Don’t get caught having your company’s inventory management conversation alone!
Making the most of one of your company’s largest assets means bringing together everyone involved from the manufacturing floor to the corner office, and focusing on more than just what’s in your warehouse.
Re-evaluating your inventory management practices can help you overcome rising supply chain costs, increasing customer demand and the growing complexity of global operations. It can also help raise profits and reduce risk. Successful inventory management all boils down to a delicate balancing act. You need to have enough of a product to satisfy customer demands, but not so much that it risks becoming obsolete or sinks your business with high carrying costs. As David Thomas, Director of Global Capacity Planning at Ford Motor Company says, inventory is “… dead money.”
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From designing, sourcing and manufacturing, to distribution and consumption, your supply chain is at the heart of your customer satisfaction levels. It has become a competitive weapon that could help you win the consumerism war. But the sheer complexity of supply chain networks, and the impact design decisions have on operational performance, makes supply chain inventory management aligning inventory investments with on-time customer delivery and margins a major challenge.
The equivalent of 7% of America’s GDP is tied up in inventory, and accounts receivable and payable. That’s $1.1 trillion in cash according to a 2013 US Working Capital Survey. It’s no wonder that number is so high with a lot of companies still struggling with inventory optimization, trying desperately to find that sweet spot between supply volume and customer demand.
Implementing inventory optimization
The challenges of inventory optimization can be immense. The focus with Inventory optimization is often on analytics, but that’s just the beginning. You’ll need to overcome distributed data and inventory, navigate a complex network of locations and bills of materials (BOMs), and manage the configuration of thousands of parts. And if you’re still using dated technologies that don’t support robust and adaptive collaboration, you may even need to make critical decisions without the context of knowing their impact on corporate-wide metrics and objectives. It’s certainly no walk in the park.
The first step in navigating these obstacles is integrating inventory management into the rest of your supply chain planning processes, and the technology solution(s) powering them. Why? Because inventory management will be the backbone of your inventory optimization processes, and has strong interdependencies with sales and operations planning (S&OP), master production schedule (MPS) and supply action management (SAM).
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A recent article in Fleetowner shed some light on the human aspects of supply chain management. Featuring research by Arash Azadegan (Ph.D, Professor of Supply Chain Procurement at Rutgers University), the article discusses some key traits held by the best supply chain managers. But the article alludes to something more: the collaborative human efforts in the supply chain, especially in difficult times.
Relationships are often really tested in times of crisis. We see this in many aspects of our lives, but the same applies in your supply chain. When the storm clouds move in, you need to get your product moved out, and you’ll need help.
Azadegan talks about how the “dominoes of the supply chain are now very close together – and the closer they are, the faster they fall.”
Imagine a situation where you have 24 hours to analyze, plan, and execute supply chain changes on a massive scale. Would your planning tool be up to the challenge? Would your team be able to deliver? Would all the dominoes fall?
In the Fleetowner article, author Sean Kilcarr discusses a textbook example of a massive supply chain crisis: Hurricane Sandy, which devastated large parts of the United States back in October 2012.
As Anne Strauss-Weider (from A. Strauss-Weider Inc., a management consulting firm) explains in the article, things had to move quickly as Sandy literally loomed on the horizon. The Port of New York and New Jersey was hit hard, and they “had about 24 hours’ notice before Sandy hit,” she said.
In a crisis like this, Azadegan says “jobs, inventory, and profits are at stake, and beyond that, suppliers, customers, communities, and families of employees etc. are at risk as well.” There is no time to panic, “there is only a short time that [a manager] can be visionary and academic. [These situations] are unforgiving.”
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This post concludes my inventory management blog series.
Throughout this series I’ve proposed an elevated role for the inventory manager that challenges the assumption that an inventory manager is a victim of his colleagues’ business decisions and plays only a limited role in formulating inventory results. Inventory management is not a stand-alone business process that occurs after other processes are complete. It is a high-level process that should be integrated into other supply chain planning processes including, at a minimum, sales and operations planning, master production scheduling and supply action management. Inventory managers should support multiple business objectives and should have business integrated targets related to inventory levels, customer service levels, total inventory cost, and inventory quality.
The inventory manager needs to act like an air traffic controller, effectively collaborating with his management peers to guide and coordinate their processes together in a way that leads to optimized inventory results. They should be able to update safety stock and order policy settings, and they should be able to collaborate on improvement initiatives related to lead-time optimization, supply and demand variability, and supply chain agility. It’s important for the inventory manager to have strong analytic skills and a deep understanding of the principles of supply chain management as a successful inventory manager will understand how to meet his targets without negative consequences in other areas of the business. The company should support the inventory manager with access to continuous learning resources and development courses to ensure they stay current and can take advantage of recent industry advancements.
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The modern day inventory manager described in this series is the backbone of your company’s inventory planning process. She has a strong understanding of supply chain fundamentals and is an expert at controlling the key levers impacting the inventory company’s investment in inventory. All that’s left is to add a planning system that enables her to work effectively. If you leave her to build reports and metrics that she needs in excel then she’ll spend all her time crunching numbers instead of planning your company’s largest asset. So, what features should you look for in a good planning system?
