Manufacturing optimization is defined as the practice of utilizing data to build better products more efficiently, all with the goal of creating and sustaining a competitive advantage. Applying manufacturing optimization methodologies to core functions such as inventory management will, in the end, drive top-line revenue and bottom-line profit. It’s a smart investment that will future-proof your business.
Today, manufacturers are challenged by intense pressures on their businesses – rising interest rates and costs and fluctuating market demand – while still addressing weaknesses in their supply chain structures and inventory investment strategies that were exposed during the COVID disruption.
Why Is Manufacturing Optimization Important Now?
In such churning seas, the temptation is great to simply fall back to the age-old mindset of customer fulfillment and sales-at-any-cost to stay afloat and wait out the rough waters. However, such a path is not a sound strategy. It may even further exacerbate the fragility of a company’s financial condition by perpetuating a cycle of eroding inventory ROI, margins, and net profit.
Manufacturing Optimization Through Item Stratification
Item stratification is a manufacturing optimization approach that promotes increased demand to grow top line revenue, margin, and EBITDA. Item stratification ensures those strategies are aligned with effective inventory investment policy while not sacrificing customer fulfillment. While not a new concept, item stratification is just as relevant today as it ever has been – perhaps even more so in this current economic climate.
Therefore, it has never been more imperative as it is today to deploy already strained resources where they can be most impactful. Meeting the widest latitude of customer demand possible leads to unintended consequences, including item proliferation. If you think you have bloated inventory values and complex supply chains, you may be experiencing item proliferation.
Through the process of item stratification, inventory items are ranked according to their revenue and profit potential. Revenue potential is ranked based on existing revenue and demand. Profit potential is ranked based on gross margin contribution, the cost to serve, and supply chain throughput.
At the end of the ranking, you’ll have your products assigned to one of four categories and you can then establish strategies that will help you manage the products in each category to increase profitability.
- Critical items that contribute the most to your company’s profitability.
- Exploit items that could be profitable with some adjustments.
- Target items that aren’t in high demand, but some adjustments could increase it.
- Non-critical items that are candidates for elimination.
You may encounter some challenges in performing the stratification. For example, you may need to adjust the scoring and weighting values to customize the approach to your specific business. You’ll also need to determine how to compile the required data, and more. Working with an expert in the field will give you the guidance you need to get the process established initially.
A Path to Profitable Growth
Once you have an established item stratification process in place, you’ll begin to see many benefits that can lead to greater profitability. For example, you will:
- Align sales negotiations to your goals
- Increase inventory ROI
- Accelerate your sales cycle
- Identify sources of underperformance in your company
- Simplify supply chains
- Promote growth without reducing liquidity
- Build shareholder value
If you would like more information about item stratification, download our guide, “How Manufacturers Can Grow Profitably Using Item Stratification.” Written by Tom Fitzgerald, E&A’s CFO and in-house expert for the item stratification services we offer our clients, this guide contains actionable information on starting your own item stratification process.