For some manufacturers Christmas doubles the average sales for the rest of the year. Most work their production lines hard all year round to maximise return on investment. That always leads to a build-up of stock over several months to meet peak shipment needs.
I am working with a company which has very high production line utilisation. It cannot meet peak shipments without a major stock build over the four to five months prior. Absolute stocks at peak have grown as the company has grown. Peak pallets stored exceed average pallets stored by more than 10,000 this year. Core warehousing is now insufficient all year round and the company has been forced into several temporary outside storage locations.
The proportion of peak stocks held in outside store has risen from 30% a few years ago to 53% this year. As a branded business, this company cannot ship direct to customer from outside store. So the logistics of re-handling through outside store overcame the supply chain's capability to manage it. As a result customer service and profitability have been very badly hit. The cost of getting it wrong this year was £900,000, plus the cost of lost profits on service failure.
Clearly action should have been taken years ago to address this issue and either production capacity should have been expanded or more core warehousing provided.
For this business, optimal costs occur when 83% of peak inventory is held internally, which depends on its seasonal business and the cost of internal space. If you cannot ship direct from outside store and you have a seasonal business with peak stocks occurring (as they must) around peak shipment time, I would argue that 20% in outside store is manageable. Any significant increase on that risks service failure and high costs.
It is easy for the financial people to say: "The logistics people always manage, so let's not build more storage yet." But, if you wait until the first year of failure before acting to increase capacity, you will have cost your company a lot of money and customer credibility.
is Director, ProActive