Factory orders roll economy forward; Inventory fall comes to a halt but experience taught firms to better control warehouse flow
The recession taught Millipore Corporation a thing or two. One of them was how to better control its inventory. ''About two years ago, we recognized that inventory was growing faster than we liked, relative to sales,'' explains Edward Ward, operations planning manager for the membrane products division at Millipore, based in Bedford, Mass.Skip to next paragraph
Subscribe Today to the Monitor
Millipore, a company that sells to pharmaceutical, chemical, and electronics companies, faced a situation many other manufacturers were experiencing: Declining sales were causing inventory pileups. Especially at a time of high interest rates, the longer inventory stands unused, the more expensive it becomes to store. Money that could be used elsewhere is tied up in idle goods.
''We couldn't continue like that indefinitely,'' Mr. Ward says.
The products division decided to reduce production rates, let sales eat off excess inventory, and find a better way to forecast demand to avoid inventory buildups in the future.
Over the two-year period, Millipore developed its own forecasting method, based on techniques published and researched by Dr. Robert Goodell Brown. Millipore programmed its models first on a calculator, then moved to Apple computers, and finally to a large mainframe computer. The company reforecasts product demand every month now and works closely with its marketing people who contribute information for the forecast.
The forecasts are never right, Mr. Ward admits, but they are accurate enough to mean a significant improvement. In Mr. Ward's division, finished goods inventories were down from $9 million at the end of 1981 to $6.5 million at the end of last year. The goods that were slow sellers were pared way down, while the availability of goods customers wanted most increased by 25 percent.
Richard Norris, senior specialist in physical distribution for Arthur D. Little, says the effort to more closely match inventory to sales is ''spreading out from a small number of sophisticated companies to a larger number of companies.''
The reason behind the increased attention is an economy that's forcing change. During high inflation, ''you could sweep a lot of dirt (inventory inefficiencies) under the rug with high prices,'' Mr. Norris says. But with inflation low now and interest rates still high, inefficiency is tough to hide. ''Industry has had to cut a lot of fat - and one of the areas is inventory,'' Mr. Norris adds.
There is a ''tremendous'' interest in inventory control, and it's ''being driven by the auto companies,'' says Steven Walleck, head of manufacturing practice for McKinsey & Co., the consulting firm.
At General Motors, Leonard Ricard says his company has found the Japanese philosophy of inventory control ''extremely helpful.'' The philosophy is based on a system known as ''just in time'' inventory. The idea is to reduce inventory to just the amount needed for a certain assembly period, a week in GM's case.
This increases the ''visibility of problems, such as a down machine or poor factory layout,'' says Mr. Ricard, GM's director of inventory management. While cost control is important, he says, the main reason for starting the system two years ago was to improve quality and productivity.
GM still gives its suppliers long-range forecasts of parts it will need, but those parts are no longer delivered all at once. Instead, suppliers deliver just the amount needed for five days. ''This forces the supplier to ship higher-quality parts, because we won't have any extras at the assembly plant to cover bad parts,'' Mr. Ricard says.
The shortened delivery time is part of a three-prong effort by GM to improve inventory management. In the places where the new method was applied, it has helped reduce total inventory by 21 percent in the last 18 months, Mr. Ricard says. But GM still has a way to go: ''We're looking five days out, instead of looking five hours out like Toyota would,'' he comments.
Hall-Mark Electronics Corporation, an electronics parts distributor in Dallas , which has 10 million different part numbers to keep track of, also found unsold inventory piling up in the recession. Like GM, it broke large supply orders into a series of small orders. But the company also developed a computer program that figures out the lead time needed for ordering parts.
Jerry Ihnat, senior vice-president at Hall-Mark, says his suppliers would often tell Hall-Mark that parts needed to be ordered 10 weeks ahead of delivery. But those parts would often show up after only five or six weeks. Inventory was being dumped earlier than expected on the loading dock, adding to Hall-Mark's expenses. The computer program compared the actual lead time with professed lead time and helped the company fine-tune its ordering. ''Generally, these methods have worked very well,'' Mr. Ihnat comments.
According to Mr. Walleck at McKinsey, ''cheap computing power'' is playing a growing role in inventory control. ''Several consulting firms have sprung up in the last 18 months selling inventory-control software to small business.''
One firm in Los Angeles, the American Bar Code Systems Inc., designs software that records inventory electronically. The software is used with the bar-code scanners that are common in grocery stores, and it allows businesses to quickly record inventory marked with code when it comes in. It also keeps track of it as it moves around the floor.
''My business has tripled in the last month,'' says Marc Menowitz, president of the firm. A major spur to Mr. Menowitz's business has been a new government law mandating bar coding on nearly everything sold to the government, so Uncle Sam can keep better track of inventories, too.
''Northrop, Hughes, and other big contractors are buying equipment,'' he reports, adding, ''Some electronics companies like Digital Equipment and IBM are bar-coding entire factories.''