Getting Control of Inventories

By Christopher Byron

Companies tighten up on an old form of waste

One of the most closely watched signs of business activity is the level of company inventories. As sales slump during a recession and stockpiles of unsold goods swell, businessmen begin dumping their inventories and cutting back on orders from suppliers. In the process, layoffs surge throughout industry, and inventories grow skimpy. Then, when sales-hungry businessmen detect the first signs of an improving economy, they begin to rehire workers and restock warehouses. The level of inventories, thus, is usually a telltale signal of a recession or recovery.

Inventory liquidation has been driving the economy steadily lower since last December. Week after week, in wave after wave, companies have been emptying warehouses, trimming stockpiles and cutting back on orders from suppliers. This was the major cause of the 3.9% drop in the gross national product during the first quarter. Says Otto Eckstein, chairman of the Data Resources Inc. economic forecasting firm: "The most significant factor behind the economic decline during the past three months has overwhelmingly been business's huge liquidation of inventories."

With interest rates high and sales projections dismal throughout virtually all of American industry, few businessmen seem eager to start hastily rebuilding their stocks to former levels. Instead, more and more firms are studying ways to hold down costs and operate with leaner inventories.

Tighter control of stocks is being made possible by the spreading use of computers throughout business. With computers, managers from supermarkets to steel mills are able to know, from one minute to the next, exactly what is in their warehouses and storage bins. This helps save hundreds of thousands and even millions of dollars a year by holding stocks to the absolute minimum levels needed to keep production lines humming.

At Stew Leonard's Farms, a large retail food outlet in Norwalk, Conn., computerized check-out scanners keep watch over the shelf and warehouse stocks of more than 650 different consumer items. Says J. Michael Peters, the firm's financial controller: "These scanners have helped tremendously to keep inventories in line with sales. Before we got them, it would take days, sometimes even weeks, to check out our inventory-to-sales position. Now the scanners provide the data instantaneously."

Computerized inventory control has proved especially helpful to heavy industries like steelmaking. More than simply keeping track of large stockpiles of raw materials, such as iron ore and coking coal, steel firms also have to make sure that stocks of finished goods, ranging from rolled steel to ingots, sheet metal, cable and wire, are neither too large nor too small for projected demand. Says Albert E. Martz, a general manager for Jones & Laughlin Steel Corp. of Pittsburgh (1981 sales: $4.7 billion): "As a result of higher interest rates, we are trying to run leaner and operate closer to the bone. Now we maintain less inventory in order to accomplish the same thing."

No inventory problems are bigger than those of the U.S. auto industry. To produce a car or truck requires thousands of parts supplied by dozens of subcontractors scattered across the U.S. Running short of even one crucial component can force the shutdown of an entire assembly or production line at a plant. On the other hand, the costs of buildings and guards for equipment that is not needed can be staggering. For example, at Ford Motor Co., which lost $1.06 billion in 1981 on sales of $38.2 billion, every $1 worth of inventory costs the company an additional 260 a year in overhead expenses. Sums up William J. Harahan, Ford's director of technical planning: "Substantial inventories are just no longer an affordable luxury."

The Japanese have introduced the just-in-time approach to inventory control. This system, which was developed over a ten-year period by Toyota Motor Co., requires suppliers to deliver only enough components to build exactly the number of cars scheduled for production during a given day or week. The autos are then quickly shipped out to the market. The just-in-time system has spread throughout Japanese industry. Factories of YKK, the world's largest zipper manufacturer, have no warehouses at all. Goods are moved immediately from the production line to distributors.

Both Ford and General Motors are experimenting with just-in-time production. At GM's truck assembly plant in West Carrollton, Ohio, Findlay Industries Inc., a local manufacturer of truck seats, makes daily deliveries of seats that are bolted into truck cabs within four hours of their arrival at the plant. The seats used to sit around in a plant warehouse for as long as two weeks waiting to be drawn from inventory and used. At GM's Linden, N.J., and Tarrytown, N.Y., assembly plants, similarly tight inventory management procedures are expected to save the company upwards of $100 million.

Firestone has undertaken a major reorganization in order to bring about tighter control of inventories. The company cut down the types of tires it keeps in stock from an incredible 7,200 to 2,000. Its huge distribution center in Cranbury, N.J., now keeps only one-fourth as many tires as it did four years ago.

As a practical matter, neither the auto industry nor business in general is ever likely to do away with inventories entirely. Indeed, some inventory stockpiles are necessary to prevent unexpected supply interruptions from turning into crippling production bottlenecks that can spread havoc throughout the economy. But computers now permit companies to maintain leaner inventories, and this more precise business management should eventually reduce costly overhead charges and increase profits. --By Christopher Byron.

Reported by Bernard Baumohl/New York and Paul A. Witteman/Detroit

With reporting by Bernard Baumohl/New York, Paul A. Witteman/Detroit

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