Production Management in Real Life – Part 1

September 30, 2011 at 9:28 am 3 comments

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. 

  1. Inventory Management
  2. Efficiency (Cost Control)
  3. Quality Control
  4. Supply Chain Management
  5. People Management
  6. 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.

 

Inventory Management

“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…..

 

By,

Vibhor Tikiya

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Entry filed under: Branded Retail, Business Strategy, Observations, Production Management. Tags: , , , , .

Reader feedback on Changing Sweet Tooth Preferences Production Management Part 2: Efficiency (Cost Control)

3 Comments Add your own

  • 1. Rahul Jhaveri  |  October 17, 2011 at 7:21 am

    Interesting read. In diamond manufacturing, for instance, a big problem is also residuals. Residuals vary from between 15-20% of total rough (raw materials). We tend to keep them at a lower values and adjust the cost of final polished diamonds accordingly. However, these residuals can only be sold in bulk so I have to wait for at least 3 manufacturing cycles to dispose of them. This leaves us with higher inventories, vulnerable to market fluctuations, and reduces our ability to buy more rough for manufacturing since the capital is blocked in these residuals. The people we sell these residuals to sell them to smaller manufacturers on credit in “retail” so as to diversify their risk (on 60 or 90 days credit). However, for a stand alone manufacturer is it difficult to replicate this model since the people who buy the residuals do so from multiple sources so have economies of scale. The solution I have come out with is to manufacture the residuals just like the smaller manufacturers do but outsourcing the production to units with lower manufacturing costs. As margins become tighter, price of raw materials become more volatile and competition increases – horizontal integration becomes critical to control inventory and increase profitability.

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    • 2. escapevelocityblog  |  October 19, 2011 at 4:29 am

      Hi Rahul

      Thanks for sharing your experience with us.

      Best,
      Roshni

      Like

      Reply
    • 3. escapevelocityblog  |  October 20, 2011 at 11:45 am

      Hi Rahul,
      Most interesting to see that in a very different industry, the problems you face are similar to the ones Vibhor mentions and that you have found a similar solution too.
      Regards,
      Zen

      Like

      Reply

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