Driving Profitable Growth in the Automobile Industry through Lean Inventory Management


Automobile Industry and Inventory Management


The automobile industry originated in 1769, with the invention of a three-wheeled steamer by Nicholas-Joseph Cugnot, in order to support the French army haul artilleries. Although this three-wheeled contraption was not technically an automobile, it is still considered to be the first recorded motorised road vehicle in the world. Almost a century later, in 1886, Karl Benz built the first automobile powered by an internal combustion engine in Germany and received the German patent for his invention. The commercial production of automobiles was initiated in the United States 10 years after the invention of Karl Benz, paving the way for the automobile industry to grow into the global giant that it is today.


Today, being one of the industries that are in continuous development thanks to various technological advancements, the automobile market has become highly demanding in terms of cost and functionalities. To gain guaranteed market shares and to stay ahead of the competition, automobile manufacturers are required to show a significant reduction in the time that it takes for logistics, development and production, all in extremely strategic methodologies. Furthermore, they are required to adopt mass customisation concepts, which can offer a wide range of functionalities and options at highly competitive prices. These two factors alone can justify the call for a reliable inventory management system that can be usefully implemented throughout the supply chain of an automobile manufacturer.


Just like any other industry today, the automobile industry has also been hugely impacted by digitisation and technological advancements. Since it involves so many moving parts, their seamless integration and the requirement for them to run smoothly without interruption, the successful management of an automobile supply chain is one of the most challenging tasks faced by those who are involved. With the miscount of a single unit having the ability to define the difference between profit and loss, the importance of proper inventory management in the automobile industry cannot be emphasised enough.


An effective inventory management system can enhance the supply chain of an automobile manufacturer of any scale by streamlining the following business processes that ensure uninterrupted production and distribution.

  • Demand planning

  • Supplier management

  • Production scheduling

  • Warehouse management

  • Order fulfillment

  • Customer service

  • After-sales services


Types of Inventory in Automobile Manufacturing


Since the automobile industry is one of the most expensive and in-demand industries in the world, the accuracy, timeliness and proper utilisation of materials are essential. The miscount of a single screw can mean the line between disaster and perfection; hence, the entire supply chain depends on the proper characterization of inventory and its diversity. With this being said, the effective management of such an important asset is imperative to stay above the competitiveness of other automobile manufacturers.


When it comes to inventory management techniques and concepts, a multiple number of them have been proposed and implemented because of the automobile industry alone. However, most of them propose common types of inventory/stocks which are specifically described in terms of the automobile industry. It is vital for anyone who is involved in automobile industry inventory management to explore and get a better understanding of these.


Usually, production stocks and non-production stocks are the two main categories of inventory. All the materials which produce the finished goods after being processed are identified as production stocks and the non-production stocks are identified as the stocks which do not involve in the processing, but only accompany the production (packaging materials, spare parts, etc.). However, production stocks are the ones that are discussed in inventory management concepts, and they can be further grouped into three categories; raw materials, work-in-process and finished goods.


Raw materials


These are the stocks of raw materials and inputs that are needed to create the final product. Raw materials transform during the manufacturing process to produce the final outcome. In terms of an automobile manufacturing process, these raw materials can be tires, glass, steel plates, etc., while sub-assemblies obtained from other suppliers are also considered to be raw materials.


Work-in-process


Most commonly known as WIP, this type of stock represents the materials on which the production process has started, but not yet completed. WIP are never ready for sale.


Finished goods


As the name suggests, finished goods refer to the completed products on which all the production activities have been successfully completed. Finished goods are the products that are ready to be sold and consumed by the customer. In an automobile manufacturing plant, these are completed vehicles on which all the necessary tests have been done.


Driving Factors of Inventory Management Concepts in the Automobile Industry


When it comes to an automobile manufacturing plant, the flexibility of the production lines is assured through accurate predictions when planning, and this is achieved through inventory keeping. Keeping a proper number of stocks also allows automobile manufacturers to react quickly to changes in the market demand and they also act as a safety measure against precariousness in the logistics chain. This way, it is no surprise that proper inventory keeping is a great benefit when it comes to staying ahead of the competition for any automobile manufacturer.


From a financial point of view, keeping an abundant level of inventory, especially raw materials, can bring significant cost savings for automobile manufacturers. Better discounts can be requested and negotiated when purchasing a large number of materials at once, and they also reduce the cost of ordering and transportation. Having an ample inventory of raw materials in stock also means that the manufacturer is protected from material price inflations in the market.


