Performance measurements have a way of getting our attention, don’t they? But sometimes they have us focusing on the short-term – or on the wrong thing.

We could all generally agree, I’m sure, that inventory levels that are too low will result in lost sales, and inventory levels that are too high will create unnecessary carrying costs, potential obsolescence, disposals, discounting and margin loss, etc.

Sometimes a lack of appropriate systems causes us to hesitate to drive inventory down, or we are averse to the risk of losing throughput (customer shipments) or increasing operating expense (backorders).

What results? We cling to inventory as a security blanket to protect us against the complexities and disruptions of our operations and the vagaries of customer demand. We ignore or don’t seek out new leverage points to produce a different result.

There are some generally held opinions about our supply chains that, I think, need to be refuted. It requires different thinking. Just keeping inventories in the supply chain, high, to protect sales is not an approach (a correct one).

What drives us in the wrong direction?

First, it’s the concept of “efficiencies.” You’ve heard it before; what gets measured improves or gets done. Ask a distribution manager. He/she will tell you that company inventory is providing for 99.5%  fill-rate or on-time delivery or some other familiar measure. Those performance measurements communicate the “health” of the measurement. Why not shoot for 100% fill-rate then? Why not encourage the behavior? Better for the company, right?

Secondly, there’s the “financials.” Inventory in the western world is considered an asset. Is it really?

Next are “the vagaries of forecasting.” Everyone tells you that “most forecasts are a best guess” (even the ones with fancy algorithms). We all know that we will have excess inventory of some items and stock-outs of others. The longer the forecasts look out into the future, the worse the answer becomes – proportionately larger excesses of inventory and stock-outs. The same holds true as we expand a product SKU to more stocking locations.

Sometimes we hold to the rule that it’s a bigger sin to lose sales than to hold high inventories – in other words, protect sales at all costs.

Next, the “desire to protect sales” is not impacted just by inaccurate forecasts. Suppliers sometimes are at fault, transportation may be disrupted, etc. It all results in unreliable lead times. So, increasing inventory levels will protect us against this by reducing the effects of the variations in lead time.

Next, “sometimes suppliers push,” meaning, pushing more inventories into the supply chain. A lot of companies are drawn in by the aggressive discounts they are offered. Sometimes only the most cash-strapped ones resist. Generally, there is always an ongoing effort to push inventory to the next level in the supply chain. What causes this push behavior? I think it’s the illusion that, sales from one supply chain link to the other is seen as creating throughput -  a good thing(?). Combine all of this with the other “inventory drivers,” and the result is often too much of the wrong products and not enough of the right products.

Financial impacts

It’s generally accepted that the main effect inventory has on the bottom line is the carrying cost of the inventory. It’s not the only thing though, nor is it necessarily the greatest factor. Others include:

• High levels of cash required
• Inventory takes up space – increasing warehouse and management expense
• Obsolete or slow-moving product to dispose of - reduces margins
• Extra time it takes to count inventory
• Inventory at the wrong location – increases transfer costs

The answer

So, is keeping high inventory levels the lesser of two evils? Of course it isn’t. What about changing the way we view the supply chain? Not as independent links striving to only increase their own throughput, their own bottom line, their own performance measures. 
At the risk of using an overused term – there needs to be a “win-win” answer. Say hello to the philosophy of “As long as the end user/consumer has not bought, we have not sold a thing.” Adopt that across the supply chain. We must be “pulling” inventory (not “pushing”) as close as possible to its actual demand, or actual consumption, by the end user.  There are a variety of well-proven methods to accomplish just that and go to the core of managing your inventory drivers.
They all lead to a well managed supply chain:

• Shorter replenishment lead times
• Correct products in stock at the correct location
• Quicker reaction to changing demand
• Less obsolescence, discounting and disposal
• Overall reduced operating cost

Let me know if I can be of help in answering any of your supply chain planning questions.    

MCA Associates, a management consulting firm since 1986, works with wholesale distribution and manufacturing companies that seek and are committed to operational excellence. A staff of senior consultants provides operational excellence – thought leadership — and implements continuous improvement solutions focused on business processes, inventory and supply chain management, distribution center/warehouse design and productivity improvement, sales development and revenue generation, information systems and technology, and organizational assessment and development including family-business succession planning. Contact MCA at 203-732-0603, or by email at hcoleman@mcaassociates.com. Visit our website at www.mcaassociates.com.