better INVENTORY

You do not really understand something unless you can explain it to your grandmother. (Albert Einstein).

Years ago, I told my grandmother (whose hearing wasn’t what it used to be) that I was working in supply chain.

“What? A chain-gang?” she said with visions of me in leg irons breaking rocks.

“No. Inventory management,” I replied (…louder this time) going on to explain it.

When I finished, she looked up from her crossword. Putting her pencil down she turned to me and said, “It sounds like you’ve got the easiest job in the chain-gang. Move your inventory in the right direction while always having it when and where it’s needed. That means you’ve only two things to do, …and all day to do them in. Simple!”

She picked up her pencil again and carried on with her crossword. She was right. I only had two things to do;

Minimise inventory; &,

Maximise customer service

…but the ‘Simple!’ part was hard to take.

After all, the inventory you manage is the OUTPUT of the supply chain processes. And these might be out of your control.

Her ‘simple’ view of inventory management is shared by senior management. It’s always a case of;

“You’re carrying too much Inventory!”; and, “At the same time, you’ve let Customer Service fall!”

Your job is to switch these simple views around – both in their head, and reality.

How do you go about it?

Here’s;
10 steps to take to move things in the right direction.
10 steps to keep it going that way.
10 steps to assure your grandmother that you’ve got your two tasks on the “chain-gang” under control

You’re analysing your inventory

Before you start leaping into solution mode, understand where you are.

Take a step back and understand the size and scope of your inventory issue.

Can you call upon your own network for help to benchmark against the KPI’s of comparable firms? Or even your direct competitors?

Of course, you’ll be tracking your basic inventory KPI’s including;

Classifying your inventory – ABC (…or even ABC/XYZ)
The age profile of your inventory via ABC
Stock cover or Days of Supply via ABC
Safety Stock via ABC
Days of Stock Cover for Average Order Lot Size via ABC

This will give you the foundation-in-facts that you need to understand your inventory.

If you have a problem, where is it, how extensive, and where do you need to focus your efforts.

Armed with facts you can engage the support of others to dive into solution mode.

You’re fixing your demand

The key supply chain process to influence your inventory is Sales & Operations Planning.

When the agreed demand and supply plans align, inventory is being driven in the right direction.

While slow and obsolete stock might hinder progress, the trend will be positive.

Controllable inventory problems can trace back to demand planning.

Fixing it is a project of its own and is the subject of an earlier article.

When you know what inventory you have today, and how much you want to have tomorrow [INVENTORY PLAN] then you can determine how much you need to add [SUPPLY PLAN] based on what you plan to consume [DEMAND PLAN].

The key variable with the biggest impact on your inventory situation is your demand plan.

Today’s Inventory
+ Today’s Supply
– Today’s Demand
= Tomorrow’s Inventory

You’re optimising your lot sizes

Simple mathematics shows average inventory is half your lot size plus your safety stock. So, cutting lot sizes cuts inventory.

It’s simple in theory, but hard to achieve in practice. Any lot size reduction involves trade-offs.

Shorter production runs reduce your manufacturing capacity by increasing downtime for changeovers.

Winning smaller and more frequent purchase order quantities means negotiating with your suppliers. In effect, you’re asking them to fund your inventory reduction. This will bump up against their sales order quantities. They’re set to keep their inventory down…at your expense. It may cost more when you move up into a higher price break.

The cost of;

lost capacity,
increased changeovers,
increased purchase price,

can outweigh the lower lot size.

Lot size optimisation delivers a net benefit to your supply chain.

You’re striving for shorter lead times for everything…

Quick definition:

The lead time for an item is the number of days from order placement to order delivery PLUS whatever the gap in days between order release.

The shorter you can make the lead time for materials the bigger the inventory pay off.

You’ll squeeze three key benefits from shortening the lead time;

Less Safety Stock. There’ll be less demand variation to cope with over the shortened demand lead time.
Less Order Maintenance. The longer an order’s lead time, the more demand that needs to be covered, the more scope for error and the more expediting or de-expediting that’s required.
Quicker Reaction Time. Shorter lead times give more flexibility to react to changes. (…so long as the supplier and production site are flexible too).

Target shorter BUY and MAKE lead times to shorten the total supply chain lead time. Achieve this and you’ll reduce both forms of inventory.

You’re pushing for rationalisation

Do you really need every single SKU?

