, through putting in place the right tools, technologies and knowledge, businesses can help their organisation action operational excellence.
With customers including some of the UK’s leading automotive brands such as FPS, Yuasa and Alexander Dennis, Slimstock has helped countless businesses to provide their customers with an industry-leading service level. “Given the speed at which the automotive industry is moving forward, now is the time business leaders must drive performance improvements across their supply chain,” concludes Richard Evans.
Register for our free inventory health check today and discover how you could reduce inventory levels, increase service levels and ultimately, improve customer satisfaction!