We thought you might be interested to know what kinds of correspondence we might have with a real client that is seeking solutions to the current supply chain and inventory management challenges. Here is a real-life example.

 

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Dear [Client]:

 

Thank you for the opportunity to participate in today’s discussions regarding your firm’s current challenges and opportunities.

 

We want to be very clear as to what I have been calling strategic inventory positioning. In order to reap maximum return on investment from inventories in a multi-echelon environment (such as manufacturing, or in a multi-level distribution network), there are five crucial steps.

DDMRP 5-Steps to Success.png

The first step simply cannot be overlooked or missed. It is truly foundational.

 

Most organizations with which we work believe—and, even, know—that their inventory is a strategic investment. Chances are, it is also one of their larger balance sheet assets. Nevertheless, beyond recognizing that it is “strategic”—in the sense that it is a relatively fixed investment and that their business would fail without it—most of inventory managers and supply chain executives are unable to tell you HOW and WHY (in dollar terms) the investment of dollars in a specific SKU-Location is the right one, and how it is optimizing their ROI.

 

There are, we believe, critical factors in determining strategic inventory positions and investments:

 

  1. Customer Tolerance Time – The time the typical customer is willing to wait for a given SKU before seeking an alternative source of supply. APICS has a roughly equivalent term in “Demand Lead Time,” which it defines as “The amount of time potential customers are willing to wait for delivery of a good or a service. Syn: customer tolerance time.”

  2. Market Potential Lead Time – This is the lead time that will allow an increase in price or the capture of additional business from either existing customers or new customer channels. This lead time should be developed through the active involvement of sales and customer service teams.

  3. Sales Order Visibility Horizon – The sales order visibility horizon is the time frame in which you typically become awareDDMRP InventoryProfile_Typical.jpg of sales orders or other actual demand (e.g., transfer orders).

  4. External Variability – Includes the following:
    1. Variable Rate of Demand – Categorized simply has high, medium or low, this term references the potential for swings and spikes in demand that could overwhelm resources (e.g., capacity, stock, cash)
    2. Variable Rate of Supply – Also categorized as simply high, medium or low, this refers to potential for and severity of disruptions in sources of supply for a SKU-Location.

 

Because these vital factors are frequently under-appreciated, and methods to implement effective change are missing, most organizations that handle inventory use traditional methods and struggle with a bi-modal inventory distribution. That is to say, when looking across their spectrum of SKU-Locations (SKULs), they are quick to admit that the largest number of their SKULs fall into one of two categories:

  • We have too much of this…
  • We have too little of that…

 

Only a small slice of their inventory is, at any given moment, at what could be described as “optimal” levels.DDMRP WhereRealInventoryValueLies.jpg

 

Given the fact that maximum return on investment is garnered only by inventory that is strategically positioned, sized and maintained at or near its optimal average inventory value (on a SKU by SKU basis, not just a mythical dollar-value), it is no wonder that companies are constantly sacrificing ROI to lost opportunities, firefighting and expedites on the one end of the spectrum, and to high carrying costs, obsolescence and other factors on the other.

 

Our hope is that [your proposed solution] can, and will, provide you and your team with the data it needs to strategically position your inventory and size your stock buffers to achieve the highest levels of ROI. We will certainly do all that is in our power to help move your project in that direction.

 

A recently released book—perhaps the finest written to date on the subject—might be valuable to you and your team as you move forward. The book is entitled DDMRP – Demand Driven Requirements Planning: An Intuitive Proven Planning and Execution Method for Today’s Complex and Volatile Supply Chains, and you might find it worthwhile to buy a copy and share with some in your organization.

 

While you should read from the beginning of the book—to get the complete picture and a comprehensive understanding of why the methods are so effective—I would call your attention to chapter 7 on “Strategic Buffers.” This chapter shows you how the ROI of every SKUL can be effectively calculated and compared to alternative stocking options. (NOTE: The book was written with a focus on manufacturing environments, but the principles equally to any multi-echelon inventory environment. This is highlighted in the latter portion of chapter 6, where the writes address “Distribution Positioning Consideration.”)

We look forward to helping you and your team achieve significant gains in ROI from your inventory investment over the coming months.

 

Let us know if you have further questions or concerns on these matters. We look forward to hearing from you soon.

 

Very truly yours….

 

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