Inventory As a Top Business Priority
As executives continue to navigate these volatile economic conditions, the focus on inventory management increases. It is especially tough to determine what to do if you don’t know if sales opportunities will dramatically increase as the competition falters and consumers drive demand or if sales will tank as recession fears increase and business optimism falters. Worse yet, even if you can get ahead of the most likely scenarios and build resiliency into your processes, supply chain disruptions continue to abound. Thus, the best and proactive are increasing the focus on inventory management and are prioritizing strategic decisions related to inventory. Likewise, the worst are also prioritizing inventory because they are panicked over cash flow. As you can imagine, inventory expertise is in high demand!
Strategic Inventory Decisions
Let’s start with the best of the best as these are the companies making strategic inventory decisions. The weak will let inventory manage them right out of business. The best of the best companies’ executives are seeing opportunities in the future. They realize the weaker companies are struggling with inflationary pressures, supply chain disruptions, extended lead times, and changing customer requirements. Therefore, they are more likely to upset customers and leave opportunities in their wake, and so they want to be positioned to take advantage of these opportunities without allocating too many resources unnecessarily and ending up with the “wrong” products in the “wrong” place at the “wrong” time.
These companies are utilizing a SIOP process (Sales, Inventory & Operations Planning), also known as S&OP, to better predict potential opportunities and position supply to be ready to take advantage of the best of these opportunities. The SIOP process highlights the appropriate strategic decisions for your situation. Thus, although you’ll need the appropriate talent to know when to pull the trigger, they are supported by a process that provides meaningful direction and surfaces opportunities. Instead of throwing the dart and hitting the exit sign (which has never happened to me:-)), they will at least aim for the outer ring, also called triple.
Practical Examples in Making Strategic Inventory Decisions
For example, a life sciences manufacturer of proteins had a strong pipeline of customer opportunities. Instead of simply focusing on aggressive growth with already existing customers, they were thinking three steps ahead and knew that they could further grow the business in the Asia Pacific regions if they could build the base infrastructure and build to a minimum stock level to support the most likely customers’ immediate needs. Although their success was built on prudent investments and strict operational controls, they decided to take advantage of the opportunity. They brought us in to accelerate progress and rollout a SIOP process to gain insights as to where to focus investment dollars. To support the growth, they had to hire additional manufacturing talent, scale up a new facility, and prioritize an inventory build.
In a completely different scenario, a building products manufacturer had significant increases in demand during the pandemic as building and construction took off. As supply chain disruptions occurred, demand inflated further as companies became concerned about extended lead times and their ability to support customers if they planned for just-in-time deliveries as had previously worked effectively. Thus, they talked with customers, evaluated recent order patterns, and analyzed inventory factors in order to determine where to add inventory (which locations, skus and/or for which customers). They updated their inventory planning systems, trained resources, and took advantage of opportunities as competitors couldn’t supply product. As interest rates started to rise, they knew it would have a dampening effect on their business at some point in the future, and so they rigorously focused on managing inventory levels without slashing production or inventory that would be needed to take advantage of opportunities or enable resiliency. For example, they shut down production lines to bring inventory levels down (so they didn’t incur storage costs for the “wrong” products) but kept the people so that they could spring into action as opportunities arose. Of course, they also planned key projects to automate, reduce scrap, and perform critical maintenance.
Why the Focus is High on Inventory Management
When it comes to inventory management, the weak companies and strong companies are aligned. Inventory management has became a top priority. The strong companies are proactively managing inventory so that they can minimize the amount of inventory tied up throughout their supply chain unnecessarily. In essence, they have the optimal levels of inventory to ensure the successful execution of growth plans, customer service, operational efficiencies, and supply chain effectiveness. On the other hand, the weak companies are focused on reducing inventory to free up cash in order to meet payroll and survive.
Best Practices in Inventory Management: Start With Your Foundation
When thinking about best practices in inventory management, you must start with your foundation. Potential clients call and request training for resources and selection of software to support better inventory management. Unfortunately, these requests are typically the 20% of the 80/20 equation in achieving success. Thus, we change the conversation and suggest an assessment to determine where to focus to pull the 80% lever to accelerate progress and results.
Although every client is different (unique combination of people, skills, processes, systems, and strategic objectives), there are common issues that cause subpar inventory management results:
- Weak process disciplines
- Transactions do not occur on a timely basis
- Inventory inaccuracy
- Lack of visibility of inventory throughout the system
- Lack of focus on demand planning
- Confusion in thinking lean will “work” without fully implementing the appropriate cultural norms, hybrid practices as needed, and executive support when it isn’t easy (ie. month end)
- Confusion over which inventory planning formulas and strategies to utilize
- Thinking they are limited by software
- Lack of a monthly cadence with a SIOP process, also known as S&OP
Although you don’t have to completely resolve these issues to make meaningful progress in upgrading your inventory management processes, it must be a parallel priority to sustain results.
Best Practices in Inventory Management: Upgrade Your Processes
The best of the best achieve industry-leading inventory turns while supporting financial objectives. The good news and the bad news as it relates to inventory management is that strong planning processes accompanied with a SIOP process will deliver results.
Depending on your industry, strategic priorities, company footprint, and overarching objectives, you will emphasize or deemphasize specific planning processes. The best practices will incorporate:
- Demand planning
- Production Planning
- Capacity Planning
- Replenishment Planning
- Material Planning
- Production Scheduling
- Logistics Planning
- Vendor Managed Inventory
- Order Management/ Customer Service
Before rolling out each of these best practices, perform a quick assessment of your situation from a people, process and systems perspective. This will give you a lay of the land so that you can see your strengths, weaknesses and opportunities and relative importance to achieving results. It will also provide a sequence of priorities to have the greatest impact. Then, the successful will focus on execution.
Refer to our blog for volumes of articles on these topics and read more about these types of strategies in our eBook, Thriving in 2022: Learning from Supply Chain Chaos. If you are interested in talking about how to quickly upgrade your inventory management processes, contact us.
Did you like this article? Continue reading on this topic:
Getting Ahead of Inflationary and Deflationary Pressures Using S&OP