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 alike, there has been a shift
in attitudes towards the phenomenon of stock. Not so long
, every book that addressed this issue contained a case for
the importance of holding stock for safety reasons or as a
a buffer (the ‘just-in-case’ philosophy). Partly under the influence of the Japanese
production philosophy, attitudes towards this issue have shifted considerably
.
Nowadays, stock is regarded as the root of all evil, and
as such, it must be reduced to the absolute minimum (the just-in-time
philosophy). High stock levels often mask operational and/or
organisational problems. People seek refuge in building up stock; they fight
the symptoms. Good stock management tackles the root causes. From this perspective,
, stock is indeed the root of all evil.
The
inventory problem is common to every organisation, regardless of the sector in which it
operates. Both profit and non-profit organisations (schools, hospitals or
the service sector) are confronted with it. Inventory represents a
considerable amount of capital when expressed in monetary terms. If one calculates the
value of stock relative to total balance sheet assets, one often finds
ratios of 30 per cent or more. When one takes into account that
annual inventory costs account for an average of 20–25 per cent of this, it becomes clear
immediately what sums could be freed up for investment if one
succeed in reducing stock levels. Stock costs are often higher than the
depreciation on investments in buildings and machinery. This is often
underestimated. On the other hand, it is not just the cost of stock that needs to be reduced
.
Essential customer service
Stock levels are
also essential for ensuring customer service. In practice,
, this means that stock costs and service levels must be balanced.
If stock levels are reduced, the service level falls; if one wishes to
, stock levels must be increased. It is up to management to
decide which course of action to take: a particular service level is linked to a
certain stock 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.
Reducing stock whilst improving service
The challenge
lies in selecting and developing better inventory management systems that both
reduce stock levels and improve service levels. Why is it so difficult to
determine the correct stock level, even though research has been carried out in
the field of stock management? There are plenty of well-known theories and formulas
regarding stock management, yet many companies still struggle with how
tackle inventory management (inventory analysis, inventory management and inventory control)
tackle it. Based on my experience, this is best approached in a pragmatic way
. Start by carrying out a stock analysis so that you at least know
where they stand. Next, move on to the following phase, namely defining
the stock strategy. In this phase, a number of important questions
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 stock parameters
In the next
phase, we will set up and maintain the stock strategy. Here, the focus
be on correctly calculating the parameters required for
controlling Material Requirements Planning (MRP). A great many companies operate
with incorrect stock parameters. Parameters should be regularly
in line with the life cycle of their products. This requires
requires supporting software – and not in the form of an Excel
spreadsheet or master data within an ERP system.
Within
stock management, a second aspect of communication is important, namely aligning the
business strategy with the stock strategy. Consequently, this is not merely a
responsibility of the supply chain but one shared by many
stakeholders within a company or organisation. This is where things often go wrong, as these
responsibility and coordination regarding inventory management are often unclear.
Next time, I’ll take a closer look at the third process relating to S&OP, and to conclude:
what are the key factors that can help with communication across the
various processes?
Gunter Fonteyne - partner at Xeleos Consulting and Optimact