- All your data’s in one place. Your planning system should combine all your company’s data in one system. It should be up-to-date (daily at a minimum), and include all the input data required to make your inventory planning decisions.
- Closed Loop. If you don’t execute with your planning system, there should at least be a closed loop between the systems so you don’t spend all your time transcribing after making a decision.
- Built in reporting systems should immediately alert your inventory manager to changes requiring response. Agile response can make all the difference.
- Your inventory manager needs a dashboard that can give her a clear picture of the current status of the inventory plan and provide insight that guides her actions each day. It’s also useful to have more in-depth tools that provide a visual representation of a wide array of metrics simultaneously to help identify concerning trends and improvement opportunities across all the levers in her toolbox. While it can be hard to find time for it, exploratory analysis often pays big dividends.
- I covered this last week, but I really can’t stress enough how important it is to select metrics that support all of your business goals. It’s important that the impact of you planning decisions are visible across all parts of your organization. These metrics should be using live data, and you should instantly see the results of the changes you make.
- Interactive charts and graphs. The metrics on your dashboard should be interactive to enhance their analysis value. You should be able to hover your mouse over charts to read key figures, and you should be able to drill into the details with a single click. Metrics should update immediately when you make changes and you should be able to filter the input data to dig in to areas of concern.
- Hierarchies. Data hierarchies allow you to see your data at various levels of aggregation. Imagine being able to see your metrics at a global, regional, country, or site specific level with a click of the button. Hierarchies can be built into dashboard and reports to allow instant filtering to look at key details.
- What-if scenarios allow you to immediately calculate the results of changes you make so you can evaluate the results before committing the changes to your master data. You can easily lose a whole day if you have to wait for your ERP system to refresh overnight before you can understand the impact of a settings change.
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Over the last several weeks, this blog series on Inventory Management has explored the objectives and roles of inventory managers and outlined several of the improvement levers available to them. This post will discuss some of the metrics and analysis tools that an inventory manager needs to identify risk and opportunities and to make intelligent decisions to optimize the performance of their inventory.
When determining the metrics required for any business process, the first question you need to ask yourself is, “What are the business goals of the process?” Once you can answer that, you need to understand where the business process fits into the organization. What processes are upstream of your current process? Who relies on the outputs, and what are their priorities? These are all important questions to help you select metrics that facilitate a balanced decision making process and allow you to understand the trade-offs between proposed scenarios.
The metrics you choose should answer the questions your organization is asking, without requiring additional analysis. If you find your organization spending too much time completing repetitive ad-hoc analyses, you may want to re-evaluate your metrics. Each metric requires context. This could be a target level, or simply historical data that allows the reader to understand how the current situation compares to the ideal. Your dashboard metrics should highlight issues requiring immediate action and should be supported by details that can tell the whole story. If your organization wants advice on data visualization techniques for dashboard design, communication, or analysis purposes, I highly recommend checking out the work of Stephen Few.
So, what do you need to measure to manage your inventory?
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So you’re an inventory manager, and your CFO just asked you to reduce inventory by 10% before year end to free up some capital for next year’s big investment in R&D. At first glance, it’s not so bad; you’ve got nine months to do it. But then you look at historical trends and see that lately, your inventory has been growing by 3% each quarter. Suddenly, you need to be about 20% below your current year end plan! That’s a big challenge! On top of that, you know you’d better do it without negatively impacting your customer service levels, because you can’t afford to spend all your time fighting fires for your customer service representatives.
So, what improvement levers can you pull to accomplish this goal? Do you have the authority to act on your own? Even if you don’t, you can be sure that you’ll be held accountable anyway!
Below are five levers that I believe should be available to an inventory manager to help them effectively plan and manage inventory. I’ll refer to Figure 1 below, a simple representation of the inventory of over time for a single part with safety stock, to explain the impact that each lever can have on your inventory levels.
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Managing inventory can be a challenging job! Inventory managers have to balance multiple conflicting priorities, support multiple internal and external customers, and are typically responsible for millions of dollars spread across multiple sites. They often manage their company’s single largest asset and receive little thanks for their efforts.
Unfortunately, many inventory managers don’t have the tools necessary to meet these responsibilities effectively. Supply chain complexity is increasing as companies find new ways to provide value to their customers. The inventory manager needs tools to exploit this complexity to get the most out of your inventory investment. All too often inventory managers are stuck spending all their time building reports and urgently responding to the latest shortage. They become experts at transferring and reallocating inventory to put out the latest fire, but can’t always track the true impact of their actions on the organization. Training and professional development is often sidelined to maintain focus on daily issues.
As companies increase the maturity of their inventory management process, the role of the inventory manager often evolves. The best planning systems provide users the ability to visualize and plan their inventory, monitor their inventory performance, predict issues before they happen, and prescribe improvements to maximize the benefits of your inventory. Once a plan is set, the system should alert the inventory manager so they can effectively respond where adjustments are required. With the right tools and training the inventory manager can evolve from a firefighter to an air traffic controller and become an expert at manipulating the levers that set a company up for success, not just today, but 3, 6, and 12 months from today.
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