Authored by: Vijendra Kargudri
Millenniums after the invention of the first wheel, the auto industry has come a long way. The auto manufacturing industry is clearly important to global mobility & economy. It has been a source of many innovations in manufacturing technology (i.e., the assembly line, just-in-time inventory, kanban, etc.) and product design.
Today there are a greater number of auto manufacturers thriving the competition than ever before! Increased competition & improved technology has gone hand-in-hand to pamper the customers’ demands with newer features by global auto manufacturers. Not to be left behind, major banks & financial bodies too are enticing customers with tempting loan offers to buy a new car/bike!
With the growing demand for automobiles, it is the inventory of the finished good that drives the dynamics of the entire demand & supply chain.
How does Inventory performance affect the auto manufacturers’ supply chain?
Many industries have witnessed that the deployment of lean inventory levels does yield desirable result, but it is also seen to yield disappointing result in about a third of manufacturing industries. For an auto manufacturing industry, the key decision is how much inventory to hold to meet customers’ demand?
Auto manufacturers’ inventory decision involves a delicate balance between three major categories of costs incurred – the ordering cost, the inventory cost, and the shortage cost. Apart from this, several types of inventory held like the raw materials, spare parts & supplies for work-in-progress, and components decide the final product for an auto manufacturer.
Why does inventory performance matter?
For a high-value product like an automobile, inventory is the biggest asset. It directly affects the bottom line & the very existence of an auto manufacturer in the market. Most of the auto manufacturer try to hold optimum inventory for various reasons like –
Smooth out seasonal demands:
With changing seasons & festivities, customers’ demand changes too. Most businesses hold inventories on hand to smoothen such seasonal demands. For example, every major festival, retailer, distributors, and auto manufacturers go in top gear to stabilize and meet the upcoming festival demands of customers. If they do not hold any inventory, the entire supply chain will be at a loss and not able to meet their target.
Meet any unexpected demand:
The entire demand & supply chain really comes into the picture here. Every auto manufacturer knows that customers expect finished goods and services when they need them, else they go to someone who has it readily available or meets their demand. A prolonged waiting period is the last thing a customer can ask for. Thus, an auto manufacturer usually over-stock up their inventories to meet such dynamic demands.
Offer price discounts to customers:
When a retailer purchase goods from the manufacturers and distributors, they usually get price discounts when they buy in bulk. Manufacturers and distributors give these discounts to attract and maintain customers and have the biggest market pie. Passing the price discount advantage to a customer is helpful at times but one must always remember not to overstock the inventory because a sudden change in customer’s requirement may cause the failure of the business.
Hedge against price increase:
Auto manufacturers usually hold raw materials inventory to evade the ever-fluctuating market price of materials. By having an efficient & good inventory system, manufacturers can control the cost of their final product in the market.
The need for optimum inventory performance by an auto manufacturing industry
In the wake of the global economic meltdown, trade wars, depleting market, having an optimum inventory performance is very critical for auto manufacturers. It allows them to successfully negotiate the volatility in supply chain arising out of economic uncertainty, growing customer expectations & demand, and supply variability.
Optimizing inventory in multiple stages simultaneously and modeling for variability will help achieve inventory targets to not just meet/exceed customer service levels, but also reduce working capital and thereby improve the bottom line, market position, and product offering. Adopting this method will take into account critical factors like internal service level between Warehouses and DC’s, lead time variability, etc.
SAP IBP for Inventory provides auto manufacturers with an edge to achieve high customer service level along with an optimal safety stock, which otherwise through traditional means would not be optimal and project higher figures.
How can Krypt help auto manufacturers achieve optimum inventory performance?
As an SAP’s preferred partner for IBP and having a long-standing experience with various auto manufacturers in the past, Krypt can provide holistic process assessment and following customized solutions to achieve optimum inventory performance –
- A completely scalable – demand, supply chain and financial model at an aggregate & detailed level
- A real-time, “What-if” scenario & simulation planning, and
- A multi-stage Inventory Optimization to maximize working capital efficiency to meet service level targets & customer demands.