Managing Inventory!

Dr Vijay Sangam, 09:08, 06 Jul 2010

We all worry about Inventory Control and Inventory carrying costs. Let us ask one fundamental question, why we carry inventory at all? There could be many reasons for that but some very important are:

1. It enables the firm to achieve economy of scale.
2. It balances supply and demand.
3. It enables specialization in manufacturing.
4. It provides protection from uncertainties in demand and order cycle.
5. It acts as buffer between critical interfaces within the supply chain.

Even though there are five reasons given, I see only two reasons and they are, to meet uncertain demand and to save costs. The very important reason why we carry inventory at different levels in supply Chain is due to uncertain demand. We carry inventory in anticipation of customer order. That is a fair assumption, but the issue that bothers me is lack of efficiency in demand forecasting. I agree no one is good at creating forecasts accurately. But you can always improve your inaccuracy as you go forward and my question is why we are unable to correct it, is it impossible? No it is not, but it needs some level efficiency to achieve it.

Cartoon Source:, contributed by Kari McEwen.

The other reason is to achieve economy of scale. Fully justified in case of seasonal demand products such as fire crackers, winter clothing, rain jackets etc. but not sure why should go for mass production for an every day consumed product and suffer from inventory carrying costs?

If some one is able to find answers these two questions, we have cracked the DNA of Inventory Control. In my opinion inventory control is about discipline. Discipline in planning discipline in buying, discipline in selling and discipline in warehousing and managing inventory. If we are able to develop checks and balances to control forecast inaccuracy, we should be infusing discipline into planning activity. If we are able to balance our buying process and do not allow EOQ factor to influence our buying pattern, we would be in a position to control what we buy and buy what we sell. In the name of cost savings, I have witnessed large corporations buying huge quantities and ending up with inventory that bites. As long as one is able to liquidate inventory quickly, it works out well for any organization. Procurement experts should look at establishing collaborative approach with the suppliers and develop solutions to could liquidate non moving inventory and at the same time meet the unplanned demand.

Being a supply chain professional I have worked closely with many sales teams. Surprisingly, I have seen one similarity across all industries and that is, demand is generated for a product for which the organization is running low on inventory. Is it something to do with customer mindset? Not sure. If we agree with a production plan and create inventory for product “A” and invariably the demand is more for product “B” which was not part of our planning. I am unable to understand the reason behind this pattern. We end up creating back orders, low clear to build ratio and order processing is on allocation instead automated.

I have worked with a great and successful CEO who used to send a very simple message to sales, “sell what is available”. It needs great ability to do that. I strongly believe that Sales teams all over the world have the ability to do that. It is only matter of honing that skill aggressively. The best example is the second hand car sales person. Often we end up buying what he wants to sell.

We do hear about inventory shrinkage, it is an unpardonable blunder. One of the objectives of warehousing is to assure protection of assets. If we are unable to achieve it with the help of world class WMS (warehouse management systems) and with best of breed surveillance techniques, it is shame. If you are unable to handle operational excellence, outsource and drive excellence through KPI monitoring and improving.

Explore the possibility of establishing pull process with regard to buying and by using Vendor Management Inventory (VMI) model and differ the inventory ownership. Collaborating with vendors and sharing consumption pattern in order to prepare the suppliers for the demand onslaught or slump. Explore the possibility of using Cross Dock or JIT models (again a pull process). In order to implement all these concepts, the supply should be abundant, delivery cycle time should be very short and competitive market conditions. All industries may not enjoy the luxury of meeting all the above mentioned criteria. In those circumstances, we should explore conventional inventory control techniques and keep the inventory carrying costs down.

Inventory carrying cost us in $$ and it may not appear in P&L as a direct cost, but it is a fact that it costs us up to 25% per annum as explained in the below given graphic.

Hence, it is essential to control the inventory and add value to the business process by minimizing inventory carrying costs. In order to control inventory we need inventory status update on online basis (inventory visibility). The first step towards inventory optimization is to know your total inventory in supply chain. The second step would be to understand poor inventory management symptoms. They are:

1. Increasing number of back orders;
2. Low Inventory Turns;
3. High Customer Turnover rate;
4. Lost Sales;
5. Periodic lack of sufficient storage space;
6. Inventory Variance;
7. Obsolete inventory.

Some of the suggestions for improving inventory control:

1. Create Inventory Visibility;
2. Introduce aging (FSN) analysis of Inventory if not already in practice;
3. Create accountability and introduce incentives for meeting inventory targets;
4. Implement Cycle Counts every week and ensure stock take once a month;
5. Classify the inventory (A,B, and C) and increase focus on big ticket items;
6. Improve surveillance efficiency to eliminate pilferage;
7. Optimize Ordering Process;
8. Share POS information and consumption patterns with Vendors;
9. Make Vendors jointly responsible for avoiding stock outs and excess inventory;
10. Align supply with Demand;
11. Invest time in reducing supply lead time;
12. Partner with suppliers with great flexibility to adopt to the changing demands;
13. Introduce checks and balances in Forecasting methodology;
14. Develop six month rolling forecast plan and freeze some portion of the plan depending upon supply lead time;
15. Opt for modular production techniques;
16. Deploy excess buffer manufacturing capacity/encourage like minded third party manufacturers;
17. Introduce postponement to address product differentiation;
18. Explore possibility of inventory differing concepts for dependent demand related products;
19. Consider Inventory balancing in a decentralized inventory carrying situation;
20. Consider consignment sales for independent demand products to maximize sales.

We all know these techniques but still end up with huge inventory. The reason behind the debacle is lack of discipline in implementing the best practices and silo approach adopted by majority of organizations. In order to achieve overall success, we need an integrated and collective approach internally and collaborative approach externally.

Cartoon Source:, contributed by David Armstrong.

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