I am especially compiling this article for you and your seniors being a supply chain management expert. There was a time when months of inventory (production inputs), and the products of the company (finished goods) were lying in respective stores and were not given a proper treatment. The months turned into years and a lot of material had to be scrapped due to obsolescence and poor quality.
The reasons for this can be many such as lack of sources for supply, lack of proper transportation, lack of buyers, competition, finished products all together not required and replaced by less costlier products.
With the passage of time and increase in competition the norms for inventory control have become much stricter. The months of inventory have come down to weeks and the organizations are more aware of the changes in the industry. The organizations have become innovative and are prepared for cost deduction to face competition. Inventory control (lesser inventory on production inputs and finished goods on average basis) directly adds to the profit and loss account at the bottom on an annual basis as profit.
The industry has reorganized itself and started finding out more sources for supply which go as production inputs. They have also become more conscious to locate or bring the supplier closer to the plant so that the transit time for the same is drastically reduced. The purchase department in supply chain management are instructed to locate competent transporters who have their trucks and good’s vehicle and are able to attach a few more vehicles whenever required from their associates. So the transport contractor is finalised not on the basis of low rates but on the ability to transport more goods and if need be hire more vehicles from their associates. The rates payable to the main contractor are the same as stipulated in the contract irrespective of what he pays to the additional vehicles. This is done with an intention of reducing inventory and consequently the cost.
The above logic is applicable to both engineering and process industries. You may be surprised to note that the inventory levels have come down from few months to few hours for some industries. That is the reason along with inventory I have included logistics in this article. If the transit time is reduced then safety stocks and thereby inventory levels can be kept to a minimum. I have also highlighted the advantages of lesser transit time by significant contributions from transport contractor and source of supply. The out sourced supplier or sub-contractor should also be willing to move closer to the plant so that supplies can be made frequently and as a result the inventories can be kept lower. Normally the volumes the buyer is purchasing and the facilities offered by the buyer’s organisation encourage the source of supply to move closer to the plant and set up shop there.
Above I have mentioned about innovation and low cost. This can be better understood by examples rather than just saying it. Let me first take the construction industry. Ambuja Cements were the first to transport cement in bulk in bags of 25 kgs to mass consumers. This way they were also able to bring down the cost (packing cost), retained the customer, took initiative for frequent and regular supplies, and also passed on some discount to customers (bulk consumers) as ‘Loyalty discount’. Cost came down on account of this.
Then almost all reputed Cement companies started supplying ready to use Cement concrete by specially made vehicles to the project site of the customer. The customer this way had to do away with concrete mixers and was also able to save on inventory, project time and therefore the costs and do away with scrap materials.
I will now come to Textile Industry. Polyester Filament Yarn (PFY) is used to make polyester fabrics. PFY is made from Di Methyl Terephthalate + Mono Ethylene Glycol (MEG) or the latest and efficient method Pure Terephthalic Acid + MEG. Earlier both raw materials DMT and PTA were supplied in powder form in 25 kg bags.
Taking the case of DMT it is now supplied in molten condition thereby eliminating the packing cost and energy saving at buyer’s end. It ultimately resulted in cost saving for both the seller and the buyer. The inventory was maintained at 24 Hrs (molten) with a safety stock of 3 days (solid).
The suppliers for PTA were different and taking a hint from the Cement industry, it was transported in bulk avoiding packing cost and enabling the buyer to keep low inventory including safety stocks with everyday supply. This was also possible because the buyer’s plant was about three hours away from the suppliers plant.
Thus, the marketer and the buyers must explore the possibility of reducing inventory and cost.