However, utilising the inventory properly and for the long-term profitability of an automobile manufacturer does not necessarily mean stocking up raw materials as much as possible. Several factors can be considered as the driving forces behind different inventory management concepts, the most common of them being the production process. Maintaining a large inventory leads to mass production where large quantities of WIP and finished goods are made available at all levels of production, which is always not for the better. As opposed to the mass production concept, lean manufacturing ensures the reduction of WIP as much as possible, while producing exactly the forecasted number of finished goods only.


Lean Manufacturing and Lean Inventory Management


Before the discussion on Lean Inventory Management begins, it is important to understand the concept of Lean Manufacturing. It is one of the main two approaches to manufacturing management, the other being Mass Production. Both of these approaches focus on minimising waste, although not necessarily in the same way. The general idea of waste in manufacturing can be described as any process, operation or item that does not add value to the finished product or reduce its quality.


Mass Production can be briefly put as working hard, while Lean Manufacturing can be put as working smart, as opposed to working hard. In Mass Production, more products than the actual demand are manufactured and the waste-minimising reasoning behind this is that more products are made in less time, using fewer resources. Here, it will create a surplus of products to be stored, expecting customer orders. However, Lean Manufacturing focuses on customer orders and only produces a sufficient quantity to fulfil customer orders, which does not leave a surplus inventory of finished products. Simply put, Mass Production is based on demand forecasts, while Lean Manufacturing is based on customer orders.


The advantage of Lean Manufacturing is that because it only produces a small number of goods that are sure to get sold, there will be no surplus of finished goods. Even if there is to be a market downfall or a sudden demand lack, there will be a smaller number of obsolete items.


Since the automobile industry is one of the most competitive and expensive industries in the world, manufacturers cannot afford to be left with unmoving items. Hence, the value of Lean Manufacturing was first identified and implemented by the Japanese Automobile Manufacturing giant, Toyota, and then when their competitors saw how much ahead of the curve Toyota was running, Lean Manufacturing and its components became highly sought after. With the adaptation of high-capacity Enterprise Resource Planning (ERP) solutions, Lean Manufacturing was made even more effective, flexible and manageable, making the job of automobile manufacturers easy and effortless.


Lean Inventory Management is a concept that runs shoulder-to-shoulder with Lean Manufacturing. While Lean Manufacturing represents the entire supply chain and the manufacturing process, Lean Inventory Management provides the necessary logistical support to the manufacturing process in terms of inventory. It is also focused on reducing waste; time, materials and labour.


Lean Inventory Management is a systematic approach to enhance the value of an inventory by recognising and eliminating waste. It is a continuous process which can fix production bottlenecks that lead to unnecessary carrying costs of WIP and finished goods, over a period of time and with proper practices. One of the universally-agreed facts about inventory is that it does not gain value until it is sold to the customer. According to finance and logistics analysts, unnecessary carrying costs of inventory can add up to 30% per year. When considering a mass automobile manufacturing plant, these costs are not to be ignored because of the sheer size, expensiveness and value-of-life of the materials involved.


Lean Inventory Management techniques are based on five principles; Value, Flow, Pull, Responsiveness and Perfection.

  • Value: Identify the value that can be gained for the business by Lean Inventory Management

  • Flow: Understand how inventory flows in the manufacturing process

  • Pull: Move inventory only for customer orders

  • Responsiveness: Open to the concept of change

  • Perfection: Track the performance of inventory and refine it continuously to ensure uninterrupted quality, cycle time, cost and efficiency


Implementing Lean Inventory Management techniques in the automobile manufacturing industry can bring long-term benefits in a remarkable way, but the initial move towards it has to be taken cautiously because if inaccurately implemented, it can bring down the entire supply chain in a devastating way. To achieve this, there is various enhanced ERP software available in the market today that allow automobile manufacturers to remain competitive in their field. A good ERP system offers features such as real-time reporting and sales tracking to accurately forecast the demand as well as the functionality to keep track of stock levels and reorder points.


When it comes to the automobile manufacturing industry, both the benefits and risks are gigantic. Therefore, not losing track of what is important and what is not is vital for automobile manufacturers. This can be achieved through Lean Inventory Management, paving the way to higher profits and productivity.