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Supplying Thought: Inventory Management Pt. 1

15 May 2016 10:11 PM | Christon Valdivieso

Authored By: Christon Valdivieso

Edited By: Afton Knight


           During my professional career, I have had the opportunity to work with various different inventory management systems and strategies and it is likely you have or will too. The primary focus of an inventory manager seems simple on paper: control raw materials, work-in-progress (WIP), and finished goods. The complexity arises from understanding how and when to balance lean (pull) strategies against slack (push) strategies.

Everyone in their various positions that you deal with will undoubtedly have the “correct” answer for you, but as Deming[i] tells us, “knowledge depends on theory” and “information is not knowledge.” Thus, it is important to understand how (and why) one should arrive at a certain inventory management solution.

Lean strategies

When I first started as an inventory manager, I had no idea what I was doing. Demand was seasonal, variable, and emotionally driven. Furthermore, my inventory sustained a quick rate of obsolescence. To make matters worse I had limited data to support strategic decisions and POS data was unreliable and rarely mirrored data from the floor. Needless to say the inventory management process was time consuming and arduous. I adapted a Just-In-Time (JIT) strategy for my category A inventory items and maintained low safety stock to reduce holding and obsolescence costs. Substitutes were easily sold during periods of stock outs, making stock out costs low. Demand for category B and C goods were mainly dependent, thus correct A item planning captured the majority of issues.

Slack Strategies

When I moved to the next company, the pattern was different and I had a steep learning curve. Demand was less seasonal yet significantly more variable. Stock out costs were very high and I had a rude awakening when I attempted to implement my lean strategies of JIT and low safety stock levels. I had to increase my safety stock levels, use my sales data to determine peak periods to ensure coverage and high customer service levels (CSL), and train my team to ensure product availability. Thankfully, we had a fully integrated system that collected accurate sales data in real time and increased inventory visibility.

Even though I adapted my strategies, I still did not understand the theory behind my decisions. My actions were reactionary at best. So what do you do when you decide it is time to be proactive?

The simple answer is to seek alignment. The supply chain and its practices must be aligned with the business strategy. A Quality Digest[ii] article recently pointed out that a common mistake is maintaining a narrow focus on performance (more on this in Part 3), but I would take it further to say there is too narrow a focus on the supply chain. Remember:

             “optimization of the parts does not optimize the whole.” -Deming

Take a look at your company and the market space it operates in. Where is its success derived? Consider these elements and how they relate to your company.

·        Does your company focus on being responsive or having inventory available?

·        What are your company’s CSL KPIs?

·        What is your voice of the customer (VOC) research telling you is important from your customer’s prospective?

There are various other questions, but these will capture a large portion of your inventory design needs.

Responsive or Available?

               Like it or not Amazon is changing the game for everyone, but not always in the same way. For many retail and B2C companies, availability is the name of the game. If your supply chain cannot have product in the right place at the right time, you lose a customer. Do it twice and you’ve lost that customer, and some of their friends, for life. For some companies, mainly B2B, the emphasis is on delivering product on schedule after receiving an order. Understanding which one of these you are is your first step. Yes, this one is simple but common knowledge is not always common. Additionally, many companies are actually responsive but use safety stock to sell themselves as available. How your company behaves and how they see themselves will often lead to frustration as you plan your lean/slack strategies.

CSL KPIs

               If this section’s heading does not make sense to you, it is important to do some research because the concept is integral to monitoring your supply chain’s alignment strategy. Customer Service Levels (CSLs) and how they are measured (KPIs) will drive structure. CSL refers to how often customers receive complete, accurate, and on time order deliveries. This is the part that causes rush orders, upset salespeople, and “unpleasant” emails. While most companies have some way of interpreting their CSL, they will not always have a clear measurement of it. If there is a mismatch in your responsive/available value proposition, you will be faced with an unclear and misunderstood CSL. Your CSL (measured in percent orders) will be a balance between the cost of not getting your customers’ orders correct and the cost to do so every time. While it can be cost prohibitive to seek a 100% CSL, in instances like successfully landing a plane, it is impossible not to.

VOC

               The voice of the customer—their needs, wants, and feedback—is so critical it is a wonder how it is missed. I have seen sales people so focused on what they need to close a deal that they miss what the customer is actually saying. Even more often, I have seen salespeople make promises the operations team cannot deliver (or did not know they needed to deliver). Therefore, it is integral that processes and relationships are in place to ensure that the VOC is communicated with the inventory manager. Having a supply chain that is integrates and aligns departments throughout the company will begin to break down barriers and open up communication between necessary parties. Part 3 will have more on the customer relationship management (CRM) processes that will facilitate VOC communication.

               Understanding the VOC, CSL, and nature of your company are the keys to understanding the theory behind your lean/slack inventory decisions. If you have not yet taken a minute to look at these, I supply this thought: Is your inventory management strategy reactive or proactive?



[i] http://www.maaw.info/DemingExhibit.htm

[ii] http://www.qualitydigest.com/inside/quality-insider-article/ten-common-inventory-mistakes-and-how-avoid-them.html


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