Last month, we discussed the importance of actively managing inventory and presented what we call the Seven Habits of Highly Effective Inventory Managers.
This month, we outline a second approach to taking control over your inventory—techniques that will help you manage your inventory, instead of allowing your inventory to manage you. This second approach is modeled on the 12-step recovery programs used to combat addictions (yes, inventory can be addictive). The steps can be summarized as follows:
- Base inventory decisions on Pareto analysis. In the world of inventory, almost everything—sales, inventory, cube movement, SKU counts—is subject to the 80/20 rule and ABC analysis. The key is to remember that As account for 80 percent of whatever it is you're measuring, Bs 15 percent, Cs 5 percent, and Ds 0 percent. You'll quickly see the imbalances. And the Ds? Solving the mystery of how SKUs with no sales can consume inventory should have a big payoff.
- Reduce replenishment lead (cycle) times. Suppliers often welcome offers of help in making their operations more efficient. You may even see some of the savings on your end.
- Restructure order cycles/quantities. This one's easy: Just order half as much twice as often—unless the gains will be offset by higher transportation costs. If that's the case, you'll need to get creative.
- Improve forecasting. The dreaded "F" word is coming back into vogue. Though it nearly faded into history during the Just-In-Time era, forecasting takes on new relevance in an era of extended supply chains.
- Eliminate obsolete stock. That may sound easy, but it often requires the strength of 10 to overcome objections from sales or finance—or both. If you can't get rid of it, at least move it off the premises.
- Centralize inventories. The biggest gains will come from centralizing inventories of high-cube/low unit volume items and those with genuinely lower service requirements.
- Customize service levels. That sounds like heresy, but not every customer (C and borderline D) deserves—or really expects—the same service performance as the As. And they certainly don't expect top-tier service on all products.
- Manage SKU counts. It may not be practical to achieve blanket reductions in SKU counts in a universe of SKU proliferation, but intelligent and disciplined product or product family lifecycle management can help.
- Reduce demand variability. It's time to get real. Make a realistic assessment of intrinsic underlying demand. Quantify how much apparent demand is artificial—deals, specials, and so forth—and work with sales and marketing on smoothing the curves.
- Reduce supply variability. Attack this with all you've got. A consistent four-week cycle is preferable to one that averages three, but ranges from two to seven. This may require a candid evaluation of suppliers and their performance.
- Control inventory accuracy. You wouldn't think this would still be an issue in the 21st century, but it is. It's all about good processes, discipline, technology, and problem-solving methods. Cycle counting helps.
- Get the metrics right. Dump the disconnected, siloed measures and replace them with a comprehensive, unified set of metrics. Think total supply chain cost, perfect orders and customer satisfaction. Above all, don't get discouraged. Recovery takes hard work and persistence. Just remember, whatever the accountants may say, inventory is a liability, not an asset.
