Strategies for moving inventory at the right time, to the right place, and the right partner.

Inventory. It is one of the largest items on the balance sheet for many companies. This is especially true today, with so much manufacturing being done in international locations, such as China, Vietnam, the Philippines, and Mexico, which means that companies must have a lean and effective supply chain strategy that enables just-in-time (JIT) operations to keep inventory at the appropriate levels.

Companies of all sizes struggle with carrying the right amount of inventory and deriving the associated financial benefits, which can include more cost effective warehousing, transportation, labor, and more. This is true even for large businesses that have ample resources to hire dedicated in-house logisticians to focus on precision inventory planning and calculations that guide their inventory planning.

If the complexities of managing global supply chains and inventory levels are difficult even for the largest, most sophisticated of companies, imagine the gauntlet it can present for small- and medium-sized enterprises (SMEs) that do not have the resources to add logisticians and other supply chain and transportation experts to their staffs.

Out of necessity, many SMEs tend to focus as much as possible on their core competencies. SMEs often struggle to come up with the resources for payroll, much less develop intricate supply chain models, optimize inventory levels, and calculate their carrying costs.

One aspect on which SMEs can never afford to lose focus is meeting customer demand and keeping their customers and trade partners happy. This prompts many SMEs to carry excess inventory-often referred to as safety stock-to prevent stock-outs and charge-backs.

However, carrying safety stock can be dangerous because excess inventory on the balance sheet can lead to costs that SMEs and their accountants may not be considering. For instance, carrying more inventory than necessary will likely lead to increased costs for transportation, warehousing, real estate, rent, taxes, and personnel. These not-so-hidden hard costs can add up quickly and increase an SME’s need for capital, such as debt and equity.

Maintaining precise inventory levels helps trim the fat on excess stock levels, but it leaves little room for error. Miscalculations in inventory planning can lead to those dreaded and costly stock-outs and charge-backs that can delay internal production processes and damage relationships with trade partners anxiously awaiting the critical goods they need for their own operations.

This creates a bit of a conundrum for SMEs. Carrying too much inventory can lead to a significant hit on the balance sheet; carrying too little inventory can leave a company without the goods it needs to operate and keep its customers happy.

Striking the balance between too much and too little inventory is what makes a JIT inventory strategy attractive for SMEs.




 

The roots of JIT

When the JIT concept was developed in Japan decades ago, it was a revolutionary new approach to the way companies managed their manufacturing and supply chain processes. The process cuts waste and allows companies to operate more efficiently, rather than holding inventory on the shelves just in case a situation arises in which that inventory is needed. The approach incorporates indicators that signal when it is appropriate to order additional inventory.

Today, companies still implement the JIT strategy to reduce the associated costs of carrying that inventory.

The JIT approach can be an especially beneficial strategy during challenging economic times. A few years ago, when the economy headed into the recession and consumer spending began to decline, many businesses were left with far too much inventory on their retail and warehouse shelves, tying up assets and having to pay for storage costs. This led to costly markdowns, with companies slashing prices to avoid their goods becoming obsolete before being sold and to recoup as much cash as possible.

An effective JIT inventory strategy should also incorporate indicators that alert companies when consumer spending increases and inventory levels need to be increased to accurately meet consumer demand.

For most SMEs, implementing a successful JIT inventory strategy is not something that can be done alone. Often, the optimal and most cost effective approach is to work with a reliable logistics partner that can provide greater control over and visibility into the disposition of their goods along the supply chain.


 

Reliability + Visibility = Flexibility

Global supply chains have the potential for “black holes” where companies can lose the ability to track their in-transit goods, and even brief visibility gaps can make it difficult for SMEs to maintain optimal inventory levels. Thankfully, however, SMEs can work with reliable logistics partners to avoid those pitfalls.

Reliability and visibility go hand-in-hand. Reliable logistics partners must have the tools and technologies to provide complete visibility throughout the supply chain, and allow SMEs the flexibility to swiftly react to changes in consumer demand.

