The Inventory Tug of War

by Punita Chhabra

Make no mistake, inventory is an asset… until it’s not.

The balance between not having enough and having too much has plagued companies for as long as supply chain management has existed. The recent pandemic has further highlighted the importance of finding the right equilibrium in inventory levels.

Inventory Planning is the process for determining the optimal quantity of product needed, at the right time and in the right mix. It directly affects cash flow, strategic investments, payables, and the overall Customer Experience. Consequently, it creates an ongoing challenge to strike the right balance required for success.

While there are various Inventory Planning software solutions available in the market, they alone are not sufficient. Achieving the right level of inventory is both a science and an art. It demands a robust, rigorous process and skilled inventory planners.

In the realm of Inventory Planning, success lies in being flexible and nimble. This becomes particularly challenging when faced with long cycle times, extended lead times, a vast range of SKUs, and a volatile market. Despite these complexities, companies must strive to establish an effective planning process that accounts for the multitude of factors that can impact outcomes.

Steps for an Effective Inventory Planning Process:

Define Goals

1. Define and understand the Objectives: Clearly define the objectives of the inventory planning process, finding the right balance between revenue maximization, cash flow, and customer experience.

2. Establish Entitlement levels: Determine entitlement levels for each business group, taking into account lead times, safety stock requirements, desired service levels and customer contracts. Entitlements provide a benchmark to measure performance.

Develop the Plan

3. Improve Demand Forecasting: Develop a robust demand forecasting process that includes accurate metrics and action plans for timely course corrections.

4. Plan Inventory based on Value and Variability: Categorize products based on their value and variability. Allocate resources for detailed analysis using the 80/20 rule, focusing on the most impactful items.

5. Create Operational Plans: Establish consensus plans that incorporate safety stock and buffer targets. Customize product as late as possible. This minimizes inventory cost and reduces the risk of obsolescence.

Evaluate and Course Correct

6. Measure Performance: Use standardized methodology or system to gather actual accrued inventory cost and analyze the outliers. Identify any significant deviations from the plan and take appropriate action.

7. Address Non-Moving Inventory: Identify and address stagnant inventory through promotional sales opportunities or write-off’s.

8. Take Prompt Action: Regularly analyze inventory data and take small actions over time, preventing large-scale disruptive course correction.

Achieving optimum inventory levels is a dynamic process that requires flexibility and adaptability. It is not a single fixed number, but entails finding the right range based on market conditions. There are times when a lean approach is necessary to minimize costs. At other times having extra buffer stock can enable capitalizing on anticipated market surges. Maintaining a constant push-or-pull, continuously adjusting the tension of the rope, is crucial to achieving the optimal balance for success.

Strategic and well-managed inventory serves as a competitive advantage for a company. By investing in your inventory management processes, people and systems you can transform your inventory into a valuable asset, rather than a liability.