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KNOWLEDGE LIBRARY

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27Jun

Warehouse Occupancy Percentage

Optimal storage utilization helps enforce healthy inventory management. In our early work with Honda their...

02Jun

Efficient Procurement Inventory

Efficient procurement inventory (EPI) is often required to realize steep discounts when a special opportunity...

02Jun

Inventory Carrying Rate

The inventory carrying rate (ICR) is the percent of the unit inventory value used to...

26Jun

Inventory Activity Profiling & Data Mining

Suppose you were sick and went to the doctor for a diagnosis and prescription.  When...

27Jun

Inventory Performance Measures

Inventory performance measures include financial, productivity , quality, and response time indicators for evaluating the efficiency and...

The Inventory Delimma

A few years ago I conducted a workshop for the operating committee of one of the world’s largest industrial conglomerates. The heads of operations for each business unit plus the company’s COO participated. We had a question and answer session at the end of the workshop. The COO asked the first question. “Dr. Frazelle, we have quite a bit of conflict in these meetings. Especially lately. Why is that?” I asked him what the charter of the group was. He said, “We have two main objectives. The first is to reduce inventory. The second is to lower our unit costs.” I said politely, “You just answered your own question. Your main methods of reducing unit cost, global sourcing from cheap labor sources and buying in large quantities to receive discounts, increase your inventory levels. Your objectives are at odds with one another so you are at odds with one another.” He asked me what they should do about it. I encouraged them, like I encourage all our clients, to take a step back and reconsider their objectives and their approach. I suggested that their objectives would preferably be to maximize return on invested capital (ROIC), improve perfect order percentage, spend whatever was required in total supply chain cost to support those objectives, and invest in whatever inventory level was required to accomplish those objectives. Sometimes that inventory level will be higher and sometimes it will be lower. Inventory is not an end in itself; it is a means to an end.

 

We encounter this conflict in nearly every client situation. In all but the wisest and most mature organizations, highly qualified professionals are required to do the impossible; respond to a barrage of typically uncoordinated and irreconcilable initiatives from across the organization. Those initiatives normally include many of the following. Increase SKUs. Increase customization. Increase inventory availability. Reduce customer response times. Reduce transportation costs. Reduce purchase costs through global sourcing. Reduce manufacturing costs.  Mitigate increasing supply chain risk with multiple sources. All of these naturally work to increase inventory levels. Yet, facing prevailing lean thinking, they are still required to reduce inventory.

 

A few months ago the head of logistics from one of the world’s leading computing industry companies called in tears over the impossible situation they had been placed in. That was a first: inventory angst to the point of tears.

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