Why Build-to-stock-only worries me

August 17, 2006 9:08 pm 0 comments

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I mentioned in my last post on lean manufacturing that the model adopted by the industry is a bit disconcerting.

It is more than just build-to-stock manufacturing. As I mentioned I am particularly concerned because companies will often not even forecast the stock to keep. The businesses would just build up a large amount of inventory, and keep going until they stock runs dry, before scheduling another purchasing run.

Why is this a concern? Many things, discussed after the link. But remember, I only point these out so that we can start thinking of strategies to fix them.

To ensure the analysis is complete, please do inform me if you know of anyone doing lean manufacturing, or has minimal inventories. Even if it is a bakery, or scratch cards launched by ISPs. I would like to know who is doing it smartly.

– I am concerned at how much money businesses can afford to just lock into inventories. This is money that could have been spent on product design and quality, in expanding sales and marketing, in innovation, or otherwise benefitting the customer.

– I am concerned that the high holding costs of inventory bumps up the customer price-points. Our customers often are not wrong to complain about rising prices — Turnovers will often be limited by lead times, quality of manpower among other things, and if turn-overs or purchasing cycles are fixed, rising consumer demand means more inventory to hold, which makes the holding costs jump up, resulting in higher prices.

– I am concerned that the speed of bringing newer products to market reduces greatly — most businesses will keep offering the same product choice to customers for years. In turn, this will often slow down the business from jumping into newer areas or expanding as they wait for investment recovery.

– In a related concern, consumers will see much lesser choice than otherwise, and this infact creates opportunity losses for the business. I am sure more consumers will be attracted to a WLL operator if the operator offered more choices of handsets, but without forecasting demand of different product configurations there is nothing that differentiates the WLL operator from its competition.

– In industries where product offerings are affected by seasonal changes, the high inventories will result in costly end-of-season promotions to burn off the stock (as is seen in ChenOne and others)

– I am concerned most of all that this industry is shutting out innovation and entreprenuership. Small newer businesses with interesting products would often not see enough ROI from their ideas because of having to build up inventories well before market response has been measured.

– I am concerned because even large businesses will fear innovation. Large businesses will not think of launching anything but tried, testing, commoditized products with largely stable and recurring demand. If they launch an innonvative breakthrough product, and if the demand suddenly dimishes, all of your inventory becomes losses. This means that most product manufacturing will continue to be much as it is right now — commmoditized or high-demand products are manufactured ; niche ‘in-demand-for-now’ products are imported in shorter limited supply orders at huge premium prices for customers (iPods come to mind). I will be writing more about this in later posts as I explore my view of fulfilling customer orders in PK.

– Lastly, this is preventing manufacturing units from specializing and creating deeper skills. Many manufacturing units continue working somewhat like some IT sofware factories. They will claim to do everything under the sun, and only think about how to actually deliver the project after they have received them. They will source new machines, skills, and materials only if required by the one project. They are — generally — not improving their efficiencies by sticking closely to one niche.

All of this said, quite often things work this way because of market and industrial challenges.

If we are to work on creating better models, we must first analyse these dynamics and the models in more detail. Hopefully that will happen with more coffee down the road.

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