In today’s manufacturing environment, we know that getting the product to the customer in a timely manner while keeping the cost of production and delivery as inexpensive as possible is one of the top goals.
In other words, businesses make the most money by giving as much value to the customer while simultaneously incurring the least cost. As with other considerations in life, having too much or too little of something will cost you one way or another.
Manufacturers need to be aware of supply chain management, the oversight of raw materials as they move from entry into the plant, into production and then on to the consumer. Manufacturers need to be concerned with the entire process and how it impacts consumer satisfaction.
Manufacturers Have Special Concerns
Rather than simply getting material from one point to another – say from the wholesaler to the consumer if you’re a retailer – manufacturing has multiple phases. They include:
- Raw materials
- Work in process
- Finished goods
These can be thought of as three different kinds of inventory. When manufacturers have too much or too little of these inventories, the entire process (wholesale, retailer, consumer) suffers. That’s why getting as close to a perfect inventory as possible is so important.
What Does Overproduction Mean for a Manufacturer
Overproduction, or oversupply, means you have too much of something than is necessary to meet the demand of your market. The resulting glut leads to lower prices and possibly unsold goods. That, in turn, leads to the cost of manufacturing – including the cost of labor – increasing drastically.
The end result of poorly managed inventory and the resulting cost of labor may lead to future losses of profitability. A well-managed supply chain can provide a road to increased profitability.With effective supply chain management manufacturers can avoid inventory oversight and reduce overproduction
Accounting for Fluctuation Helps Maintain a Healthy Balance of Inventory
Inventory ratio is a comparison between the cost of goods sold and the average inventory level.
For manufacturers, the inventory ratio usually ranges from 1 to 2. Throughout the course of a year, this ratio will fluctuate. However, pinpointing when the fluctuations will occur are difficult to predict.
One way is to measure your industry’s and business’s trends year-to-year In this way, you can get much closer to perfect ratios, thereby adding more value to the customer and maintaining labor costs and sustained profitability.
Is Your Cash Flowing in a Positive Direction
Cash flow – the movement of cash into or out of a business or an account – can be divided into positive or negative terms.
Good cash flow indicates that a company’s liquid assets are increasing in value. Money is coming in to reinvest in the business, pay expenses, settle debts, return money to shareholders and generally have money available for the future.
Bad cash flow means that a business’s liquid assets are losing value, and that money is not coming in at a rate that can sustain solvency. When overproduction occurs, it means that too much money was invested and that sales are not coming in at a fast-enough rate.
So, overproduction means too much was invested in production. However, too little production means that you’ve missed out on an opportunity to adequately supply demand and make more money.
Clearly, cash flow will be improved if you can sell excess inventory as fast as possible. Inventory depreciates faster than any other asset. Overall, manufacturers can avoid negative cash flow by finding ways to improve sales, reduce overhead, achieve better cash flow estimates for the future and generally get everyone on board to be more efficient.
Beware of the Risk of Loss
Depending on the industry, some manufacturers are at a higher risk of loss than others. The “loss” part means having to bracket some percentage of inventories as unusable.
Sometimes, there’s just no way to know or control a loss, which may be determined by a sudden and rapid change of market taste. By identifying the category of production inventory is in – raw materials, work in progress or finished goods – you may be able to identify red flags and reduce loss.
If one inventory is abnormally high, perhaps finished goods, then you may be overproducing. For more on reducing the risk of loss and avoiding other problems leading to overproduction, click here.