Achieving Inventory Velocity "and" Customer Delight
by Lisa Anderson
Do these hypothetical situations sound familiar?
- Acme Company has a large, priority customer called Wylie Company. Acme must service Wylie flawlessly to maintain the contract, so to ensure stock is always available when Wylie needs it, Acme agrees to a guaranteed safety stock level for Wylie. And, Acme ends up following the typical inventory strategy of "increase inventory to ensure customer delight".
- However, Wylie doesn't buy as anticipated (even if Wylie buys the anticipated total volume, the item by item volumes are quite different than anticipated), so the right products are not in stock to satisfy customer orders and Acme continues to build inventory to service Wylie company. The higher the service level expected, the more inventory built. For example, let's assume that Acme sells t-shirts in multiple colors. If your goal is to keep your service level at 96% (96% of the time when a person asks for a red shirt, you have a red shirt available), you'd need more red shirts in inventory (let's assume 1000 shirts) than if your goal was 90% service level (let's assume 500 shirts).
- Soon, Acme Company begins to struggle with cash flow. Inventory must be reduced immediately. Therefore, inventory goals are set and inventory is reduced; however, Wylie's customer service is impacted (red shirts are not available when requested) and customer complaints increase. Suddenly Acme is working overtime to ensure expedited shipments arrive in time to keep Wylie a happy customer.
As a supply chain consultant and former executive, I've seen these scenarios more times than can be counted. Yet, there is an alternative that "works" in delivering seemingly conflicting goals of inventory reduction combined with customer service and delight - inventory velocity.
How can the Acme Company situation change with inventory velocity?
One company I worked with more than doubled inventory turns two separate times (from 4 to 9 and, in a different time/ situation, from 6 to 12) while reducing lead times by 25-50% and taking customer service levels from the low 70%'s to the high 90%'s within 6-9 months. Based on my experience and research, I've found a 25-50% inventory improvement feasible for most companies. With a typical cost of capital of 25%, there is significant cash flow and cost savings when reducing inventory so long as customer service is maintained / improved.
Background
The purpose of inventory is to cover uncertainty. The equation says that the degree of known customer demand (ability to predict sales) impacts the customer service levels and /or inventory levels. For example:
- The better the degree of known customer demand
- The higher the customer service levels
- And the lower the inventory can be without impacting service levels
This math holds true and is why the Acme Company example occurs frequently. However, achieving inventory velocity is a viable alternative to becoming an Acme statistic. The essence of achieving inventory velocity is to deliver the "and" - lower inventory "and" customer delight by taking the foundation of the model to a different level. Instead of struggling to make an educated guess of unknown demand, fix the foundation. The solution seems so straight-forward and non-sexy that it is often overlooked and challenged. Although fancy inventory theory, cool software tools, and much discussed process strategies such as TPS (Toyota Production System) can improve your company performance, they aren't the key; instead it is communication.
How?
Although there are excellent tools on the market to support this communication and to improve upon an already solid base, it requires only the basics to gain the first step-change improvement - a telephone. Here are my suggestions for implementing inventory velocity:
- Communicate internally - why purchase x quantity? Why produce y quantity? How do we determine safety stock levels? Why? Who? When? How often? Is the information flowing smoothly among departments? What can be improved? Are customer goals tied to performance management systems?
- Communicate externally (with customers, customers' customers, suppliers, carriers) - what do you expect business to be this quarter, next quarter? Why? Do you have any new customers? Promotions? New sales people? Sales training? What sales numbers are tied to bonuses? Are any products selling better? How can we partner together to increase business, save cost etc?
- Develop a plan and communicate - write down what you've agreed upon.
- Execute the plan - communicate with all involved with the plan
- Audit - what happened? Communicate again internally, externally - what went well, what can be improved, why? How?
- Standardize - incorporate learnings into processes, communications etc.
- Start again
Developing this win-win type relationship extends throughout your extended supply chain for maximum effectiveness - to your suppliers, your suppliers' suppliers, your customers' customers, your carriers, your internal customers, etc. The more people/ companies in your supply chain included the better the total supply chain forecast, and therefore, the better the total supply chain inventory turns, service levels and costs.
Why not sales forecasting?
Sales forecasting is one popular method to improve demand accuracy. Although this can help, it is a small aspect of the total solution. The total solution is to build win-win relationships throughout your supply chain. Why spin your wheels trying to estimate your customers' forecast when forecasts are inherently inaccurate? Instead, communicate with your customer - understand their business, their shipments, their trends, etc. Establish a win-win relationship - the more information you have, the better you can service your customer and the better the supply chain's inventory turns and costs. Once a win-win relationship has been established, then it can be a good time to utilize software tools to improve upon data transfer efficiency and statistical methods. One excellent tool for forecasting, inventory planning and supply chain demand integration is Prescient. However, the critical element is the foundation - communication and the win-win relationship.
When focusing on communication within the supply chain, the "and" is achievable. Typically, by following the inventory velocity process and starting with a tool as simple as a telephone, you can achieve 25-50% inventory reduction "and" customer partnership and delight.
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