My inventory is impossible to manage! What do I do now?
08 Dec 2020
Many organisations do not realize that inventory is a direct result of choices that are made – or not made – consciously or unconsciously. Reliable inventory levels can easily be influenced by a variety of factors including variation in demand and supply, data accuracy (especially inventory records), the performance of the individual supply points, the supply strategy (where we meet our customers), and the network set up.
To take control of inventory, businesses must use a holistic approach – engaging everyone responsible for influencing areas, including:
- Sales who define the desired customer service level for each customer or customer group and provide demand plans in relate to their general activities with customer groups and in the different channels.
- Operations who influence lead-times for customers e.g. ship this product within 24 hours. They also influence order lot sizes – larger lot sizes can lead to slower replenishment cycles and higher inventory levels in the warehouse.
- Warehousing through its operations as well as controls.
- The supply chain network that directly impacts lead times through distance
I advise my clients to project their planned inventory level 36 months out. It is important that they measure their inventory projection capability to determine whether they are meeting or missing the projection. This allows them to understand the root-causes behind either outcome and direct the improvement activities to the key causes.
Businesses should also beware of bias and the impact onto not only inventory build but onto effective customer service and ultimately the business. Inventory for customer service levels is based on demand and supply variation, assuming normal distribution of the variation, as shown below.
If a business is biased, the curve is shifted which means we will never have the right products at the right quantity and place in the supply chain, as shown below. Achieving customer service is at an excessive additional cost and provides unnecessary stress within an organization.
Top tip: Put inventory management back on the agenda but as a tool to differentiate the way you run your end-to-end supply chain.
Here are 5 questions for you to think about:
- How much inventory do we need to run our business effectively based on the strategy we are deploying?
- What inventory have we already got and why?
- What inventory do we need to meet our business targets?
- How can we influence our inventory and what are the decisions and risks involved?
- What are the improvement opportunities across velocity, quality, and service level?