Over the past two years, having spoken to countless Inventory Managers and Supply Chain professionals, the same pain is being voiced again and again. It’s particularly acute in high-mix environments where there’s often a long tail of product variety & high-SKU count, and the additional challenges of having shared equipment in your production environment with a long, extended Supply Chain.
The pain is this: there’s too much inventory of the “wrong” stuff, and not enough of the “right” stuff. The fallout is working capital is being tied down in stock that’s often sitting wastefully on a warehouse floor, taking up space, and leading to higher percentages of obsolescence, damage, or even theft. On the other end of the spectrum, often simultaneously, we see that other SKUs aren’t being stocked enough. This is much bigger issue as it can directly affect your customer service level and lead to firefighting & expediting or, worst case, a lost sale.
So how do you ensure your customer service performance in a high-mix environment without loading your stocks to the sky with excess inventory?
Over the years we’ve seen a variety of Inventory Management techniques. On the low end, we see what we call “acoustical” inventory management where whoever is shouting the loudest gets the orders pushed through. Don’t need to be an expert to realize this often a stressful way to manage a business and leaves a lot to be desired in terms of root analysis of where the real issue lies.
The most common form of Inventory Management is “Rule of Thumb.” Where a company will hire an experienced supply chain professional to analyze previous sales history, often comparing new SKUs with similar old SKUs in order to make a good educated guess how much they’ll need to stock for their goods. Often with enough effort, trial and error, and Excel magic, an Materials Manager might get pretty close to optimal levels when stocking a good. However, as the SKU count grows, as new products are introduced, as seasonality rears it’s ugly head, it becomes harder and harder to maintain such an approach. And what happens when that experience professional retires or leaves for greener pastures?
The real problem however is these approaches often neglect a key input that’s necessary for accurate Inventory Management: Variability. A SKU with an average forecast or demand history of 50 units a week with a standard deviation of 5, can and should not be managed the same way as a SKU with an average demand history of 50 units a week with a standard deviation of 100. The coefficient of variation must be considered. The same is true for the supply side, where replenishment or production lead-time is often a fluctuating rather than a static number. This is the reason manufacturers are seen often purchasing from more expensive but closer-to-home vendors, rather than cheaper vendors in southeast Asia, where the variability of lead times if often much much greater threat than the cost of potential savings.
With this variability, and with the challenges of a massive SKU count in the thousands, the answer to good inventory optimization often lies outside Excel spreadsheets and with more complex, more robust forms of Inventory Analysis. And despite the LEAN principle of Keeping it Simple, often times software is simply necessary to crunch a large data sets of numbers, to account for variability in both Supply & Demand, and to return the optimal Inventory levels that will let you operate with high customer service levels and at the same time, just enough Inventory to meet those levels. No more, no less.
For more information, visit our Inventory Optimization page, and see if our company Invistics might be able to share our experience, and our software tools to lessen the burden of searching for and hitting that sweet spot in right-sizing your stock.