Lora Cecerce, founder of Supply Chain Insights, posted a very insightful article in Forbes called “Does Better Forecasting Improve Inventory? Why I Don’t Think so Anymore”.
Inventory has always been necessary in supply chain management to buffer against supply and demand variability. With the advent of high-mix manufacturing and the need to produce a longer tail of SKUs with more equipment changeover, this is more true than ever before. Lora, in her recent analysis of planning benchmarking for large mult-nationals, states:
“A mistake that I see companies making over and over again is improving forecasting, but not improving inventory levels because of the lack of a holistic focus. After the implementation of a forecasting system, and getting basic functionality in place and providing a reliable forecast with minimal bias and accuracy, there is only minimal value in continuing to refine the forecast. Most companies do not have a forecasting problem. Instead, they do not know how to use the forecast to drive inventory strategies.
Why do I state this so boldly? The forecast is always wrong. This is true by definition. Improving it by a few percentage points on forecast accuracy is not going to drive the improvements in inventory that most people think. While most companies focus on the numbers, it is understanding the probability of demand and translating it to supply strategies that makes a difference.”
Lora counted four trends that lead her to rethink how inventory should be managed.
Cycle Stock is the Opportunity for Most Manufacturers
“Cycle stock is most effectively managed through the successful implementation of production planning. (Cycle stock is the management of stock required to cycle through production runs and procurement buys effectively. It involves complex logic on batch size, change-overs and production sequencing.) With the rise of item complexity, improving production planning becomes more important. This planning technology is tricky to implement and many of the technologies are not up to the task; but doing it well is essential.”
One of the cornerstone of Invistics’ solution is to view Inventory holistically as a combination of Cycle Stock and Safety Stock. It’s very common for companies to order materials in large quantities, often to meet a bulk discount, but then to skip the next step of figuring out bulk discount savings vs cycle stock inventory management costs. Even if you save 20% by ordering a years worth of product X in bulk, you must account for the holding, movement, and obsolescence risk of that left over inventory as it sits in your warehouse for the next year.
Download our Whitepaper to Learn More: Optimizing Cycle Stock, Lot Sizes, and Rhythm Wheels in High-Mix Manufacturing
Inventory is the Most Important Supply Chain Buffer, but Requires Design
“The most important buffers–shock absorber for volatility– in the supply chain is inventory and manufacturing capacity. The reduction of cost and improving asset utilization is usually the charter of the supply chain team. As assets become more and more utilized, manufacturing loses the ability to buffer volatility through manufacturing capacity optimization. In parallel, with more and more manufacturing outsourcing, companies lose the capability to buffer through the use of manufacturing capacity. As a result, inventory becomes the critical buffer to absorb demand and supply volatility. Designing the supply chain and making conscious choice about push-pull decoupling points, cycles, and late-stage postponement helps.”
At Invistics, we also stress the design before the implementation for three reasons. 1.) It builds consensus. 2.) It develops a relevant business case to get stakeholders invested, and 3.) it identifies processes and tools that are require to support the new approach. Our workshops begins with sketching out the “As-Is” value streams vs the future “Should-be” value streams, and discusses many of the items Lora mentions such as when to use Push vs Pull.
Technology can Help
“More and more companies are purchasing inventory technologies, but failing to give planners time to plan. This is a mistake. With the rise of the global multi-national. There is more and more need for an inventory planning role to manage the form and function of inventory and develop inventory strategies. Buying the technology and not having clear processes and accountability does not help. We are still in our infancy in the use of multi-tier inventory optimization technologies, but as shown in Figure 2, there is a strong impact when implemented correctly.”
Most high-mix environments will require technology due to sheer numbers. Traditional “rule of thumbs” approaches to inventory management such as “let’s hold 4 weeks of supply for product X” are becoming more and more outdated in a world where demand and supply rates fluctuate quickly. Often times you need a tool that can drill down into the just the items you are managing, to pull data from multiple computer systems, and can give you an accurate solution without tying up IT resources to sustain. If interested, here is a demo of a multi-tier inventory optimization technology called the Inventory Advsior: https://www.invistics.com/inventory-optimization-software/
“One of the surprises for me in the benchmark data is the gap in understanding of inventory strategies by the supply chain executive team. The concepts of planning and the management of form and function of inventory are not well understood. Most executives believe that the answer lies in having a better forecast. They are not able to have a discussion on the form and function of inventory. It takes training. The strategy requires careful definition with finance. However, it is worth it. Inventory turns correlate to market capitalization, and who can argue with improving market capitalization?”
Leadership is the key to sustainability. All the planning and software tools in the world aren’t enough to effect change if your companies management isn’t on board with visible metrics and staff training to ensure the new processes are being implemented with care.
To share with you an example from Invistics past, we completed a new inventory management workshop at a large company where we “capped” inventory using Pull-driven methods. Later on, when we came back to audit the shop floor, planners were still relegating to their old habits and focused only on maximizing machine utilization even when there was no demand for more of the product. In the planner’s eyes, the waste was due to letting a machine sit “unused”, instead of the storage and handling cost of the piles of unnecessary inventory. Leadership is key to bridge such communication gaps.
We hope this blog article was educational. If you have any questions or would like a consultant with Invistics please contact us using the contact button at the top of the page. And oh, a Happy Holidays to all.