Look across your current raw, packaging and finished goods inventory range. Are there no raw materials, packaging materials or finished goods that are interchangeable?

An SKU rationalisation exercise to move from two similar raw material ingredients to one delivers;

Opportunity to negotiate a lower purchase price against greater volume
Reduced cost of goods sold,
Reduced average inventory

An SKU rationalisation exercise to remove part of the tail of C-class finished goods reduces and/or removes;

Finished Goods inventory,
Unique raw and packaging materials,
Overall supply chain complexity.

This avenue to inventory reduction involves effort. But the benefits can extend beyond simple inventory reduction.

You’re enlisting the help of your suppliers

Your suppliers can always help when it comes to inventory reduction. Be prepared though. They’ll push back on any changes on their part.

Options you can take with selected suppliers can include;

Implementing Vendor Managed Inventory (VMI). Have your supplier manages ongoing re-supply to you. They can maintain your inventory within pre-determined bands e.g. no less than 1 week, and no more than 3 weeks cover.
Develop a closer relationship and increase information sharing. The aim here is to reduce uncertainty and inventory on both sides– a win/win.
Raising supplier reliability issues for improvement.

Beyond covering demand variability over the lead time, your safety stock levels can often link to a history of quality problems or delivery delays. Resolving these problems can deliver reduced inventory.

Work in partnership suggesting ways you can both reduce uncertainty and inventory

You’re challenging capacity to seek lower inventory

Inventory and capacity are linked. It’s essential to challenge this link to optimise your inventory.

Take another look at this link by asking yourself some questions.

How well do you know the capacity utilisation of your suppliers?

⇨ If they have spare capacity, they can respond faster and accommodate a shorter lead time? This allows you to reduce your safety stock of their materials to cover the demand variation over that lead time.

Do you have an excess of production capacity?

⇨ Would it be cheaper to chase demand (run more shifts) instead of carrying inventory AND paying for excess capacity?

Do you have a shortage of production capacity due to seasonality that means you need to build stock?

⇨ Would it be cheaper to invest in more capacity?

⇨ Can you outsource to a co-manufacturer?

The capacity situation of your suppliers and your own manufacturing sites impacts on your inventory

You’re acting on SLOB stock

Start identifying your SLow and OBsolete stock if you haven’t done so already.

Work with your Finance Team.

Determine a value and make a write-off provision in the company’s balance sheet.

Together you can highlight the issue and start chipping away at it.

Can you sell any of it?
Can you re-work any of it?
Can you find an alternative use for any or all of it?
Can you sell it back to the supplier, or another of the supplier’s customers?

Alongside the seven actions above, all these points can help you start to reduce the SLOB stock.

You can realise some or all of it’s cost – more if you’ve got the Sales Team behind you…

SLOB stock can’t be ignored. It must be in the spotlight. If it is a big problem, it must be the subject of action reviewed weekly until under control.

You’ve a customer service strategy in place

All customers are equal, but some are more equal than others. (apologies to George Orwell).

You’ve classified SKU’s and suppliers by ABC (…or even ABC/XYZ), but what about your customers?

You need to classify them too.

You can adopt Gold, Silver and Bronze for example and set service levels accordingly.

With the knowledge you have of your customers ask yourself the question;

Is it necessary to hold the same stock and service level for all?

The cost will outweigh the benefit.

And then a follow-up question;

Is it sensible to hold stock cover for an SKU that is consumed by a single customer once or twice a year?

Refine your inventory holding profile by applying a customer service strategy. It will assist in reducing your inventory.

You’ve KPI’s that tell a story

Remember the Plan-Do-Check-Act approach to change?

This is the Check step.

You’re in the middle of all the hard work to improve your inventory position. It’s heading in the right direction.

Are you moving in the right direction?

Inventory management is a matter of “inventory down, customer service up”. Simple!

The tricky part lies in your inventory being the output of the supply chain processes.

Today’s Inventory
+ Today’s Supply
– Today’s Demand
= Tomorrow’s Inventory

This is where it becomes a demanding task – not as simple as your grandmother makes it out to be.

The task is achievable if you work at it methodically, concentrating on the key drivers.

Do you need to re-visit some of them?
Have you minimised the chance for today’s Demand Plan to lead to tomorrow’s firefight?

If you feel you need to address any of these, then today’s the day.

…after all, if you’ve found and read this document, who’s to say your manager won’t find and read it tomorrow?