But, it seems apparent that, in every supply chain, all benefits accrue to the FLOW of relevant information and, hence, relevant materials or goods. Since profits result only from the flow of goods into the hands of the consumer, and not from the buying, storing and handling of goods, then the only priority for inventory and supply chain managers is FLOW.
When FLOW stops
There are two strong indicators for inventory and supply chain managers that FLOW has stopped (or, is stopping).
- The obvious one is STOCK-OUTS. When inventory levels fall to zero for any SKU-Location (SKUL), the FLOW stops, as do all the benefits of FLOW—such as, profits and customer satisfaction.
- The less obvious one is OVERSTOCKS. When inventory levels are too high, well beyond what is necessary to support FLOW, the overstock becomes a consumer of profits, rather than a producer of profits. The result is obsolescence, liquidations, and more.
ERP systems don’t solve the problem
Sure. The ERP (enterprise resource planning) system can identify stock-outs. But, GAAP-based accounting cannot and does not measure the real impact or cost of such stock-outs--at least not in a direct way.
As W. Edwards Deming made so clear: all of the really important numbers that affect a company’s present and future are unknown and unknowable. These include numbers like:
- The actual lost Throughput from lost sales due to out-of-stocks
- The actual lost Throughput from lost sales that might be affiliated with the out-of-stock items
- The actual lost Throughput from the loss of dissatisfied customers
- The increases in Operating Expenses in sales and marketing operations to recoup or replace lost customers
- The increases in Operating Expenses related to excess freight for expedited inbound or outbound shipments
- The actual lost Throughput from markdowns taken in liquidations of excess stocks
- The actual lost Throughput that would have accrued from the sale of other products when their sales were cannibalized by liquidations of excess stocks
Because executives and managers tend to compartmentalize and departmentalize the factors affecting an enterprise or a supply chain, even if some of these factors are latently recognized—like lost sales, lost customers or increases in sales and marketing expenses—these symptoms are seldom traced back to the root causes in how the supply chain and inventory are managed. Instead, there will be separate initiatives undertaken to improve sales, customer satisfaction, the effectiveness of sales and marketing, and so forth.
The single (non-conflicting) priority is FLOW
Let us assume that the supply chain managers and executives have already created an effective way to determine buffer sizes for each SKUL, dynamically manage each SKUL’s inventory buffer size, and the buffers have been strategically positioned. (We acknowledge that this is a very dangerous assumption. A good many supply chains—most, in fact—are not in such a state.)
Then, to assure a focus on FLOW, an inventory and supply chain manager’s “smart metrics” dashboard needs to focus on those SKULs that are found in the “tails” of the curve displayed in the accompanying figure.
- Out-of-stocks and near out-of-stocks (EXCESS FLOW)
- Number of days out of the last 180 days a SKUL spent in the red zone
- Number of days out of the last 180 days a SKUL was out-of-stock
- Number of days out of the last 180 days a SKUL was out-of-stock with actual demand (not forecast or planned demand)
- Overstocks (UNDER-FLOW)
- Number of days out of the last 180 days a SKUL spent in the green zone (over floor of, say, 15 days)
- Number of days out of the last 180 days a SKUL spent over-the-top of green (over a floor of 15 days)
- Number of days out of the last 180 days a SKUL spent over-the-top of green but less than the 15-day floor
FLOW is a system issue
When changes in FLOW are identified, it is not only the supply chain managers’ problem. It is, instead, a system matter that should be addressed by the entire system’s management team.
- For EXCESS FLOW SKULs, changes in demand should be examined by sales and marketing to see how the improvement might be sustained. Changes in supply should be examined, as well. Determinations of cause should be made and appropriate steps should be taken to correct or compensate for any changes in the consistency of supply.
- When looking at UNDER-FLOW SKULs, once again the whole team should be involved. Declines in actual demand should be understood and appropriate actions should be taken as soon as possible.
By using a Pareto analysis of the data supplied by the KPIs listed above, the entire management team can stay focused on the top few SKULs in each of the conditions affecting FLOW.
Generally speaking, taking action on these items should not await a monthly or semi-monthly S&OP meeting. Instead, daily or several-times-a-week stand-up meetings that last just ten or 15 minutes each and highlights the top offenders in each category should be sufficient to begin moving in the right direction for ongoing improvement.
What are your KPIs and how do you effect corrective actions?
Please let us know what your enterprise, and your supply chain executives, use as KPIs to drive improvement. What do they focus on? Or, are they caught in conflicts—trying to focus on two or more objectives? Please contact us or leave a comment below.