There is a supply chain cliché, “You will get yelled at for having too much inventory and get fired for having too little.” I offer up a third scenario of “You will unlikely be thanked for having the right inventory unless it’s on the heels of having way too much or way too little.” Enough with the gallows humor, somebody has to manage inventory. More accurately, many somebodies must manage inventory—in transit, raw & pack, work in progress, QA stock, finished goods, the warehouse space, and metrics that span inventory turns, tonnage, throughput, pallet spaces, and dollars of working capital.
With fall approaching, hopefully you’ve completed one or two iterations of your 2024 Annual Operating Plan (AOP). If not, what are you waiting for? The 2020s have provided supply chain professionals with non-stop reminders that the only certainty is uncertainty. I had worked in supply chain planning and analytical roles for 20 years prior to the pandemic and did not believe there was much left that could surprise me. And oh was I surprised! The pandemic shifted customer behavior and every dimension of supply chain availability from pallets to packaging, freight rates, and lead times on ingredients, new suppliers and capital assets. On the good news front, more people than ever (kind of) know what supply chain means, and more non-supply chain business leaders (Sales, Marketing, Finance) appreciate the role of inventory in managing uncertainty.
As you work through your 2024 AOP and in particular inventory, here are 3 questions to address:
To be clear, these questions are relevant all 365 days of the year. I don’t believe in New Year’s resolutions. If something is important, do it today!
Question 1: Do We Have an Inventory Strategy?
Stated another way, have you designed processes and systems to manage the flow of materials and products throughout your supply chain? Is there a policy that covers inventory and/or customer segmentation, service targets, re-order points, min and max levels, review frequency and ownership?
In addition, an inventory strategy often uses some combination of well-defined methods: materials requirement planning (MRP), just-in-time (JIT), Economic Order Quantity (EOQ), Vendor Managed Inventory (VMI) or Days of Supply are examples.
Question 2: Is it a Good One?
In my experience, a good inventory strategy uses well-defined methods, has an analytic basis, and is largely automated. The system settings (lead time, production frequency, minimum run or PO quantity, safety stock, etc.) should be reviewed at regular intervals. At a minimum, annually during AOP makes sense.
In terms of an analytic basis, for finished goods this would include SKU level upper and lower limits on days of supply, with limits based on at least service targets, safety stock, production cycle time, forecast accuracy, and production or supplier reliability. A number of other factors can also be included depending on industry and related processes (i.e. long QA period relative to production cycle time). All this math should be automated by planning software, with at least a few personnel understanding the math, inputs, outputs and assumptions.
Actual inventory reports should reflect real time (and historic point in time) availability in multiple units of measure—production may be concerned with cases or pounds, warehouse operations may focus on pallets, and finance may be analyzing days of supply or dollars.
Finally, for Question 2 please give your company bonus points for having an integrated planning process (S&OP, SIOP, IBP) or software that delivers an inventory plan detailing raw & pack and finished goods in multiple units of measure (i.e. pounds, cases, days, pallets, dollars) for at least the balance of current year. And celebrate more extra credit if your company has a Product Lifecycle Management (PLM) process led by supply chain and executed at least once each year.
Question 3: Is it Working?
Does inventory fluctuate within planned lower and upper limits while delivering expected service levels? Not every SKU every day of course, there are too many uncertainties in any supply chain. But do weekly and monthly inventory changes by planning group and/or location (plant, warehouse) make sense?
Answering Question 3 can be nuanced if inventory is chronically below or above expected limits, say for 8-12 weeks or more. You may have a strategy and it may be a good one, but if key inputs in real life do not match major planned inputs (i.e. forecast accuracy or production capacity) then results may be muddled. The same goes for prolonged periods of bias (i.e. large errors in the same direction for either the shipment forecast or production attainment). Your inventory strategy may be “working” the way real life inputs have forced inventory to move.
Lastly, do you have reporting and metrics to support daily operations and tactical planning of both physical and fiscal inventory levels?
Examples of daily operations reports may include:
Examples of tactical reports may include:
Building an AOP is a ton of work, but in my experience is always worthwhile. Fully half the value is in the conversations it drives—about inputs, assumptions, causality, relationships, and changes in supply chain methods or priorities. Creating an integrated and aligned inventory strategy should be a stated objective, and not an output taken for granted. Good luck!
—Jonathan Fleck, St. Onge Company