Podcast #51:
Profitable Growth Podcast
Supply Chain Management: Part 7 of 9
Enhancing Management of Inventory
Transcript:
By Jim Tompkins, CEO, Tompkins Associates
Jim
Hello, my name is Jim Tompkins. I'm the CEO of Tompkins Associates and Tompkins International.
I am pleased to be with you today to present the seventh part of our podcast series on Profitable Growth.
Throughout this series, we've been working through the numerous ways that effective supply chains and good management can create and sustain profitable growth.
Today we turn our attention to enhancing the management of inventory for Profitable Growth. To help us out here, I am pleased to welcome back the Tompkins Associates thought leader on inventory management, Ralph Cox.
First, could you please help our audience understand the chicken and egg question: Can world-class inventory management create growth or just support the growth driven by other factors?
Ralph
Really good inventory management can do both.
Obviously, good inventory management practices such as replenishment order quantities which are tuned to increase turnover as volume increases along with accurate and smaller lead times. These things can support growth that is driven by new product features, reduced costs or other competitive advantages.
However, in many situations, exceptional inventory management practices can also create profitable growth independent of any other driving forces.
Jim
That’s very interesting, but I’d like to be sure that I understand. In what way can inventory management actually create profitable growth?
Ralph
This can be done by capturing demand that would have otherwise been lost. Specifically, this can be done by minimizing out-of-stock and low inventory situations for customers for which the demand must either be fulfilled now or seemingly lost forever.
We encounter many different versions of these types of situations. If a distribution center has a line item (SKU) fill rate of, say, 95%, then changing it to 96% may mean increased period gross margin.
There are several ways to do this – some require additional investment in safety stock, and some don’t. If an additional investment is necessary to increase the fill rate, then the return can be provided by the increase in margin.
Jim
Wow, that’s impressive. I think I can see how that might be possible. Does that apply to retailers’ store operations and their inventories?
Ralph
Yes, retail demand is not infinite; however, most retailers presume that out-of-stock situations represent a high probability of lost demand. Note that addressing this requires increased product availability on the shelf (as opposed to just in the back room).
Jim
OK, but does increased product availability always create additional sales?
Ralph
No, not for every business. In many situations, when the desired SKU is out of stock, the order is not lost. This is often true for catalog and ecommerce businesses, and especially so if the customer talks to a representative in a call center.
If the desired SKU is out of stock in the distribution center serving your region, it may be able to be shipped from another DC or shipped after the replenishment order arrives, whether you recognize that difference or not. Similarly, you may “decide” to buy B, which is in stock, instead of A which isn’t or, in some businesses, to construct A from B and C which are both available.
Jim
Ralph, let’s turn to the other aspect of profitable growth. Am I correct that good inventory management can support growth to best advantage?
Ralph
Yes, that’s universally true for all businesses.
Jim
OK, in what ways can it do that?
Ralph
World-class inventory management supports growth to best advantage through a variety of technological resources, business processes and policies, all of which should lead to increased capital efficiency.
In the safety stock area, higher growth generally leads to relatively reduced demand variability and thus, less safety stock for a given order fill rate. In the cycle stock area the total costs of replenishing and holding inventory are minimized by increased turnover.
Additionally, pro-active inventory management can support growth through forecasts with lower error rates, effective Sales, Inventory and Operations Planning (SIOP) processes, effective SKU discontinuation decision-making and through product development which is oriented to the supply chain.
Jim
Ralph, do firms often have all of those aspects of inventory management in place simultaneously?
Ralph
Yes and no. All of the functions exist in every firm in some form. However, in almost all firms there is opportunity for alignment and improvement in effectiveness. In some firms the fact that this functions exists is not even recognized.
Jim
Very comprehensive, Ralph. It sounds like all of the major management functions are involved.
Thank you, Ralph. I'm really excited about this series, and I really appreciate your input today.
I look forward to our next segment in this series on profitable growth, as we focus in on creating and supporting profitable growth through China. I look forward to speaking with you all real soon.
Visit Jim's blog, GoGoGo!, at http://gogogosupplychain.tompkinsinc.com/
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