The Inherent Uncertainties of attempting to Balance Inventories with Demand
Unfortunately, when you work in the supply chain and you believe—or you’ve been told—that your goal is to “balance inventory with demand,” your life is filled with uncertainty.
I find that a lot of folks who job it is to balance stock levels at various stocking locations with forecasts for demand are operating under a lot of uncertainty.
- They are uncertain of how much stock of various items they should have on hand
- They are uncertain of where the stock they have should be positioned—at the outlets? at the distribution centers? at their central warehouse?
- They are uncertain which department—finance or sales—is going to beat them about their heads and shoulders next; and whether its going to be for have too much inventory or for having too little
Nevertheless, they are absolutely certain that regardless of whatever decisions they make on thousands of items with which they must concern themselves, a great many of those decisions will end up being wrong (to a greater or lesser degree).
These same folks are uncertain about what fill rates they should be targeting for various products or product lines. And, even if they have the products and product lines pretty well pegged, they are never certain about which makes, models and colors will sell best—and at which locations.
Of course, they are certain that they should try to never be out-of-stock on anything. Because, while they are uncertain about many things, they are certain that they will get a stern talking-to from somebody from the sales department if they don’t have that one product that some customer wants “today.”
They are equally certain that they should never be caught in the position of holding “too much stock” on any item. They know this because they are certain that they remember being lectured a number of times by someone from “inventory control” and someone else from the finance department last time they had to obsolete and liquidate big quantities of last year’s best-seller that suddenly lost popularity.
What they are quite uncertain of is how to know precisely when last year’s best-seller will become this year’s overstock!
The Inherent Simplicity and Certainties Surrounding Balancing Flow with Demand
Compare the above UNCERTAINTIES with the comfort that must be taken by those who believe—or have been told—that they must “balance the flow of goods in the supply chain with demand.”
Reduce Lead Times
The supply chain manager who understands that his goal is to balance flow with demand across the supply chain may be absolutely certain that effectively reducing lead times will always lead to better results and improved customer service levels.
The supply chain executive who understands that his goal is to balance flow with demand may be absolutely certain that, as lead times are reduced effectively, reducing inventories in the supply chain will lead to faster and more accurate feedback on actual demand. It will also reduce the risk of loss due to obsolescence. Reducing inventories will help drive the supply chain toward balancing of flow with demand.
Supply chain executives and managers who have a clear vision of their goal as being to balance product flow with product demand can know with absolute certainty that anything they can do that increases visibility of actual demand across the whole span of the supply chain will help every trading partner to respond more accurately and more immediately to changes in demand. The improvement in visibility becomes the driver for improvements in agility. The supply chain automatically begins to move toward increasing agility when the participants become confident that their resources are being directed toward the fulfillment of actual demand—not someone’s (wrong) forecast.
Increase Replenishment Frequency
Executives and managers in the supply chain focused on balancing flow with demand can rest in the absolute certainty that increasing replenishment frequency—in conjunction with reduced lead times and reduced inventories—will have a positive effect and will result in measurable gains. They can be certain of this because many other companies have already proven the success of these concepts.
Reduce the Size of Production and Transfer Batches
Once supply chain managers and executives have a firm grasp on the value of balancing the flow across the supply chain with actual demand, they can know with absolute certainty that any reductions in the size of production and transfer batches will lead to greater agility in the supply chain. Capacity-constrained resources will spend more time making and transporting the right products to meet actual demand and far less time, money and energy will be consumed producing and shipping the wrong products (or even the right products at the wrong time).
As a result of all this certainty, supply chain managers and executives who have caught the wave of creating a truly demand-driven supply chain can also be absolutely certain that they will be able to report positive results to the C-suite as a result of their efforts.
Wouldn’t you rather be driven by certainty than hampered in your efforts day after day by the nagging uncertainty of attempting to “balance inventory with demand”?
Balancing flow with demand certainly works.
Let us hear your thoughts on this matter by leaving your comments here or, if you prefer, contact us directly. We look forward to hearing from you.