> Having less inventory is almost always better financially.
Almost. There's an exception to that maxim which illustrates how the
paradigm has shifted away from Just-in-Time and Build-to-Order for US
companies that outsource overseas to places like China.
Typically, the best pricing from overseas requires that finished goods be
ordered in container-loads. For small products, a container can hold tens of
thousands of pieces, representing a big financial commitment. It takes a
container about 60 days to travel from the dock in China to the distribution
point in the US. Payment is usually required when the container leaves the
dock, tying up the company's money for at least 60 days.
A US company with which I work has a hot new product with a steep growth
curve. Initially, the Chinese were able to build the product for less than
half our domestic cost. Unfortunately, the product had some precision parts
and the Chinese were not able to make the product with consistent quality.
Consequently, we had a relatively high scrap rate. Finally, after realizing
that we could deliver promptly, our customers (retailers) started pushing
inventory back on us by not placing orders in advance. Instead, they ordered
on an "ASAP" basis.
The result of these factors often forced us to expedite shipments by air
from China. The freight costs simply killed our margins. The short-term
solution was to boost inventory levels. Our total costs actually dropped
when we did that. Longer-term, we instituted incentive programs to encourage
customers to order in advance. As for the quality problems, eventually we
pulled most of the manufacturing back to the US. Increased volumes had made
that a better proposition than in the early going. We were finally able to
reduce inventory levels, but still carry a fair amount because we're in a
seasonal business.
Just-in-time and Build-to-Order are great for certain kinds of products, but
they don't work well for relatively inexpensive, high-volume seasonal
products. Although manufacturing costs can drop significantly when you
outsource to China, higher inventory carrying costs can eat into the
savings.
BTW, I climbed my tower 3 times yesterday, so this discussion is appropriate
to TT :-)
73, Dick WC1M
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