In the supply chain world, not unlike most other disciplines, firms frequently find themselves in search of the next big thing; some revolutionary break through that will drive big value. Unfortunately, in most cases, not only is such a break through event likely not to happen, but more often than not, in the supply chain world, real firm value is created by small, incremental improvements, to our already embedded processes.
"Depending on your product complexity and business model, building a robust S&OP process can be paramount in creating firm value"
Most of us have spent years planning and implementing a host of lean tools and robust processes in our operations, and we have done so reasonably well, but perhaps one of the last supply chain frontiers not fully leveraged, lies within the asset space of inventory management. With that said, why should we even consider dedicating scarce resource time on inventory management practices, especially since the cost of capital remains relatively low; actually the reason is both simple and profound. Customer service will always be of almost glacier-like importance, and a sound inventory strategy can be a powerful enabler towards delivering excellent customer service.
Like with most things within the supply chain, there is not a “one size fits all” approach to build an effective inventory management strategy; it largely depends on the firm’s maturity level, culture, and infrastructure. With that said, perhaps a general framework for building or at the very least refining your inventory management strategy might include the following competencies.
Complexity is Costly: Simplify where Practical
As a supply chain leader, I am always looking to reduce complexity within our processes. Complex processes cost money and almost always is a value drain, not a value contributor. We look for ways to streamline our processes, making them common across the business. The more common, easily understood processes, the less likely mistakes occur. Additionally, the practice of commonization should be extended to the firm’s language as well; a common business language reduces complexity and subsequently reduces mistakes, and more value is created. Additionally, using disparate information technology systems to manage metrics such as inventory turns, plant scheduling, customer orders, SKUs etc. increases complexity, as some type of system reconciliation will be required. Wherever possible, not only within your inventory management strategy, consider making complexity reduction, a top priority for your team.
Leverage the Back-end of the Business
Another approach to reducing complexity within an inventory management strategy is the ability to leverage the “back-end” of your business. When I talk about the back-end of your business, I am talking about most of the supply chain functions not visible to the customer, and most commonly associated with order-entry, scheduling, procuring, and the manufacturing of your products. The real reason however, you want to leverage your back-end processes are not only for component or material cost purposes, but also for SKU reductions and service. Obviously the more of a particular product or service you purchase, the better cost position you achieve. Real value however, is created by increasing in-stock positions where service is improved while either maintaining or increasing customer choice on the front-end and simultaneously limiting complexity on the back-end of the business.
Build a Robust S&OP Process
Not all firms actively use a sales and operations planning (S&OP) process as an inventory management strategy, and not all should, but at the very least, it’s worth a look. Depending on your product complexity and business model, building a robust S&OP process can be paramount in creating firm value. When done well, an S&OP process can reduce overall inventory levels, improve the quality of inventory, reduce manufacturing complexity, and improve customer service, while reducing inventory obsolesce, among other significant tangible activities. With that said, building an effective S&OP program isn’t easy, and it’s time consuming, not only for the supply chain team, but also for the firm, as it will require participation from all functional areas. According to article published by Dan Gilmore in Supply Chain Digest, only 42.9 percent of surveyed respondents said they practice S&OP at least at the “good” level; clearly not an easy process to master. With that said, an effective S&OP process provides an integrated, single business view across the firm, “sort of a one lens” approach. It effectively leverages inventory, and when the process is in-place, operating well, is an efficient means to making sound business decisions.
View your Business Virtually: Consider a Dashboard
A more contemporary way to use information technology within an inventory management strategy is to create a supply chain dashboard. Critical metrics relative to inventory management such as service levels, SKU complexity, inventory values, in-stock positions, etc., can be managed, establishing one reference point as a singular firm view, and can be an effective and efficient means to making rapid and intelligent business decisions. The dashboard should be made widely accessible to the supply chain team; aligning towards one common asset goal. Moreover, the supply chain dashboard can morph into an extension of the greater firm dashboard where the common firm language is spoken, yet again, proliferating commonization and reducing complexity.
Think Long-term: Design for Manufacturing and Assembly
By extending the theme of complexity reduction to the design phase of manufacturing and assembly (DFMA), a concept introduced originally by Geoffrey Boothroyd and Peter Dewhurst, the firm can leverage yet another inventory management strategy. DFMA deploys designs principals, largely in the research, and development and manufacturing disciplines, intended to use common parts (SKU reductions) and common manufacturing processes that assist in the simplification, and reduction of manufacturing complexity. Additionally, DFMA is another principal where the firm can speak a common language further facilitating boundary-less efficiency and effectiveness.
The Softer Side of Strategy: Your Team
As business leaders we manage many valuable assets that are critical to our firm’s success, but no other asset we lead is more important than our human capital, our talent, and, our people.
This philosophy certainly applies when building or refining your inventory management strategy. It’s important that you accurately diagnose your firm’s culture and skill gaps within the supply chain discipline, and specifically within inventory management function. We all know fit is critical to any team’s success, but fit and skill are also foundational to any strategy, especially when managing your firm’s inventory function. Building a team that understands the firm culture, speaks the language, and can navigate across functional boundaries will likely be your best value creating proposition within your inventory management strategy, or otherwise. Your people are unquestionably the greatest part your firm.
In a world where consumers have been conditioned, at a minimum, to expect the speed of commerce to include the near instant gratification of overnight delivery of goods and same day services, having a sound and robust inventory management strategy can be a compelling proposition. Additionally, when the firm leverages its talent, speaks a common business language, reduces complexity within both its products and processes; a powerful inertia occurs, and unequivocally, real value is created.
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