In a previous article, Gunther Fonteyne wrote about the importance of communication at Forecasting. Today, he takes a closer look at Inventory Management and the important role of communication in this process.
Both in
academic and industrial circles, the last decade has seen a turnaround
in attitudes towards the phenomenon of stock. Not so long
ago, one found in every book that touched on this issue a plea for
the importance of stockpiling for security reasons or as a
buffer (the just-in-case philosophy). Partly influenced by the Japanese
production philosophy, people have come to view this issue very differently.
to this issue.
Today, stocks are regarded as the source of all evil, and
should as such be reduced to the absolute minimum (the just-in-time
philosophy). A high inventory position often hides operational and/or
organisational problems. People take refuge in stockpiling, fighting
the symptoms. Good inventory management tackles the causes. From this perspective
stock is indeed the source of all evil.
The
inventory problem is peculiar to every company, regardless of the sector in which it
Both profit and non-profit organisations (schools, hospitals or
service sector) face it.Inventories represent a
considerable capital when expressed in monetary terms. Calculate the
value of inventory relative to total balance sheet assets, one finds
often find ratios of 30% or more. When one takes into account that the
inventory costs on an annual average account for 20-25% of this, one understands
immediately what sums could be freed up for investment if one manages to
Inventory costs often exceed depreciation on investments in buildings and machinery.
depreciation on investments in buildings and machinery. This is often underestimated.
On the other hand, it is not only inventory costs that need to be reduced.
be reduced.
Necessary customer service
Inventories are
also necessary to ensure customer service. In practice
this means balancing inventory cost and service level.
If one decreases inventory then the service level decreases and if one wants to improve service
It is up to management to
decide which choice to make in this respect: a certain service level is linked to a
inventory level and vice versa. This will depend on commercial and
financial market conditions. It is the task of the Supply Chain department to
deal with these issues creatively.
And reduce inventory while improving service
The challenge
is to choose and develop better inventory management systems that both reduce inventory and improve service.
Why is it so difficult to determine the right level of stock
right stock level when research has been done in the field of stock management for almost 100 years?
the field of inventory management? There are many theories and formulas about stock
around inventory management but a lot of companies still struggle with how to
stock management(stock analysis, stock management and stock control) to tackle
tackle. Based on my experience, it is better to take a pragmatic approach.
First start with stock analysis so that you at least know where you stand.
Then move on to the next phase: defining the inventory strategy.
In this phase, a number of important questions need to be
need to be answered such as:
- should we keep stock? For which product families/products do we follow a 'Make-to-Stock' or 'Make-to-Order' strategy. If we stock where are we going to stock it ?
- what types of stock are we going to keep as each type will have a different strategy ?
- should we put our products into certain categories ? What should our inventory objective be (assortment management) ?
Incorrect inventory parameters
In the next
phase, we will set up and maintain the inventory strategy. Here, the focus
will be on the correct calculation of the parameters needed to
Many companies work with incorrect inventory parameters.
with incorrect inventory parameters. One needs to regularly
optimise their parameters according to the life cycle of their products. For this
you need supporting software, and not in the form of an Excel
worksheet or master data within an ERP system.
Within
inventory management, a second communication is important, namely alignment of the
business strategy with the inventory strategy.Consequently, this is not only a
responsibility of supply chain but a responsibility of a lot of
stakeholders within a company/organisation. This is where things go wrong again because this
responsibility and alignment around inventory management is often not clear.
Next time I will go deeper into the third process around S&OP, and in conclusion:
what are some of the main things that can help with communication in the
different processes?
Gunter Fonteyne - partner at Xeleos Consulting and Optimact
