Inflation, Recession, Both?
We are in unique times with inflationary pressures continuing while recessionary trends are emerging as well. In either instance, it is vital to right-size inventory. It will not change anytime soon. With interest rates rising rapidly, it will curb demand while increasing the cost of capital. On the other hand, with supply chain disruptions continuing and world events becoming more concerning, shortages will persist, driving up costs.
What Does It Mean for Inventory?
Whether inflation, recession or both, you’ll want to right-size your inventory. In essence, you will want to have the ‘right’ amount of inventory in the ‘right’ place at the ‘right’ time. This sounds far easier to do than it is in reality. As demand changes and supply shortages persist, what is the ‘right’ amount in the ‘right’ place at the ‘right’ time?
During inflationary periods, you don’t want excess inventory tying up cash unnecessarily, and it is especially problematic since it costs more to produce this inventory. Finance isn’t excited to pay suppliers for the inflated cost of materials and components and pay employees higher salaries to produce upfront, and then have to wait for customer payment. Clearly, in the food and beverage industry, expiration dates make this situation even more concerning.
On the other hand, during recessionary times, you cannot afford to have inventory (and therefore cash) sitting idle. As customers slow down in purchases, what used to be 3 months of inventory could easily turn into 6, 9 or even 12 months of inventory. Of course, that will put you into a cash crunch. Unfortunately, after the 2008-2009 recession, we were called into several clients to right-size inventory in order to resurrect customer service levels because they cut inventory in the ‘wrong’ products (materials, work-in-process or finished goods) in the ‘wrong’ place at the ‘wrong’ time. Clearly, although possibly required to survive, it did NOT set them up to be successful in growing the business because they cut in the ‘wrong’ areas.
What is Right-Size Inventory?
It is a tricky answer. In essence, you want the optimal amount of inventory (not too much but not too little since you don’t want to run out) in the right place (most likely, positioned close to your customer, at your customer’s location or with the appropriate transportation capabilities to arrive quickly at your customer) at the ‘right’ time (when the customer needs it accounting for changing conditions in the marketplace). In order to achieve this objective, you will need the ‘right’ amount of materials, components, and ingredients in the ‘right’ place (manufacturing facility that has capacity to produce near the customers that need the products and is the lowest cost producer) at the ‘right’ time. It is no wonder successful inventory management becomes dicey.
Process to Right-Size Inventory
The best clients with right-sized inventory prioritize the following:
- SIOP: They utilize a SIOP (Sales, Inventory & Operations Planning) process, also known as S&OP, to steer the ship in terms of the appropriate manufacturing facilities, capacities, supplier partnerships, pricing, make vs buy decisions and the like.
- Demand Planning: Keeping in alignment with your customers and sales patterns can prove tricky especially in such volatile environments. Since we are entering a world stage of VUCA (volatility, uncertainty, complexity, and ambiguity), having a resilient and evolving demand planning process will prove essential.
- Supply Planning (Production, replenishment, scheduling, materials, inventory, etc.): Keeping your supply planning processes in sync with changing capabilities while navigating supply chain disruptions is quite the task during VUCA. Your process must be flexible, proactive, analytic, predictive and innovative.
- Tools & Technology: There are limited resources and skills in every client. It will be vital to right-sizing inventory to utilize your ERP system to its fullest potential, evaluate whether advanced demand and supply planning software would add value, analyze trends and create dashboards with a business intelligence (BI) software, evaluate the need for predictive analytics, potentially utilize CRM software, automation and robotics, and more.
- Talent: All of the above will prove meaningless if you do not have the talent (or are able to source the talent), supplement and support your talent, and, most importantly keep your talent.
We recently worked with a client that suffered in service levels to their customers (both on-time-in-full OTIF and lead times). Thus, growth potential was limited until resolved. In one facility, OTIF levels were in the 40%s and customers were unhappy. In another facility, OTIF levels suffered, but even worse, the lead times were too long and customers were looking to the competition. Not a good position for the market leader!
We worked with a cross-functional team to upgrade their SIOP process and to focus the discussion on meaningful data for decision-making. The meeting went from 3 hours of debate and conversation to an hour of focused review and decision-making. We also worked with the production planner to automate and upgrade the planning and scheduling process at the long lead-time facility. Production stabilized, output records were broken, and customer service improved dramatically. Lastly, we also worked with the replenishment and supply chain teams to calculate safety stocks and service levels, upgrade the process, better utilize the ERP system, and right-size the inventory across the supply chain network. Service rose to the low 90%’s.
Refer to our blog for many articles on planning, inventory and related concepts. Also, read more about these types of strategies in our eBooks, Thriving in 2022: Learning from Supply Chain Chaos and Future-Proofing Manufacturing & Supply Chain Post COVID-19. If you are interested in talking about what it would take to right-size your inventory, contact us.
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