As I’ve been blogging to share insights into the area of Inventory management, I have had the privilege of receiving comments from many inventory and supply chain professionals. One such contributor is Stuart M. Rosenberg, who is a Sr. Supply Chain Professional and Professor of Supply Chain. Below is Stuart’s article, “Ten Deadly Sins of Inventory” which I trust you will find to be helpful……ENJOY!
In religious circles there are the Ten Commandments. Well, in Inventory Management there are the ten deadly sins of inventory mis-management. If you are struggling to meet customer demand, and 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 a 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.