Financial injection from our own warehouse
By Prof. Dr. Götz-Andreas Kemmner
If you need liquidity, you should also take a look at your warehouse. This is precisely where better planning can free up a lot of financial resources. And every euro that can be released also increases creditworthiness. After all, those who have collateral to offer (almost) always get money.
We often hear that banks are no longer granting loans because many companies are unable to provide the necessary collateral. Finally, since Basel II and Basel III, the requirements for banks’ equity ratios have been increased. The financial crisis and stress tests are also contributing to the fact that loans are being granted within a tighter framework. This means that the higher a credit risk is assessed, the higher the collateral the bank has to provide on its side and the higher the interest rates. Despite the low-interest phase, the cost of borrowed capital is therefore not negligible.
An alternative form of financing is therefore always of interest to any manufacturing or trading company with nominal stocks: a cash injection from its own warehouse. This is because enormous financial reserves often lie dormant in high stock levels. And capital should always be used as efficiently as possible. Putting money into unnecessary stocks is therefore the most inefficient use of capital. In many companies, large and small, inventory reduction is also a significant and often criminally underestimated source of liquidity. This should therefore not only be tapped when capital is needed in the short term. Incidentally, this form of financing is also virtually free of charge.
Increasing complexity
The reasons why stock levels are often too high are easy to deduce. Nowadays, companies are confronted with increasingly complex requirements: Product ranges are changing faster and faster, the number of variants is increasing and customers are demanding ever shorter delivery times. At the same time, our supply networks are becoming increasingly branched and complex, making them more difficult to understand. All this often leads to unnecessarily high stocks. And these not only tie up capital but also generate costs. For example, storage costs, insurance, financing, etc. High costs can also arise because companies often have to write off a portion of their inventories, for example because expiration dates have passed or the products can no longer be sold at cost price. You have to store what you buy or produce, possibly externally, and you need infrastructure for this. These and other costs must be added to the financing costs. Inventory assets therefore cost not just four to eight percent debt financing, but between 19 and 30 percent per year – in other words, usurious interest rates!
Stock levels must be reduced
Many companies don’t even realize that their supply chain is completely out of shape. Until at some point the ever-increasing costs threaten financial collapse. Others, on the other hand, look fatalistically at their mountains of stock and do not believe that stocks can be sustainably reduced. However, practice shows time and again that it works. And it’s worth it. By reducing inventories and current assets, companies can not only create liquidity and reduce costs, but also become more successful in business and increase sales. Are you wondering how this is possible with reduced stocks?
Of course, you can’t simply reduce stocks “come hell or high water”. The trick is to reduce inventories in such a way that the supply capability can still be maintained and perhaps even expanded with the reduced inventory. This can be achieved with suitable approaches in practically every sector, whether retail or production, from the luxury industry to pallet production – logistically speaking, it is always about the same issue: improving scheduling processes.
Optimize scheduling processes
For example, fast-moving items can be delivered at shorter intervals. This reduces storage capacity. Products that are rarely in demand are produced on demand and removed directly from the finished goods warehouse. In addition, the logistical decoupling point can be set as early as possible in the value chain through modularization, thus reducing inventories across the entire supply chain. Many logistical variables are also planned from the gut and executed by hand. Filling a pallet space in the truck with slow-moving items just to save freight costs quickly drives up stock levels. So there is a lot to optimize across the entire supply chain.
Method and tool skills
Method and tool skills are required for this. For example, an extended ABC analysis was carried out at a lamp manufacturer. In other words, a classification of the complete range of articles according to
- ABC (economic significance),
- XYZ (regularity of consumption),
- STU (number of customers per item) and
- ELA (life cycle).
These classification features are important parameters for deciding which planning and scheduling parameters should be set for which item. In addition, there was a set of rules that precisely defines which article classes are to be planned and scheduled and how. With such fundamental analyses, existing stocks can be quickly reduced and delivery readiness increased at the same time.
But all such analyses and the measures derived from them are not enough if dispatchers are not also supported by suitable software, because optimal dispatching is not a trivial undertaking.
Good disposition is a complex matter
The complexity of scheduling can be seen from the amount of master data required alone: Depending on the cut of the article, you have to take care of up to 130 logistical parameters. If you imagine this as a mathematical equation, it is easy to understand that you cannot calculate it in your head. However, major mistakes are made when individual parameters are combined for the sake of simplicity. For example, safety stocks for fluctuating demand, safety stocks for fluctuating production times and safety stocks for fluctuating delivery times of the upstream suppliers are mapped in a common safety value. On the other hand, simply accumulating them can only lead to significantly more stock.
A matter for the boss
However, it is also very important to look at the “big picture”: the management must be involved here. It must not delegate inventory reduction downwards, because then it becomes difficult to achieve an overall optimum because each department wants or even has to secure its sinecure: “I was able to purchase with an unbeatable volume discount”, “Customer must be able to get all products on call” or “Was able to significantly minimize set-up times”. All of these statements are important and correct in themselves if you only look at your own department. And these are statements that the management loves. For an overall optimum, however, a compromise must be reached between individual target values. Statements like these are sometimes more accurate: “Ordered in smaller batches, which are more expensive.” “Only gets CZ items with a much longer lead time.” “We often have to retool and the machine has a lower output as a result.” Supply chain optimization requires the willingness of each area of responsibility to make compromises and is therefore a matter for the boss. If the management does not have enough detailed knowledge on the subject of supply chain optimization, it must react accordingly: Either by hiring the appropriate experts or by resorting to external consulting. And remember: the interest you pay on the stock is worth saving. And not just when you need a cash injection!
Further information on this topic can be found here:
- 13 practical tips for reducing stock
- Best practice rules for product portfolio management
- Learning from “pig cycles”
Image rights: Gerd Altmann/pixelio
