Writing recently at Forbes.com, Lora Cecere gave the supply chain management community a penetrating article on the connection (or, lack of connection) between efforts to improve forecasting and results found in better inventory. The article was entitled, “Does Better Forecasting Improve Inventory? Why I Don’t Think So Anymore.” [*]
While the whole article is certainly worth your consideration, I would like to call specific attention to some areas that I consider critical—and too frequently overlooked.
Clarity on the Goals and Function of Inventory
Cecere’s to-the-point remark on the matter of understanding the true strategic and tactical function of inventory is key here. From her years of studying supply chains and gathering of statistical data from a large number of companies, the says: “In the benchmark data, companies that had clarity on inventory goals and understood inventory drivers cross-functionally make the most improvement.” [Emphasis added.]
Our anecdotal experience in working with dozens of small to midsized business enterprises facing supply chain challenges confirms what Cecere says.
We find that, for most of our clients, inventory has merely evolved over time. Inventory levels are driven more by seat of the pants reactions to events and which part of the organization got most upset last—if sales, inventories usually go up; if finance, inventories usually go down—than they are by any real understanding of inventory goals and drivers.
In fact, while virtually all of our clients consider inventory—in bulk—to be strategic, they mean nothing more than that they could not do business without it. Almost none of our clients, if asked, could provide for us with the strategic or tactical rationale for the specific target on-hand inventory levels of any given SKU-location. My guess is that is precisely the same for most of Cecere’s clients, too.
In teaching and mentoring our supply chain clients, we emphasize the fact that inventory positions (that is stock quantities positioned at a particular point in the supply chain) are strategic, if and only if the quantities effectively perform all of the following critical functions:
- Absorb variability effectively on both the supply side and the demand side
- Decouple lead times to meet the markets demand tolerance for delivery
- Provide real (calculable) return on investment (ROI)
As Cecere asserts, then, it makes sense that the better an organization understands inventory goals—and has a well-settled and effective underlying strategy related to inventory—and drivers, the greater their opportunity for improvement. Making adjustments—“fiddling”—with all of the individual factors and departments that affect inventory outcomes is just rearranging the furniture if the firm lacks a clear understanding and strategy to drive improvement.
Inventory Is the Most Important Supply Chain Buffer
In dealing with the matter of “buffers,” Cecere says, “The most important buffers—shock absorbers for volatility—in the supply chain is [sic] inventory and manufacturing capacity.”
Of course, the reason inventory is the most important and most often used is because inventory is actually a composite buffer. Inventory stores—simultaneously—both time (the time to produce and transport the goods) and capacity (the capacity to produce and transport the goods).
However, in a strategic supply chain implementation, there are actually three types of buffers that can be strategically created and tactically managed:
- Stock (inventory) buffers
- Capacity buffers
- Time buffers
Each of these types of buffers has its place. And, each of these types of buffers can provide tactical alerts and metrics that can lead to ongoing improvement.
The Role of Technology
We are delighted to hear Cecere’s comments on the matter of technology: “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.” [Emphasis added.]
I actually work for a firm where our primary business is the sale of technology, but I frequently find myself in the odd position of telling clients not to buy more technology until a clear strategic impact for the technology can be established. And establishing the clear path to ROI means that there needs to be a sound and effective strategy for inventory decision-making that comes even before process improvement and accountability (in my opinion).
Thank you, Lora Cecere, for another clear, to-the-point and hard-hitting article to help drive supply chain improvement. My hat is off to you.
Please leave your thoughts on these important matters in the comments section below.
[*] Cecere, Lora. "Does Better Forecasting Improve Inventory? Why I Don't Think So Anymore." Forbes. November 29, 2015. Accessed November 30, 2015. http://www.forbes.com/sites/loracecere/2015/11/29/does-better-forecasting-improve-inventory-why-i-dont-think-so-anymore/.