With an inventory turnover rate of 0.65, the 40 people sized company was below the average of 1.2 in the industry. This meant the firm was holding twice as much cash in inventory compared to its competitors, which led to serious negative impacts on their cash flow. With no dedicated procurement function, the Director of Production and his team juggled between production challenges and procurement needs.
Their efforts on keeping the production running with the larger inventory were working well - the last shortage happened 7 months ago. However, the strategy was hiding a multitude of problems that started to lead to an entire set of problems.
- Operational Cash Flow: With an inventory turnover rate almost twice as slow, the firm relied heavily on short term loans and other costly financial solutions to keep their operations running.
- Long lead time: With no visibility on their forecast and no communications during extended periods - burning through the overload of inventory - suppliers were not able to plan accordingly and could only propose long lead times due to machine capacity booked ahead of time.
- Higher Cost and Minimum Order Quantities: The inventory translated to sporadic demands that gave suppliers more leverage to request for price increases and higher MOQ that turned the situation into a never-ending vicious cycle.
Having to account for additional cost due to stranded cash flow and poor supplier communication made the firm less competitive on their bidding activities and resulted in a loss of market share and negative experiences on client relationships.
"It felt like a never-ending cycle - large inventory led to longer ordering cycles which led to larger MOQs which built even larger inventory..." mentioned Dave the Director of Production.
SiRP allowed the forecast and inventory levels to be communicated more frequently to the suppliers. Every time there was a change in the forecast or delivery dates, the suppliers were notified. The enhanced visibility led to increased engagement from the suppliers which allowed planning for production schedules ahead of time and in return shorten the lead time and MOQs. The results were apparent, a 30% inventory reduction in just 4 months.
Furthermore, the production team, not occupied with never-ending email communications could focus on other improvement initiatives which further increased work satisfaction.
"I was really happy with the SiRP team, there is better energy in the team and my guys are now focusing on the right things", says Dave at the end of the interview.