“What is the right level of inventory to carry?”
Inherently this oft-asked question is directed toward inventory optimization. The supply chain executive, in this case, is typically looking to “right-size” their inventory carry. Their motivation may be their own initiative. However, it is often due to a corporate edict that identifies with fiscal P&L pressures usually associated with the P&L asset line item of inventory carry.
Inventory optimization is typically and most easily enabled through a software solution (and how one selects such a software solution is a topic for a separate discussion) but will the software solution in itself enable inventory optimization? More so, will inventory optimization by itself lead to fixing the inventory position once and for all?
One can argue that inventory optimization is a symptom of the need for a more extensive assessment. I am by no means saying the planning process is broken as soon as one hears of the need for inventory optimization, but several other aspects may need to be assessed to enable the proper leverage for inventory optimization. One may see some benefits to undertaking inventory optimization short-term, as a stand-alone activity, but a holistic approach will provide better and more long-term benefits.
At. St. Onge Company, we define this holistic approach as inventory planning management, and it typically includes several sub-areas – all of them inter-related and of which inventory optimization is just one sub-area. Said differently, inventory planning management is not one activity but a set of activities for a mature supply chain planning organization to undertake.
We’ll start with the already identified sub-area of inventory planning management, which is inventory optimization. The process, frequency, and use of technology around inventory optimization is an element that defines the overall maturity of inventory management at an organization.
Let’s reflect on some of the other aspects of inventory planning management.
True inventory management starts with an overall SKU portfolio assessment. This is a key enabler in inventory management and usually leads to a fair understanding of whether all items genuinely need to be stocked (or are there SKU candidates that can be rationalized/SKU portfolio pruned), and what is the overall value proposition for inventory planning management.
Another critical enabler is demand characterization (which is partly driven by SKU portfolio analytics). Every SKU has differing demand characteristics, allowing for inventory planning to be undertaken differently to impact the inventory stock position.
The behavior of SKUs in the SKU lifecycle presents another key enabler to inventory planning and inventory management and provides input to inventory optimization coupled with service differentiation concepts (what service level should I use?).
Couple this with a multi-echelon supply chain model, or one where a hub-and-spoke network configuration is envisioned, and the ability of inventory management methods to influence optimized levels of inventory becomes further evident. These techniques alone have a significant impact not just on inventory stock position but also on specific tasks and work-effort impact related to supply planning and replenishment planning. An alternate consideration to drive the importance of this is the centralization of a product category or a subset of SKUs – a favorite being slow-moving SKUs. Yes, one can quantify the quantitative benefits of optimized inventory through centralization, but a comprehensive approach to inventory management would further allow for an appreciation of the work-effort reduction in supply planning and replenishment planning. If you ask how to figure out which SKUs to centralize, the answer goes back to the inter-related set of portfolio assessment activities and demand characterization; it’s all a cyclical wheel of inter-related activities.
We haven’t yet talked of all the other considerations of promotions and special events, MRP, DRP, capacity considerations, working capital considerations, sales and operations planning, integrated business planning, business performance planning, amongst several others … and my word processor is prompting that I am past the word limit of a blog entry.
My hope, though, through this short discussion, is to encourage all supply chain executives tasked with optimizing inventory to be willing to step back and undertake a comprehensive review of the methods, processes, people-capability, systems, technologies, and interfacing considerations that allow inventory optimization leverage to be created for a competitive and sustainable go-forward success – which we at St. Onge call inventory planning management!
—Aman Sapra, St. Onge Company