Inventory optimization, a never-ending journey?
How many projects do you know that promised to reduce inventories by 10% or more? How many do you know that did? After so many years of inventory improvement initiatives, how come that industrial supply chains are still searching for more optimal inventories? Can the optimum be reached or are we on a never-ending journey?
Is inventory the cause of all pains in supply chain management?
In fact, quite some problems in an industrial company seem to be caused by poor inventory management.
The first one is low customer service. Industrial companies that only deliver their customers with a reliability of 75% or 80% lose sales in the short term. And they lose credibility and customer loyalty in the long term. But there is more.
A second consequence of poor inventory management are penalties. Food and beverage companies or companies in the automotive sector quite likely have contracts with their customers stating penalties in case a certain service level is not kept. Paying money back to your customers is a very painful exercise especially if margins are already under pressure. To avoid penalties or poor customer service, companies use expensive express transport: they might use air freight instead of sea freight, or express carriers instead of normal road transport just to gain a bit of time at the end of the chain.
Warehousing cost is another obvious cost related to inventories. Companies might need to rent outside warehouses because they’re internal warehousing capacity is not enough, for example.
Scrapping cost are another possible consequence of poor inventory management. Products with limited shelf life, like food or pharmaceuticals, might stay so long in the warehouse that they must be destroyed or depreciated.
A last consequence would be working capital requirement. Some companies simply realize that they have too much working capital blocked in inventories to grow as fast as they want, or they cannot generate the cash flow from operations that is expected from them.
Or is poor inventory performance just the symptom of deeper issues?
When working with industrial companies, we notice that poor inventory performance is a symptom of deeper issues like the lack of a clear inventory strategy or well-defined inventory targets, issues in end-to-end supply chain planning or simply a lack of skills in the teams responsible for inventory efficiency.
What is causing low inventory performance in your company?
To get a first idea of what is causing low inventory performance in your company, try to answer the following questions:
- How do you decide on make-to-order / make-to-stock
- How do you make the trade-off between bigger lot sizes in purchasing or production and inventory?
- How do you decide on target service level?
- How do you know how much inventory you need?
- How do you decide the required level of safety stocks?
- How frequently do you review safety stock targets?
- How much of your inventory is safety stock?
- How much of your inventory is related to lot size?
- What is the average coverage of a production lot size for your company?
- What is the average coverage for a purchasing lot size for your company?
End-to-end supply chain management
- How does your production / replenishment plan make sure that inventory targets are respected?
- How do you decide on build-up of seasonal stocks?
- How much of your inventory is caused by unreliable forecasts?
- How do you measure adherence to plan?
Skills in planning and inventory management
- How many people in your organization know the basics of inventory management?
- How many people in your organization would be able to calculate a safety stock target?
Do the answers on these questions make you feel confident that your inventories are optimized or do you think improvements are possible?