The inventory conundrum is exacerbated by many complicating factors. Those factors can be categorized into five major malfunctions:
- Data Discrepancies
- Inadequate Training & Education
- Problematic Perspectives
- Misaligned Metrics
- Poisonous Paradigms
- Base Data Errors. In many companies the base data used to control and plan inventory and to support inventory decision making is just plain wrong. In a recent project with one of the world’s most prominent HVAC firms we discovered that more than 50% of the MRP, bill of materials (BOM), and on-hand inventory records were wrong. In a recent engagement with a large engine manufacturer we found that inventory planners were regularly manipulating historical demand, set points and parameters to conjure the turn rate they wanted.
- Un-vetted Changes. It is not unusual to find hundreds of people, qualified and unqualified, with and without accountability, making un-vetted changes to schedules, demand, supplier data, and MRP data. We recently came across a client situation where more than 500 people had access to make changes to multi-million dollar assembly schedules. With a large retailer we found that more than 300 people had clearance to modify multi-million dollar store order replenishment schemes.
Inadequate Training & Education
- Untrained Planners. Based on my experience I estimate that less than 30% of inventory planners and analysts working with inventory systems have any formal education in inventory management. During a recent project I asked to see the resumes of the inventory planners. Less than 10% had any formal training in the decisions they were making. Many people pulling inventory triggers don’t know how to use the gun.
- Faulty Fundamentals. Because so few inventory planners and managers have inventory training and education, there is widespread misunderstanding and misapplication of inventory management fundamentals. During a recent engagement with a large healthcare company I asked about their inventory accuracy. They said that it was well above 98%. I was suspicious, so I asked them how they defined inventory accuracy. They said it was the portion of demand shipped from inventory. I explained that that was fill rate, not inventory accuracy. I then asked what their inventory accuracy was. They didn’t know.
- Conflicting Perspectives. Every inventory decision impacts financial, service, and operational performance. However, very few individuals understand all three and very few decision support tools consider all three. As a result, different inventory levels appear high or low depending on the glasses you are wearing. Those views need to be reconciled; a major point and objective of this book.
- Irreconcilable Interdependencies. Decisions made in customer service, inventory management, manufacturing, sourcing, transportation, and warehousing all work interdependently to impact inventory levels. However, very few individuals understand those interdependencies and very few decision support tools consider them.
- Operations Myopia. Inventory is typically viewed as an operational or tactical outcome. It is rarely viewed as a strategic contributor to an overall supply chain strategy which in turn serves as a part of an integrated business strategy.
- Misplaced Accountability. Many people influence inventory levels but often no one is accountable. I like to ask our clients early on who is accountable for inventory. The answer is revealing and quickly highlights the organizational and measurement root of inventory and/or supply chain issues.
- No Microscopes. Every SKU has a unique demand pattern, supply pattern, and dimensional profile. Individual SKUs are bought, sold, and slotted. Yet, most companies resist individual SKU inventory optimization and planning. Even in cases with 100,000+ SKUs we have developed individual SKU strategies and rolled those up into category and business unit inventory strategies. Inventory strategy is a top-down AND bottom-up endeavor. Wide angle lens AND microscopes are required and available.
- Traditional Accounting. Traditional accounting treats inventory strictly as an asset whereas operationally and philosophically inventory is popularly considered a liability.
- Conflicting Metrics. Metrics used in the five supply chain logistics activities – customer service, inventory management, sourcing, transportation, and warehousing – often work at odds with one another and yield excess inventory.
- Procurement “Cost Avoidance”. In the name of “cost avoidance”, procurement is still looking for the cheapest first price that may cost much more in related excess inventory carrying costs.
- Lean. Lean literature and previously idolized supply chain operators often veil the fact that their inventory turn advantages typically come at the expense of suppliers further up the chain.
Were it not for poor fundamentals, grasping for silver bullets, limited education, misaligned metrics, myopic perspectives, misplaced influence and accountability, misalignment with corporate strategy, and false prevailing paradigms: developing inventory strategy would be a piece of cake.
During a recent client workshop the chief supply chain officer noticed that I was becoming discouraged as they bemoaned their inventory ills. He said, “Dr. Frazelle, don’t get discouraged. We don’t. We just keep our heads down, keep making stuff, and hope it turns out OK in the end.” Fortunately he was joking. Unfortunately many live in a world with their heads down, making and buying stuff, and hoping it turns out OK in the end. There has to be a better way.