LTD Management
Logistics & Supply Chain Management Consulting Global Solutions That Work

INVENTORY-Critical Issue in Supply Chain Management

World Wide Shipping
October/November 2002
President LTD Management

Inventory is key to profitability. Inventory velocity turns assets into profits. The faster inventory turns, the greater the profitability. Inventory is the key issue to supply chain management success. Customers demand that their orders be shipped complete, accurate and on-time. That means having the right inventory at the right place at the right time.

But this is easier than it sounds. Inventory management is the Gordian Knot of supply chain management. No one knows how to untie it, and it cannot be cut. The inventory quandary applies to all inventories-finished goods, raw materials, parts and components, MRO and work-in-process. It includes new products and existing products. It covers all types of businesses-manufacturers, distributors, wholesalers, retailers and others in about every industry.

There is a dichotomy of views. Sales wants 100% customer satisfaction and to make sure that there is always inventory on hand to meet each order. Finance wants to carry less inventory to free up capital for other needs. Given the vagaries of sales patterns, supplier lead times, and production sizes, the "answer" is dynamic. When sales are booming, inventory may not be as scrutinized as it is when sales are slow and inventory is sitting in warehouses and plants. As a result, inventory creep can occur.

The purpose of supply chain management is to drive out inefficiencies, especially excess inventory. Yet, inventory is a buffer against uncertainty. Uncertainty is difficult to forecast. Collaboration between supply chain partners helps reduce uncertainty because of faster ability to respond and change, but it does not eliminate it.

Supply chain visibility is vital to reducing uncertainty and to managing inventories. The easier and more accurately that you know what inventory is where in the supply chain, from purchase orders at suppliers to what customer orders are being picked at distribution centers, the better you can manage inventory.
Look at the process, people and technology used to manage all inventory. Managing the many different inventories that exist takes both strategic and tactical views and efforts. Part of that means to challenge what is done and why. For example--

*Why do you have inventory? What drives the present level of inventory? How are inventory levels set? How current is the decision on inventory levels and what drives inventory? How often are inventory decisions reviewed? What direction is inventory being driven, and why is it? How does the direction and/or change in inventory compare with the direction and/or change in sales? How variable is demand? How variable is supplier and manufacturing lead times? How much of the inventory reflects safety stock?

*Who is responsible for setting and for managing inventory levels? Are they the same person/department or not? How are excess inventories, and the cost of, reflected in management responsibilities? How is the alternative, inventory stockouts, and the cost of, reflected in management responsibilities?

*Where is inventory stored and why? How many distribution centers are used and why? Are they in the right locations? What are the actual service requirements of customers? Each distribution center means additional safety stock. How much obsolete/dead, old promotions and very slow-moving dead inventory sits at warehouses and factories? What is the storage cost for such "useless" inventory?

*How is forecasting done? Is forecast accuracy regularly measured? How accurate is it, at the item level and at the SKU level? How timely is it prepared and submitted? How are algorithms and underlying assumptions reviewed? Is customer input used? How does it incorporate in-transit inventories with the total lead times for sourcing, manufacturing and delivery, especially for internationally sourced parts and finished items? How accurate are the net on-hand inventories that are used in the resulting production planning and sourcing? How does purchasing and manufacturing handle the forecast inaccuracies? Do they overbuy or overbuild to compensate for doubts about the forecast?

*Is inventory forecast to the distribution center level so the right inventory at the right quantity is carried at each facility? Or is the forecast at a macro level with no direction on what inventory, how much inventory and where inventory should be positioned? In those situations, there can be sufficient inventory at the total company level but it is in the wrong locations. As a result, inventory is transferred between distribution centers to provide inventory to fill orders. That is inefficient use of transportation and not good customer service.

*How are supplier reliability and lead times reflected in inventory planning and management? Are additional inventories factored in to buffer for each of these issues? How are these issues factored into supplier selection decisions? Does purchasing have purchase order visibility with suppliers to control ordered items at the SKU level? Do suppliers understand and collaborate with the inventory philosophy and approach? Do purchased products flow to keep inventory in the supply chain or are they irregular, aggregated?

*How are transportation reliability and transit times reflected in inventory planning and management? Are additional inventories factored in to buffer for each of these issues? How are these factored into carrier selection decisions? How are these factored into routing decisions for internationally sourced items? For example, do imports from Asia move using less-expensive, longer transit time all-water shipping or using more expensive, faster transit time MLB service? Does freight cost or inventory need drive that decision?

Effectively managing inventories requires proper process, people and technology. It means integrated management of the supply chain from the suppliers' doors right through to the customers' docks. Inventory should move, not sit in warehouses and plants. Inventory velocity is key to supply chain success, company profitability and shareholder value.