10 Advice to Struggling Teams - 10.3 Excessive Inventory

10.3 Excessive Inventory

It is very costly to carry large amounts of inventory (total unit cost is multiplied by a 12% inventory carrying charge). The ideal year-end inventory position is one unit in each product line: one would know that every potential sale was made, and the carry cost would be so small as to be inconsequential. Excessive inventory goes hand-in-hand with less than expected revenue from sales - a double-whammy. Not only did the team experienced unanticipated inventory overhead, it also had substantially less income than planned.

Typical Problems

Overly Optimistic Sales Forecasts: Previous year customer demands (and segment growth rates) are listed on each market segment analysis. Compare the company's sales forecast figures (found in the Decision Audit, see 3.7.3 Decision Summaries) - against segment demand. Were their sales expectations unrealistic? For example, if the segment demand ceiling was 3 million units, and there are six teams with products in the segment, a "fair share" starting point is 500 thousand sales per team. If the company had a better than average product, its sales will be higher. The opposite is true for less than average products. However, companies should understand that every product that tracks within the rough-cut parameters will experience some sales. In other words, customers do not buy all of the best products first, and when it stocks out, then begin buying the second best product, etc. Instead, customers evaluate each product monthly. The best products get more sales than less desirable products, but it is relative. It is possible for less desirable products to stock out, better products carry inventory. For example, say the Andrews team produces 250 thousand of a lousy product in the Capstone® Size segment, and Baldwin produces 750 thousand of a great Size segment product. In this scenario, it would be feasible for Andrews to stock out while Baldwin ended up with 150 thousand units in inventory.

Not Understanding How The Spreadsheets Work: Sometimes participants get confused about the relationship between sales forecasts, production schedule, and production capacity:

• Sales Forecasts, entered in the Marketing decision area only affect proformas, which help participants visualize financial results should the sales projections hold true.
• Production Schedule in the Production decision area is the actual production decision for the year. It should reflect the forecast, subtracting for any inventory left over from the previous year. Participants must enter the number of units they want to produce. In the schedule.
• First Shift Production Capacity is the size of the factory. If the capacity is 500 thousand, companies may produce up to one million units using a first and second shift. However, all units produced above 500 thousand will have a second shift labor cost, which is 150% of first shift labor costs.