To get an SME’s inventory to the right place at the right time, logistics providers need to be able to combine visibility technology with the ability to move goods via a variety of transportation modes. For instance, using ground, rail, or ocean freight services can move inventory in bulk if inventory planning is relatively steady, but adjusting to air freight may be necessary if demand is ratcheted up quickly and time-sensitive, such as after an unexpected celebrity endorsement of an SME’s product.

Reliability also hinges on experience. Obviously, experience does not always equal more reliability, but a logistics provider with considerable experience working with SMEs in a variety of industries will likely be able to offer the right technology and services to make accurate and effective JIT inventory management a reality.




 

Transportation and logistics options

Obviously, there are many benefits to working with a more reliable logistics partner. However, many cost-conscious SMEs may still be inclined to blindly select the cheapest available transportation provider to handle the movement of their goods.

On the surface, a cheaper transportation provider will reduce transportation costs and lead to higher profits; however, if the low-cost provider does not offer the high level of reliability and visibility necessary to optimize inventory levels, SMEs may be forced to keep more inventory on their books than necessary. This can lead to significant costs of carrying excess inventory and negate the hard-cost savings of the lower-cost transportation provider.

While many SMEs may be concerned about the sticker price when it comes to selecting a logistics provider, the real question to consider is how many days of inventory a logistics partner can remove from their balance sheet with increased control over and visibility into the disposition of their goods in the supply chain.

SMEs can usually avoid the pitfalls of carrying excess inventory by taking a more calculated, full-scope approach to selecting a logistics partner. Low up-front costs are hard for many SMEs to resist, but working with a more reliable logistics partner allows them to realize the benefits of precise JIT inventory planning.

The decision comes down to whether a reliable logistics partner that can provide increased visibility can cost SMEs less in the long run than competitors with lower up-front costs.

Essentially, when it comes to logistics partners, SMEs get what they pay for. The price of a lower cost transportation provider may be attractive at first glance, but a more reliable logistics partner can help SMEs keep inventory levels more fluid to maintain a JIT strategy and consistently measure up to demand, without the need for excise safety stock. This, in turn, can dramatically decrease overall inventory carrying costs, from financing to warehousing to labor to taxes.

The impact of working with a low quality, unreliable logistics partner will manifest itself in SMEs’ financials. Without the visibility and logistics services to enable a lean, seamless, and flexible supply chain, a poor logistics partner will distort an SME’s equity position and return on equity (ROE) by increasing the amount of equity needed to run their operation.




 

Crunching the numbers

Looking beyond the initial cost savings

Optimizing inventory can be a tricky task for SMEs. Even if formulas to forecast demand for its goods are accurate, getting those goods to the right place at the right time presents a challenge. And without the resources to hire in-house logisticians or develop their own transportation networks, SMEs must depend on third-party logistics partners to enable a JIT inventory strategy.

The quality and costs of those logistics partners may vary, but the expectations SMEs have for their partners should remain constant. Partners must be reliable, with the experience and expertise necessary to overcome challenges. Partners must also have complete visibility into the disposition of goods throughout the supply chain, and the flexibility to adjust transportation swiftly to meet customer demand while avoiding carrying costly safety stock.

Many SMEs may fall for a low sticker price for transportation, but a low up-front cost is often negated if SMEs find themselves working with a lower quality partner without the ability to right-size inventory. SMEs may find it difficult to recover from the negative financial impact of carrying too much inventory on the balance sheet or of losing customers due to stock-outs.

When all the various financial statements are connected and both hard and soft costs are considered, it becomes apparent that lower up-front costs for transportation and logistics do not always lead to higher quality performance and long-term cost savings. Working with a reliable logistics partner is the key to inventory optimization and deriving the associated financial benefits, including adding value for SMEs’ shareholders through increasing ROE. wt



Gary Carleton is Managing Director of Global Supply Chain Finance for UPS Capital, the financial services arm of UPS, at www.upscapital.com.