You can probably guess the answer to the above question: communication. Communication within the process of Forecasting, Inventory Management and Sales & Operations Planning is crucial. In many companies, this is a problem that really shouldn't be a problem based on today's technology. In this triptych, I would like to elaborate on this important role of communication in all these processes, based on my knowledge gained during projects.
Good inventory management
Inventories are a source of much discussion. Whenever there is even a momentary inability to deliver, stock has to go up and when the end of a financial year approaches, stock has to go down again. With inventories, we support being able to continue production undisturbed and have the certainty of delivering to customers.
Good inventory management ensures efficient use of working capital, but above all it has a great impact on reducing failure costs. The failure costs associated with inventory management can easily exceed the company's bottom line. Examples include write-off of obsolete stock, rent for temporary storage, interest costs, extra deployment of people, claims from customers, urgent purchases at different prices, deployment of couriers and extra transport, loss of turnover, rebates as a make up or extra administration costs due to partial invoices and credit notes.
Performing an analysis
Many companies and organisations do not have or make time to carry out an inventory analysis, or have no awareness that current inventories could possibly be reduced/optimised - drastically or otherwise - by making some small or big changes or by applying a better strategy or, even simpler, by communicating better. The inventory systems currently in place in many companies and organisations are often based on years of experience and habit of staff. This way of working can lead to stock shortages. Another consequence is that for a lot of products there are - sometimes unnecessarily - large stocks or obsolete stock.
High stocks lead to high costs and taking up space. Items age, spoil, become obsolete, are replaced.
Stock parameters
I would like to take you through the first step of the inventory management process, namely forecasting. Not every company or organisation is doing this. This process is often confused with the gathering of all kinds of data and information streams in which people think they recognise a pattern. Unfortunately, this data is often outdated or incorrect, which in turn has an impact on inventory management and supply chain planning (restocking and/or production).
Many managers dislike this topic. Yet it should be well understood that as soon as one uses stock, a statement about future demand is needed. Many escape this issue and immediately proceed to determine inventory parameters. However, if this is done according to the classical models from the literature, one assumes that future demand is completely equal to historical demand and that demand is regular (normally distributed). Let me just point out that it is naive to accept these assumptions: the recent past shows that the world is not stable, product ranges change faster than ever and only 50% of the product range can be considered regular.
Forecasting tools the solution?
If you want to set up a correct process you will have to have it supported by forecasting tools. Are these tools going to provide a solution for everything? The answer is no. But on the basis of a generated forecast, the demand planner can start focusing on the result. Here, an initial communication is already important, namely: the coordination between the demand planner and the other stakeholders within the company/organisation. This is where things often go wrong, as in many companies this initial communication is not fully covered by a process and ownership. A good process in this area will already do wonders towards stock management and S&OP.
In my article next week, I will elaborate on the second process around inventory management.
Gunther Fonteyne - Partner at Xeleos Consulting and Optimact
