14 July 2014 | Dawn Kynaston
Too much inventory or not enough. It’s the eternal struggle at the heart of effective supply chain management, but it’s an equation organisations continually get wrong. If they are to get it right they need to completely shake up the way their inventory is being managed.
It’s a typical situation; a business holds too much inventory, so attempts to reduce it. Production stops until inventory is cut to an acceptable level, only to find, a few weeks later, customers can’t get the products they want. So production restarts and runs flat out for the next few months. The result? The organisation ends up with more inventory than it started with. But it doesn’t have to be like this. Just follow these eight simple tips:
• Understand your inventory. Trying to remove inventory without tackling the root cause is like tackling the symptoms of an illness before the diagnosis. First you must understand why it’s there in the first place. The inventory an organisation holds today is typically a consequence of the decisions it made months, years, even decades ago – many of which are forgotten with the passage of time. When they make these decisions, all too often companies fail to recognise the long-term impact they have on inventory. So understanding what you have and why you have it is the first step.
• Look to the future. To avoid making the same mistakes as your predecessors, you need to look beyond the immediate execution window and consider all supply variables before making decisions. An integrated management process can help to achieve this.
• Remember the great unwatched. All too often organisations rush straight in to removing visible inventory (cycle stock, safety stock, pre-stocking and hedging stock), when it’s on the rest - the great unwatched - which can make up as much as 25 per cent, where efforts should be concentrated.
• Consider your service offering. In an ideal world every organisation would have 100 per cent service levels; the reality is many can ill afford this and have to settle for 95 per cent at best. A small drop in service levels can have a significantly positive effect on inventory levels, although of course for some this is not an option. Performance benchmarking can determine what an acceptable service level for the market is.
• Change your cycle time. Long campaigns can aid operating efficiency, but result in cycle stock. Consider making half as much, twice as often; this can result in a company not only becoming more responsive to the market, but also significantly reduce cycle stock.
• Invest in safety capacity. Most organisations see inventory as their only option to buffer poor supply performance and provide the flexibility to satisfy unforecast demand. But investing in safety capacity can be a cheaper option; reducing planned capacity slightly and having the ability to ramp it up when demand requires can provide a good alternative.
• Vary your safety stock. Many businesses carry a generic weeks coverage model of safety stock for every product in their portfolio, but it’s important to consider the significance of each product. Some popular products may require a lower level of safety stock, whereas others with higher variability require more.
• Effect cultural change. It’s vital that demand and supply take joint ownership of inventory. For this, you must eliminate blame culture. Plenty of people are involved in inventory management; from those who effect financial change, to those in planning frequency and safety stock. These people are the organisation’s most powerful weapon when it comes to inventory management, so clearly define their roles and equip them with the knowledge to apply best practice.
☛ Dawn Kynaston is a partner at business improvement consultancy, Oliver Wight EAME