In religious circles there are the Ten Commandments. Well in Inventory Management there are the ten deadly sins of mis-management. If you are struggling to meet customer demand, you are losing customers and new sales then inventory mismanagement is the primary cause.
All organizations that have embarked upon an inventory and thereby a cost reduction program have its own opportunities and challenges. Managing for the right sizing of inventory is goal that requires meticulous attention and sustainability to maintain the edge. The outcome – improved customer service, increased sales, reduced costs and profitability – are well worth the endeavor.
In my years as a supply chain professional I have witnessed much short-sightedness or inexperience in managing inventories of various types. In that time I have compiled a list of deadly sins that must be avoided to ensure the accuracy and right-sizing of inventory. At the same time as I give you the ‘sins’ I will suggest solutions.
Deadly Sin Number 1: Using a narrow measurement of performance
Companies alter their forecast management to meet supply chain performance. This occurs without understanding the nature of the demand and causes of forecast errors. If forecast accuracy is stressed the fill rates and inventory turns do not improve. Inventory managers have no clue as to how well customer’s needs are met. At the same time, without realizing how quickly inventory moves through the entire process there is no inventory management.
The solution is twofold – tracking of the fill rate and inventory turns and develops a realistic and logical forecast system. How much forecast error a company can withstand is unique to each company?
Deadly Sin Number 2: Unqualified employees manage inventory
If warehouse managers, clerks and other employees who have no specific inventory training are making inventory decisions, then there is no doubt of the outcome – wasted inventory is being stockpiled throughout the system and facility. There is no clear and concise inventory plan.
If a company is emphasizing buying inventory over planning there is no strategic plan in sight, opportunities for improvement will most certainly overlooked and financial benefits will wither away.
Recognize that inventory management requires professional job skills, assign accountability for inventory management and unify inventory planning.
Deadly Sin Number 3: Forecast management without a disciplined process
Just like inventory management someone must be held accountable for the forecast and its accuracy. Disproportionate forecast overrides often is a reflection of a lack internal collaboration on the forecast process. It is needless to say, but it happens too often, inaccurate input information will lead to erroneous forecasts. All too often the knee jerk reaction to having too much inventory is to cut the forecast. But this ‘disconnect’ will separate inventory planning from its vital partner – customer demand.
It must be recognized and acted upon – forecast management is a collaborative effort. Have a monthly forecast collaboration meeting with all vital parties prior to the sales and operations meeting. Do not override a forecast based upon such notions as a ‘gut feeling’ or to ensure ‘the numbers look right’. If these actions are taken, rest assured the numbers will not look correct and will harm your customers.
Deadly Sin Number 4: No internal communication
We touched on this in sin number 3 – collaboration. Let’s go into it a little more in depth. Promotions and or new product introduction are not reaching all vital departments. Inventory support areas should have this information for their planning and forecasting.
Companies should not have complete trust in their forecasts without periodic review and adjustments. Customer demand changes so the forecast should change accordingly.
There is a lack of coordinated input and a multitude of numbers. Clearly, each department is operating as an independent fiefdom. Inventory management, sales and finance are all using different forecasts.
To prevent this lack of communication implement Sales & Operations Process meetings. The goal of these meetings is to reach an accord on the demand side and the supply side.
Deadly Sin Number 5: Not talking to the customers
This is just as bad if not worse than lack of internal communication. There is a mad scramble to service the key customers who will surprise the company with ‘killer’ purchase orders that use unplanned resources – overtime and or expediting - to meet the requirements.
Supplier inventory planners should be meeting with customers on a regular basis to understand their drivers. Implement some key programs with the customers such as Vendor Managed Inventory or Collaborative planning/forecast/replenishment.
Deadly Sin Number 6: Preoccupation with the budget
We all understand that the budgets are vital to the operations but they must be flexible. Measure the gaps between the budget and the sales forecast. Manage this gap through inventory planning techniques. If the gap is too large change the budget, not the forecast. The forecast is most likely closer to reality than any budget.
Deadly Sin Number 7: Using reorder points to manage inventory
Many companies do not have a viable Enterprise Resource Planning system so they use Excel spreadsheets to manage the inventory. The spreadsheets cannot provide a window into customer demand. This lack of transparency will cause excessive inventory and weak customer relations. In addition suppliers and customers are not given forecast information to share in strategic planning and collaborative inventory management.
The implementation of either time-phased inventory planning or economic order point. A firm should have the information of not only what is needed in the short term but also what is needed several weeks in advance. The benefit of this information will lead to proper management of delivery timelines, truckload quantities and other variables to control costs and maximize customer awareness.
Deadly Sin Number 8: Too many Stock Keeping Units (SKU’s) in too many places
If you have reached a saturation point where no longer does 20 percent of the items account for 80 percent of sales you have reached SKU abundance. If this happens there is not a stocking policy – process control rationalization for stocking items. Once again, when buying is accentuated over planning no one is tracking the SKU levels. If a firm continuously implements their inventory reduction campaign something is amiss.
The solutions to this sin are multiple:
- Introduce an ABC analysis program where inventory is segregated by volume of sales.
- Stocking policy based upon velocity. Ties stocking decisions to the planning thus are preventing any arbitrary decisions.
- Centralize the C items of ABC analysis in one distribution center or if not possible segregated from the A and B items.
Deadly Sin Number 9: Managing all items in the same way
This outlook will result in not having too much C items and not enough of the A or B items. Companies implement the same goal for all items. Not all items are consumed in the same quantity at the same rate. Companies that endorse this goal will spend an inordinate amount of time on expediting C items. It is invariably true that companies using ‘the same goal’ concept will use a fixed safety stock methodology to replenish inventory. Will result in the same problems.
The use of Pareto’s Law or ABC analysis will tie any stocking decisions to customer demand. In addition, instead of using safety stock for replenishment use safety time. Safety time increases or decreases safety stock in response to demand.
Deadly Sin Number 10: Never trying new methods
Still trying to manage inventory through use of spreadsheets. New technology provides better capability for collaboration in forecasting and inventory planning. Company does not link itself to its customers electronically.
There is no company incentive for employees to train on new technologies or methods. Without stimulus for individual improvement they will less inclined to change.
Emphasize continuous improvement for new and different ideas as opposed to constant return on investment. Make your suppliers and customer’s partners in your business – new technology such as e-commerce makes customer sales forecasting much easier and by sharing purchase schedule with key suppliers and customers.
I have found these to be the most common inventory mistakes. However, the prevalent error is a failure to address inventory planning and management in a companywide collaborative approach. If your organization is constantly putting out fires on a daily basis to meet customer demand, then you are losing the ‘war’ to keep customers and gaining new sales.