As profit margins tighten and businesses continue to search for ways to increase cash flow and mitigate risks, reducing stockholding is an increasingly attractive option for companies. One of the main issues raised by this strategy is the lack of flexibility it affords businesses faced with high, seasonal demand for products.
Costs of Seasonal Stock
Although there are many potential savings associated with reduced stockholding, manufacturers are intent on keeping their factories as lean as possible. This tactic often entails a sustained level of production throughout the year and calls for the maintenance of high levels of product. These opposing strategies need to be balanced to ensure customer demand is satisfied when faced with high, seasonal demand.
Traditionally, lean manufacturing businesses have accepted the need to build up stock prior to the seasonal peak in demand. This approach requires the use of expensive warehouse space and also ties up substantial amounts of working capital. An alternative method is to find cost-effective options to scale up production and ensure manufacturing work takes place closer to the period of high demand.
Finding the Right Balance
The solution for most businesses lies between both extremes. The first week of any stock building programme is the most expensive. This is due to the amount of time it will need to be stored, and the length of time working capital will need to be committed. This results in the cost of producing stock declining as the high point of seasonal demand approaches.
By accurately measuring the costs of advanced stock building, together with the costs of increasing manufacturing capacity, it is possible to pinpoint a “tipping point” when it becomes cost effective to switch between building up stock and manufacturing at a higher capacity. Identifying this point can allow businesses to optimise the overall cost of managing their seasonal stock.
Reacting to Changing Conditions
Of course nothing in the business world remains static. Labour, commodities and logistics are constantly changing costs within a business. If these base cost drivers are built into a seasonal stock model, it becomes possible to rapidly reassess stock management for every seasonal cycle, without the need for major analysis. Effectively implementing this strategy ensures costs are kept as low as possible year after year.