Inventory has become a trending topic once again!
The “Amazon Effect” remains ever-popular — not only must B2C businesses deliver an exceptional customer experience to remain viable, but more and more
B2B companies must also raise the bar to contend with B2C expectations.
Let’s face it: customers are in the driver’s seat. Rapid, immediate delivery has become the norm, and 24/7 accessibility is expected. Easy returns are the normal course of business, while above-and-beyond service is required to stand out in the crowd.
In order to contend with these elevated customer expectations while keeping costs in line, managing space considerations, and successfully navigating disruption and volatility, managing inventory has reemerged as a hot topic to simultaneously achieve the trifecta of improved service, accelerated cash flow, and increased profit.
Let’s start with a checklist of the fundamentals that must be in place before sustainable progress can be achieved. Distribution leaders are starting with the basics.
Inventory accuracy — As foundational as this topic sounds, high levels of inventory accuracy aren’t necessarily common in practice. Yet to reduce inventory levels to free up cash typically requires a renewed focus on inventory accuracy. To be assured that you will have the “right” item in the “right” place at the “right” time that can change at any moment, some level of safety stock inventory is required. If your inventory accuracy levels aren’t reliable, you’ll have to increase safety stock levels to provide the same level of service.
Thus, no matter how well you think you are performing, do a quick check to verify and emphasize the importance of process disciplines throughout your organization.
Supplier reliability — Similar to inventory accuracy, supplier reliability is essential to providing high levels of service. If you cannot count on your suppliers to deliver a quality product within a reasonable window of your request, you’ll require extra inventory to cover for this variability.
In working with multiple distribution clients, it is quite clear that the most successful consider sourcing and supplier relationships a top priority. If supply is interrupted, not only are customers impacted negatively, but safety stock requirements increase dramatically. Are you inserting a measure of supplier reliability as equally (if not more important) than price in your supplier metrics?
Demand management — There has been a surge in clients interested in developing a ratified approach to demand management with a consistent cadence. It isn’t because they want to become structured process owners that beat up their sales teams for selling more than predicted; instead, it is because they are realizing the dramatic impact demand planning can have on their ability to manage inventory levels.
The more unknown and unpredictable the customer demand, the more idle inventory and capacity required to stand by in case a customer needs product. Worse yet, if your demand changes frequently, you’ll have no choice but to increase inventory to satisfy customers’ needs — unless you implement innovative approaches to get in front of it.
WORKING WITH (AND WITHOUT) AUTOMATION
Next, if you add your lead times into the mix, you’ll be able to determine what level of inventory is required to satisfy your customer’s expectations. This planning process is one of the keys to success. Here are four questions to ask to determine how your process is performing.
Is it understandable? Undoubtedly, the most successful clients do not have the most complex and sophisticated processes and systems. Instead, they have the right level of sophistication to support the objectives. If unsure, err on the side of simplification.
For example, in our 20+ years of experience, 80 percent of the time, a client will achieve better results through simplification than through adding best-practice sophisticated functionality, no matter how perfect the system.
Do your planners know how to order if the computer goes down? This might be the most important question. In today’s cloud computing world, systems rarely go down, so it isn’t a significant concern. However, those planners who know how to perform manual calculations to order the right product to be delivered to the right place at the right time via the right mode of transportation will beat the best of systems every time.
The bottom line is to make sure your planners know how to think.
Do you look for the “and” in evaluating trade-offs? Planning is a game of managing trade-offs. If you improve service, it is likely you’ll need more inventory, all else remaining equal. Or you’ll need to invest more money into expedite fees, your supplier base, or another area.
While evaluating these typical trade-offs, look for the “and.” How can you improve service and reduce inventory and increase margins? It might require looking at the situation in a new light and testing theories to find out what works.
Are you automating the 80/20? Last but not least, there are far too many distribution/inventory planners who do the work manually. They might have a Tier 1 ERP system, but it is set up rigidly, and to do their job, they use a report and do a bunch of calculations in a spreadsheet.
We have yet to meet a client without an opportunity to automate. Configure your system to assist. Purchase a simple, proactive system to supplement your ERP system. Hire a report writer or business intelligence analyst to provide the appropriate data.
No matter how badly you think your system performs, you are only using a fraction of its capability. Look for
Once you have your inputs in place and a planning process that performs, it is time to make a leap and raise the bar. Consider one or more of these advance inventory strategies.
Vendor Managed Inventory — Although by no means new, VMI remains one of the hidden gems of top-performing clients. It truly isn’t rocket science and often requires virtually no investment, yet it can provide a dramatic improvement to your service levels, inventory turns, and profitability.
VMI comes in many shapes and sizes, depending on the industry and customer requirements. It can range from a simple visual process, where you provide the value-added service of managing your customers’ inventory for them (whether consignment or not), to a moderate level of sophistication with a proactive reorder point and min/max system, to a sophisticated replenishment process frequently seen in consumer product companies — where countless SKUs and customer locations are managed with EDI and supply planning systems.
The bottom line is that the distributor is getting a closer view of customer demand and collaborating with the customer to achieve a win-win.
Delving further into your supply chain — If you can create relationships such that your extended supply chain partners are working in concert with one another, alignment and synchronization occurs.
There is an opportunity to get data from your supply chain that can be used to achieve the win-win-win. For example, gaining point-of-sale data, customer forecasts, and an insider’s view to your extended supply chain will give you a distinct advantage.
Since improvement starts with understanding your customers and working with them instead of merely trying to keep up with them, gaining demand insights will prove valuable. According to a Gartner study, a 1 percent improvement in forecast accuracy can result in a 7 percent reduction in inventory levels.
Sales, Inventory, and Operations Planning (SIOP) — In our experience, there is no methodology that has proven more effective in maximizing sales revenues (service), cash flow (inventory), and profitability than SIOP. According to a study by the Hackett group, a 20-30 percent improvement in working capital results.
The key concept relies on aligning demand with supply and, more importantly, aligning the relevant parties (sales, operations, new product introduction, finance, and more) on one plan and one version of the truth.
NO TIME LIKE THE …
Since your customers are undoubtedly slashing lead times and expecting higher levels of customized service for the same (if not less) compensation, the time is now to put a full-court press on managing inventory turns while maintaining and improving service levels.
Start by gaining an interest in the topic, and you’ll undoubtedly see the significance emerge. Those who consider inventory part of the strategic discussion as it relates to your network, the customer experience, and your supply base will thrive while your competition struggles with daily order fulfillment.
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