Inventory Management: Proper Planning Can Lead to Big Improvements

Proper Planning Can Lead to Big Improvements

By Bruce Tompkins, Executive Director, Supply Chain Consortium

Supply chains need to be able to provide customers with what they want, when they want it. And, proper inventory planning is key to having the right amount of inventory on-hand and available in the right locations when needed. This seemingly simple and straightforward idea is much harder to do than it is to say.

From replenishment and allocation to inventory accuracy and network design, there are numerous potential hazards along the way that can lead to poor decisions and costly inventory planning. Maintaining a true balance of inventory and ensuring that you are never overstocked or out of stock is essential to boosting the bottom line. This is achieved by using inventory management tools and techniques within and across the supply chain network. The Supply Chain Consortium’s report Supply Chain Planning, a True Balancing Act, outlines some inventory planning functions and notes opportunities for improvement.

Out-of-Stock Measurement

According to the Consortium’s report, measurements of out-of-stock levels are very industry and segment specific. Manufacturers are more likely to assess out-of-stock conditions at the distribution center (DC) or product level, while retailers generally measure at the company store or individual buyer level (Figure 1). The difference is based on who the customer is and where the inventory resides relative to the customer. Clearly the better we understand our out-of-stock position and the closer to the ultimate customer we are, the better our customers are served.

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Figure 1. Out-of-Stock Measurement Level

Cycle Stock and Safety Stock

To protect against out-of-stock situations, cycle stock and safety stock measurements are important factors when predicting periodic demand. While cycle stock is a regular activity and is figured into the ordering process, safety stock will create a buffer for unforeseen emergencies if the regular stock is not available. From the report, average safety stock varies between 10% and 30% of monthly sales by industry and segment. Cycle stock ranges from 85% to more than 190%. Overall, Consortium manufacturing companies carry a larger percentage of their monthly sales in safety and cycle stock and as a result have lower inventory turns (Figure 2).

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Figure 2. Cycle Stock and Safety Stock as a Percentage of Monthly Sales

 

To show the importance of safety stock, more than 90% of respondents view safety stock as the main approach for improving inventory performance, followed by reducing lead-time and lead-time variability at 76%. Optimizing cycle stock was only identified by 41% of survey participants.

Demand Planning Systems

Although some companies still prepare for inventory problems manually, having a demand planning system in place can be extremely beneficial. When asked about the criteria they use for selecting a demand planning system, support costs, return on investment, and data requirements were most important (Figure 3).

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Figure 3. Factors of Importance for a Demand Planning System

Maximizing Inventory and Financial Performance

Planning for demand is not always an easy task. There are many elements that can cause forecast inaccuracies and drive too much or too little inventory. To ensure that you are maximizing your inventory levels and locations, and in turn, increasing your financial performance, make sure the following practices are in place:

  • Strengthen your inventory positioning by performing a preliminary inventory optimization study, which includes the network design.
  • Ensure your ABC product classification is based on multiple criteria ranking, and inventory policies are set specifically for each ABC class. With more diversified services levels for each class, comes greater opportunity to improve working capital.
  • Maintain safety stock levels based on target service levels within each ABC class.
  • Determine replenishment volumes (cycle stocks) by economic order quantity calculations adjusted to meet the minimum order constraints.
  • Account for and explain out-of-stock situations, and incorporate the lessons learned into the forecasting exercise.
  • Identify overstock positions automatically and act on them with anticipation.
  • Measure and continuously monitor of Key Performance Indicators (KPIs) at the unit level and at the financial level.

This article is available for reprint with attribution. If you would like more information or an interview, please contact Keri McManus, (919) 855-5516.

The Supply Chain Consortium is the premier source for supply chain benchmarking and best practices knowledge. With 200 participating retail, manufacturing and wholesale/distribution companies, the Consortium sponsors a comprehensive repository of 17,000-plus benchmarks complemented by search capabilities, online analysis tools, topic forums and peer networking for supply chain executives and practitioners. The Consortium is led by the needs of its membership and an Advisory Board that includes executives from Campbell Soup Company, Hallmark Cards, Hewlett Packard, Ingram Micro, Kraft Foods, MillerCoors, The Coca-Cola Company, Target, and True Value Hardware. To learn more about how your company can become a member of the Supply Chain Consortium, contact John Foley, 919-855-5461 or visit www.supplychainconsortium.com.