Inventory Optimization: Part 2

STOP … Please read Part 1 of this series on Inventory Optimization before continuing …

Inventory Optimization is like being on a diet? Like managing blood pressure? Cholesterol? What the heck were we talking about in our first Inventory Optimization blog?

It is about doing the right thing every day. In terms of health, it means eating the right foods in the right quantities. It means getting into a fitness routine. We all know what to do and what not to do. The key is the doing. If we change our habits and keep working the program, we will achieve improvements in weight, blood pressure, and cholesterol. That much is guaranteed. How much and how soon is not so easily predicted. Nor does it matter. It is the lifestyle change and improvement that is important. It is adhering to the new lifestyle that is important.

The same is true in inventory management. We know what to do. We trust the best fit statistical forecast on the turn business and focus on special events, new products and promotions, the best we can. We make sure our data is being properly managed and updated. This means lead times, capacities, and run rates that accurately reflect reality and these same values are reviewed and updated on a periodic basis. We can make sure we have calculated the safety stock and re-order points on a periodic basis. Then, we have to have the discipline to follow the protocol. We concentrate only on the exceptions and follow the system recommendations as much as possible. It is the process change and improvement that is important. It is adhering to the new process that is important. We will have problems when we “think” we are smarter than the process we have meticulously put in place.

We measure and track:

• Forecast accuracy to ensure our best fit is indeed the best. 


• Customer Service KPIs to make sure the inventory investment is satisfying the needs of our Customers
  
  
  
  • Case Fill
  
  
  • Line Fill
  
  
  • Complete orders
  
  
  • On-Time Orders 
  
  
  
  


• The same Customer Service KPIs from Suppliers of raw, pack, and finished goods 


• The manufacturing schedule adherence 

On a periodic basis measure and track the following:

• Set a schedule and follow it for data management to ensure the system has the correct
  
  
  
  • Lead times
  
  
  • Capacities
  
  
  • Run rates
  
  
  • Inventory Safety Stock levels and re-order points
  
  
  • Customer data
  
  
  • New Product dimensions, weights, units of measure 
  
  
  
  


• Measure and track the Official Corporate measures Monthly and Quarterly as required.
  
  
  
  • Inventory $$
  
  
  • Inventory as a % of sales
  
  
  • Excess & Obsolete inventory $$
  
  
  • Inventory Turns
  
  
  • Days Coverage 
  
  
  
  

We can track these measures and perhaps even project into the future. Consider a 6’2” man at 200 lbs and having a total cholesterol count of 250. Having already had some improvement in weight and cholesterol, he might have enough data points to predict when he might get to 180 lbs and cholesterol at 180. How accurate is that prediction? Weight loss rates are individual, vary over the course of the lifestyle change, and dependent on adherence to the changes. Even if we are able to project when the man will be at 140 lbs and cholesterol count of 120, no doctor would let the man consider such an objective. It might be equally unhealthy at the other extreme.

The same is true of inventory. As inventory begins to come down and service rates increase, management will naturally want to know where these statistics will be over the next year or so. As in the case of our earnest dieter above, we can make a projection when we have enough data points to do so. But, like our dieter, we do not know if we will sustain the pace. Service increases can come quickly at first and then taper off. Inventory levels could follow the same or even an inverted pattern. What is the right level of inventory and service? When will we get there? When does the inventory reduction begin to have an adverse effect on service and vice-versa? Again the KPIs will help monitor this. Most companies use Inventory Sizing calculations that take into account desired service levels by SKU.

It is better to seek personal health optimization and inventory optimization in the same way. Treat them both as continuous improvement efforts and monitor the KPIs. As we track them over time, they will tell you when you have reached an optimal equilibrium. But, like dieting which is a lifestyle change, inventory optimization is achieved when successfully achieving the process improvement and management style change and never letting up.

Now that you have read my thoughts on Inventory Optimization, please share your thoughts.