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Demystifying Inventory Management


3 Processes to Nail for Sound Inventory Management

Keep Calm and Call the Supply Chain Guy!


Inventory, inventory, inventory – Do I have too much?  Do I have too little?  Do I have the inbound supply to support my manufacturing plans?

These are the questions you usually think of when discussing inventory management, very focused on levels of inventory or how much inventory.  The level of inventory is obvisoulsy important but there are other core process areas you need to nail for managing and controlling your inventory.

As someone who has managed and tracked inventory for various businesses for years, you will either have too much or not enough – that is the way it works – either way your ability to manage your inventory costs will largely depend on your inventory management capabilities and processes in the following areas:

  • Inventory balance and stocking goals
  • Inventory Accuracy
  • Inventory Movement Control – Where is the inventory and is it being tracked real-time?

Inventory Balance and Stocking Goals

So many companies manage their inventory based on gut feel or using one or two factors – such as expected monthly usage or forecast, lead-time or desired safety stock to determine how much inventory to carry for any product (FGI) or component.  Basically, it is a guess based on limited information.

Here are the key factors to evaluate when determining how much inventory to carry:

  • Product Roadmap/Strategy – Do you have a product roadmap – identifying obsolete and new product introductions?  Having a product go to market strategy obviously will impact inventory levels and purchase decisions.  Typically it is important to understand new product plans and obsolescence of existing products or product categories.
  • Demand Forecast – The demand forecast is wrong – the only question is how wrong and in which direction – actual demand greater than forecast or less.  The demand plan sets the core direction of how much inventory you need to carry.  This amount of inventory is usually described as your core usage of inventory in each period – how much can you expect to consume over the course of a month. 
  • Product life cycle – Where a product is in its life cycle has a large impact on your inventory goals and plans.  New products tend to carry a higher level of inventory to support forecast variability and as it moves through to a more mature stage, inventory levels can moderate to actual demand requirements.  Typically, you will start lowering your inventory requirements for products going end of life and have replacements on the way.  You will remove safety stocks and may even update your MRP settings to block future purchases of raw materials.
  • Forecast Variability – Higher forecast variability = higher inventory.  This factor – how much forecast variability you want to cover is the single largest $ impact on inventory goals.  Can you plan your inventory for every conceivable demand scenario? No, thus measuring your forecast accuracy is critical to understanding how much safety stock to carry.  Measuring your forecast accuracy to detect forecast bias (always under or over forecasting to actual demand is also a best practice.  Warning – supply chain professionals planning inventory – do not hedge the forecast.  While it is tempting to change your supply plans based on your own interpretation of demand – it is best to be a sounding board for your marketing/sales team – ensuring the demand planning process contains sound assumptions and analysis. 
  • Supplier Leadtime – Supplier leadtimes and supplier delivery reliability also contribute to setting inventory goals.  Longer lead-times can lead to larger inventory and vice versa.  Suppliers with poor on-time delivery metrics will need extra scrutiny – this does not mean you order more supply – likely means you need a second source or a more collaborative approach with suppliers that cannot deliver on time.
  • Service Level – Basically this is your delivery promise to your customer.  If you promise to delivery in 24 hours of an order – this will obviously require stock on hand – Longer delivery cycles may require lower inventory.  Special orders can be bought based on an actual sales order, thus reducing your inventory requirements. 
  • Supply Chain Network Design – Distances between supply nodes and logistics strategy will also impact your inventory goals – boat/ocean shipments tend to create more in-transit inventory, while faster logistics options will reduce inventory requirements but likely drive-up freight costs.

Below is a great graphic on how to view the trade-off between service level and inventory investments.

Inventory Accuracy

Most of my clients come to me with inventory variance issues.  They just conducted their annual physical inventory and had unexpected and unplanned inventory write-offs.  Very frustrating for the operations team as they were planning with bad on hand inventory information and equally frustrating for the finance/executive team to have an unfavorable financial impact.

So, why can’t operations keep inventory accurate?  Here are 5 areas to explore if you are having inventory accuracy issues.

  • Bill of Material errors – The most common problem is that the actual material used in production is different than what is being depleted from the Bill of Materials.  Do you have an audit process to ensure the BOM accurately reflects actual consumption in production?  The most common reason is unit of measure issues – while the component is being used, the amount of usage is incorrect – thus leaving wrong on hand inventory in your system.
  • Receiving Process – It is not uncommon to have receiving issues – the bill of lading is inaccurate and what is physically received is less than the bill of lading states.  The timing of inventory receipts can also be an issue.  Materials pulled into production BEFORE the receipt is actually transacted is a common occurrence I see, risking visibility of the inventory.  Your goal should be to transact the receipt within 24 hours.   Missed receipts are another issue, although not common.
  • No Cycle Count Program – Periodic (Weekly/Daily) counts of high volume/high dollar items can mitigate the year end surprises.  Cycle count programs are the early warning signal that your inventory accuracy may be at risk.  A cycle count program is a best practice for manufacturers and distributors.  You should develop a cycle count program to count 100% of your inventory over a six-month period or less.  More frequency is needed if you are not having good cycle count results.
  • Transaction Management – Parts are received but never transacted via the PO – parts are used but Workorders are not closed or workorder are never opened.  The ability to transact inventory as it physically is moving through your operation is a key process trait to be implemented.   I see so many companies physically transforming materials in production with late or missing transactions.  All workorders should be closed out the same day as production is completed.  If late, this compromises your planning system and your ability to manage your operations and can lead to not purchasing what you need and vice versa.

Inventory Movement Control – Where is it physically?

The third and final core process area for inventory management is inventory movement control.  Can you systematically, with confidence, see where your inventory is physically located without visual verification?  Nothing more frustrating that going to a bin looking for a specific component and it is missing.

Here are some of the more core and advanced technologies to support tracking the physical movement of your inventory.  (Note: As tempting it is to envision a more advanced warehouse operation, start with the mastering the core – which would be a solid warehouse management system.  More advanced features can be implemented, and efficiencies gained once your operation has mastered the core.)

  • Warehouse Management Systems (WMS): WMS is an application that helps manage warehouse operations, including inventory management, order picking, shipping, and receiving. It provides real-time visibility into inventory levels, automates processes, and helps optimize warehouse layout and space utilization.  Do you have a WMS? – Is it being used effectively?  Start there.
  • Autonomous Mobile Robots (AMRs): AMRs are self-guided robots that can navigate through the warehouse, picking up and delivering goods. They can help reduce labor costs, increase throughput, and improve accuracy in order fulfillment.
  • Internet of Things (IoT) sensors: IoT sensors can be used to track inventory in real-time, monitor warehouse conditions such as temperature and humidity, and optimize inventory storage and handling.
  • Artificial Intelligence (AI): AI can help optimize warehouse operations by analyzing data from WMS, IoT sensors, and other sources to identify inefficiencies, predict demand, and optimize inventory levels.
  • Augmented Reality (AR): AR can be used to improve accuracy in order picking by providing visual cues and instructions to warehouse workers through wearable devices, such as smart glasses.
  • Cloud-based technology: Cloud-based technology allows warehouse management systems to be accessed from anywhere, which can improve collaboration, provide real-time data, and reduce the need for on-site hardware and maintenance.

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Tight Lines,


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