End of year inventory positions are top of mind for a lot of companies and probably have been top of mind for finance teams for several months. The high mix and low volume nature of Aerospace and Defense manufacturing, coupled with the disproportionately high cost of missed deliveries for airframers and system manufacturers, create a challenging environment for small businesses that make up a large portion of sub-tier supply chains.
Maintaining readiness, optimizing cash management, and staying prepared for dynamic market conditions requires a thoughtful approach and careful analysis of internal and external data. Each company’s situation is unique and rather than jumping to a single canned solution, mindful companies can create competitive advantages by asking key questions about current and future plans.
Availability
- The high cost of getting parts late causes Aerospace and Defense OEMs to put tremendous pressure on suppliers to meet schedules. Poor quality and sagging on time delivery over the past 3 years has instilled fear and uncertainty at all levels pushing demand signals off optimal production rates. The consequences can hit on both sides of order fulfillment with the disruptive nature of overproduction as well as the consequential down cycles in demand that will follow.
- The aerospace industry has been trending to reduced inventory turnover while, over the same period of time, tackling persistent capacity issues. No doubt driven by economic, pandemic, and world issues, the uncertainty in demand signals, availability of materials, and performance challenges faced by companies has the wrong product being made and held.
- Inventory as a means of dampening demand instability is a tried-and-true method but comes at a cost.
- Re-evaluate your current plans with these key questions:
- What inventory has the greatest impact on your performance and your customers?
- Are your company’s inventory strategies refined and focused on critical path and long lead failures?
- What market conditions and new opportunities will trigger you to re-evaluate our readiness plan?
Cash Management
- With rates climbing, though possibly at a slower rate with the positive inflation news released this week, companies need to re-center on sound cash management which for many was not top of mind these past few years.
- We’ll resist the urge to prognosticate on the future of the economy but those wanting to prepare for rough times, likely have an opportunity to unlock trapped cash in WIP and finished goods, however, doing so without significant value loss can be a challenging proposition.
- Before offloading inventory, consider the following key questions:
- Does your inventory present a future opportunity for better value creation via pricing?
- Have your production and stocking plans been updated to reduce future over-inventory conditions? Do these plans include vendor managed inventory (VMI) strategies?
- Where does investment in inventory propel growth?
Companies with clarity on their current position and future needs can better organize strategies and adjust course. Considering the following when setting 2023 business plans.
- Detailed planning and forecasting are needed to determine what is real and what is fear driven. Be proactive and minimize decisions made on incomplete data and out of date narratives.
- We’ve advocated data is king, but so is an evaluation of mission and core competencies. Nail down who you are and make sure sales and operations are aligned.
- De-risk supply chain single points of failure (“SPF”) by qualifying additional sources. Empty capacity may be hard to come by, but you are likely not looking to move 100% of your volume. 70/30 splits take pressure of SPF and keep a contingency warm and ready to spike when trouble arises.
- Distribution deals can be a double-edged sword. While the temptation of offloading inventory is hard to pass on, short term benefits can quickly be outpaced by long term losses when we factor in missed value opportunities stemming from loss of price control. While the pros and cons of distribution as a path to market are deserving of their own article, those considering it as a means of managing cash via inventory reduction should carefully consider operational impact, supply chain impact, and customer impact before jumping in.
There is not a single right answer, nor will any answer be the best answer forever. Challenge yourself to review your company objectively and resist the urge to settle on a single solution.
For discussion specific to your organization, including new growth opportunities, contract our Program Team.
Derek Ashcroft
Percipient Manufacturing