It sounds incredulous; but lend me an ear for awhile.
Many companies don’t plan the size of their inventory. Instead, they plan their customer service levels. They set customer service objectives for A items, their best sellers; B items, their more moderate sellers and C items, their worst sellers.
The problem with this method is that when companies set customer service objectives, it will affect the size of the inventory. Their finished goods inventory management systems are building safety stocks to meet their customer service objectives, but their inventory planning is not tied to their financial planning.
The inventory management system should be tied to the financial plan and the sales plan. The sales plan and the customer service objectives should be the determining factors in the size of the inventory….as size of inventory will dictate the size of the safety stock.
Without this cross-functional plan imagine the scenario: the inventory increases the inventory until the customer service level improves; then the finance manager applies pressure as the cash resources are strained; then the inventory manager reduces the size of the inventory and customer service levels decrease; customer begins to complain and then the general manager puts pressure on the inventory manager to increase the inventory. The company is caught in a viscous cycle. This brings us to the question of how to end this cycle.
The best method to avoid this cycle is tying customer service to inventory turnover. But it goes deeper than that. With this connection a company can measure customer service in a number of ways. I find the two best ways are:
- Line-fill rate
- Dollar-fill rate
Line-fill rate is the number of lines a customer receives of the total lines ordered, while dollar-fill rate is measurement of dollars received by the customer versus the total dollars ordered.
Line-fill rate is a better measure of customer service as the dollar-fill rate does well by the inventory’s ability to earn sales and gross profit.
However, line-fill rate will vary by company, by type of industry and how it is calculated. If companies “back order” records are kept of cancelled customer orders and ship those items when goods are available. Companies that use this practice avoid customer reorder of cancelled items. Since those customers order fewer cancelled items, the fill rate rises proportionately.
Turnover, the earmark of well inventory is moving throughout the business. The higher the turnover rate the lower the line-fill rate.
The inventory manager and the customer service representatives for each customer together should consider these goals in setting line-fill rates:
- What is company policy on line-fill rate?
- How are the suppliers shipping?
- How and what is our recent line-fill rate?
- Are we borrowing money to support inventory and are we running out of space?
- Is our competitor’s line-fill rate better than ours?
- Is our inventory healthy – excesses or months on hand exceeding the plan?
- Do we have the proper systems in place to improve and measure our customer service / turnover relationship?
- How many items in inventory compared to last year?
- Can the production department handle change in inventory levels?
- Are we at end or beginning of a season?
Even after these ten items are considered a company may still not deliver or ship all the lines. There are four major reasons if that happens:
- Goods are available, but we failed to ship them.
- Goods are at the receiving dock, but not yet put away for order filling.
- Vendor or another facility of the company’s has failed to deliver.
- Company did not order enough.
There is a direct relationship between the inventory manager and customer service. In order to create and maintain realistic goals the inventory manager must determine what this relationship is. Inventory manager can use the following tools to accomplish that:
- Accuracy of existing forecasting system
- Mix of items in the inventory
- Size of the work force
- Availability of cash and space
- Performance of the competition
- Quality of the procurement decisions
The final step in setting these customers service/inventory level realistic goals is confrontation. Yes, confrontation. Allow me to explain. The company president knows what he wants the inventory goals to be. The inventory manager must know if these goals are realistic and set up short term goals. The basic relationship of investment, customer service and work in the company is usually unchangeable. The president will set the long term goals and the inventory manager and the customer service manager must create ways to see the goals to a successful conclusion.