I am writing this from my experience in textiles, feel it will be of interest even to those from other industries as I am quite sure that production management in other fields will be only as difficult as it is in textiles if not lesser. Production management is a difficult field and the difficulties are only increasing with time. In this series of articles, I will draw on personal experiences and anecdotes from the field to elaborate on the six areas that I have come to believe are critical.
- Inventory Management
- Efficiency (Cost Control)
- Quality Control
- Supply Chain Management
- People Management
- Regulatory Issues
A lot can be written about each of them so will cover only one topic in this post and the remaining in follow-up posts.
“I see the amount of yarn bottoms (RM) and Finished Goods inventory left behind year-on-year and wonder whether I am making any money at all. All my earned money seems to be in this stock.” This is a standard complaint by most textile manufacturers.
A leading consulting company was hired by a government organization to determine why the textiles business was not as successful in India as it was in China. The company came out with a series of recommendations, a large number of which revolved around inventory management.
- Yarn (Raw Material (RM)) should have an expiry date and
- One should have exact stock and data on the same
I talked to one of the owners of a sister concern who met with these consultants. He said, “What do I do with the yarn (RM) which has accumulated over time? Burn it ?!. I am trying to sell Fabric (Finished products) basis my RM but I can’t have an expiry date for it. Inventory is a necessary evil. If I don’t have it, I can’t respond to orders on time. If I have it, some of it always stays behind and over time it just keeps on increasing, eats my working capital, space and I end up paying heavy interest costs for it.”
I said, “You are obviously trying to sell Fresh fabric basis the yarn you have. What do you when your space gets full?” And he replied, “I sell dead stock (yarn with little relevance to running and possible future orders) to lower end production units with lower production costs due to slower older machinery, who in turn make fabric and sell it to dealers across the country. But this sale of RM to these units is at a lower price and hence my realization is lower on very old RM.”
I asked him if we could figure out whom these units sell to and if we can opt for job work at any of these units and sell the fabric directly to the dealers. It has been 6 months since this incident. He has started trading lower end variants by doing job work in low cost production units and has been able to bring down his inventory to a reasonable extent. While he does not realize the purchase price of the yarn, he is able to achieve what he says is a satisfactory realization for his RM.
The sad truth about inventory is one can’t avoid it. Standard textbook techniques would suggest standardization, minimization of product variants and hence raw material needed, stronger demand forecasting techniques to minimize inventory.
But once all that is done, then what? What does one do even after all the techniques are applied, yet they still lead to inventory accumulation albeit to a lesser extent? Which techniques should one pursue to dispose “dead” stock and minimize loss?
Most markets always have lower cost variants which are outlets for Finished Goods and RM inventory. A classic example of a market of this kind is a factory outlet of brands. Factory outlets not only have quality rejected material but also material which is excess from season sale. One might choose to develop a market for oneself of these lower cost variants or sell to someone with an access to this market. The latter generally leads to a loss. On a case-to-case basis, one can evaluate the cost-benefit of accessing the lower variant market oneself.
A “dead” stock disposer (yarn purchaser – bhangaari) approached me for my finished stock. I told him I have quite a bit but I want hard cash against what I give him. He replied “Sir, don’t worry about cash. We lot purchasers have enough cash to purchase your factory.”
This was actually not an exaggeration, as I later realized after enquiring from the market. His purchase price from me and sale price had higher hidden margins than fresh stock in some cases. It was actually easy to get a one-stage process done via job work and sell the finished product generated. It was a process which we adopted from then on.
Evaluate and get rid of dead stock as soon as possible. This will free you of space and working capital, both of which can be put to better use.
Also, over-insure your inventory. There is always some stock which is unaccounted for in units which have been operational for years while drawing estimates of “sum insured”. On 25th March, 2010, I witnessed a large fire to my unit. All stock was burnt. This spawned off a long drawn engagement with the insurers. One of the biggest things I realized in this engagement was that any underinsurance undervalues burnt stock and enhances loss. “Black Swan” events such as fire happen to the best of units and one should guard against such events.
To be continued…..