Inventory the Necessary Evil 
 By Dennis Lord - Inventory Guru

INVENTORY!   It flows through the supply chain and sits in warehouses, distribution centers, parts storerooms and on retail store shelves. It is a key component of the balance sheet, income and cash flow statements and financial reports.  Manufacturing distribution MRO and retail can’t function without it. It’s very expensive; it is the life blood of supply chains.

The goal of inventory management is to ensure the consistent delivery of the right product in the right quantity to the right place at the right time. This must be accomplished without carrying excess and obsolete inventory or lowering customer service levels. 

Six inventory drivers contribute to achieving the goal by replenishing your inventory to provide optimal customer service while controlling your inventory levels and investment.

The first driver is Supplier Lead Time. This is the time between recognizing the need to place an order, and the receipt and put-away of goods. The longer the lead time the bigger your inventory. To control inventory levels, you must control variations in demand and lead time between each order. 

The second is Safety Stock. Organizations always keep some inventory to protect against fluctuations in demand and supply, and to maintain customer service levels. This is typically the largest source of waste in organizations that rely on rules of thumb to determine the size of the buffer.

Variability in demand is affected by forecast accuracy, and it drives safety stock levels. Supply variability, in the form of excessive or inconsistent lead times, also drives up safety stock levels. Both demand and supply variability can be minimized by applying formal forecasting and optimization techniques.

Service-level policies will determine what percentage of customer demands are to be routinely filled from on-hand inventory. This directly affects how much safety stock should be carried. If this percentage is based on a measure of forecast error, in many cases a much lower safety stock level will be required. 

Lot-Size Inventory
is the third inventory driver. Companies often order more than they need to meet current requirements simply to take advantage of price discounts or reduced shipping costs. Or they will reduce set-up costs by producing larger lots. Yet this eventually leads to excess and obsolete items in inventory.

The fourth driver,
Excess and Obsolete Inventory, drives up inventory costs and should be reviewed frequently if it’s to be eliminated. You’ll decrease your carrying costs and financial reserves, reduce space for needed items, and require less cycle counting and physical inventory activity. 

The fifth driver is Inventory Accuracy. It’s the foundation of every successful inventory control system. Trying to control inventory with bad information is futile. All replenishment decisions are based on the status of your inventory. To make reliable delivery promises and keep inventory levels low, inventory records must be 98 percent accurate every day.

The sixth inventory driver is Replenishment Techniques. These seek to answer two questions: when to order and how much. Replenishment planning should strike a balance between inventory investment and customer fill rates. All forms of replenishment require accurate forecasts and lead times so you can calculate optimal replenishment levels and safety stocks.

The six drivers are challenged by greater variability and uncertainty across global supply chains makes it much more difficult to plan the replenishment of inventory across single and multiple locations in the supply chain without excesses or shortages.  For these reasons and more a new approach for managing inventory drivers is needed for reducing risk in the supply chain, dealing with increasing variability and uncertainty, and the need for visibility of inventory in supply chains. 

Inventory optimization (IO) is such an approach
.  When you optimize your inventory - so that the right products in the right quantity are in the right place at the right time - you provide maximum service to customers while minimizing inventory costs.  IO helps inventory planners determine the right inventory policies and levels by establishing the optimal mix between inventory investment and service levels for each SKU/customer/location within the supply chain.

“Inventory optimization is driven by a set of values which are typically service level and inventory investment” explains management consultant R. Michael Donovan.  “Yet, many inventory planning routines are still governed by ‘rules-of-thumb; and as a result, customer service is usually too low and there is too much inventory.”

Inventory optimization (IO) examines the demand of all individual items.  It calculates the bandwidth within which each item’s demand fluctuates and automatically adjusts parameters when required.  Items that need attention will all be flagged to the user in exception reports, focusing attention and prioritizing workloads for planners and buyers. 

Inventory is evil when slow moving excess and obsolete inventories pile up in storage facilities generating cost.  Understanding and managing your inventory drivers is the key to your organizations profits and growth.

Dennis Lord CPIM is Executive Director of IMS Business Academy - IMS Consulting
                                             Principal Inventory Management Solutions

He can be reached at 416.477-2467, dennis@imsconsulting.ca  www.lean-inventory.com