For many businesses, the driving force to satisfying customer demand is in the products they sell. In turn, the products then become the sole reason for managing and maintaining inventory. Nothing unusual here, however if you have ever spent time in a warehouse, stockroom or distribution center you have likely stumbled across scores of products, components, tools and material that serve no purpose other than to collect dust and consume real estate.
This is a stark contrast to the concept of lean, which identifies stagnant inventory (inventory that does not serve to directly satisfy customer demand) as only serving to add cost to both the business and its customers. Now let me ask you, “Have you ever heard of a company that calls its customers to advise that prices are increasing on account of obsolete inventory?” I haven’t — at least none that are still in business today.
In my work around the globe, I have yet to find a business that does not battle with some variation of weakness or vulnerability within its inventory management processes. The challenge, however, becomes bringing awareness to these challenges, particularly when they are hidden or masked. Consider, for example, that I can easily park my boat in the marina so long as there is enough water in the bay. As soon as the water subsides, rocks begin to appear and threaten my boats buoyancy, and ultimately my safety and survival. Obsolete and stagnant inventory are the rocks in your inventory. As customer demand decreases or fluctuates, your organization’s ability to stay afloat is threatened.
So if we accept the view that inventory serves the sole purpose of supporting customer needs — not predicted needs, but actual needs — then our perception of how inventory must be managed shifts. To begin, consider the following questions to determine whether your inventory or subsets thereof, serve to satisfy customer demand:
- What is the purpose of the inventory (i.e. emergency, customer need, discounted price)?
- How long has it been stagnant? What is the average replenishment cycle or turn?
- What process(es) necessitated the ordering of the inventory? Are they effective?
- Who is responsible for replenishing the inventory?
- How has technology assisted or hindered your inventory forecasting and replenishment?
From my experience, the resulting answers from these questions will serve to identify the root causes of most (if not all) of your inventory management weaknesses and vulnerabilities, which invariably will be tied to:
- Process inefficiencies
- Unclear or insufficient role responsibilities and accountabilities
- Inefficient or ineffective technology
So with this information at hand, we can then apply the concepts of lean to maximize inventory investment and utilization. In doing so, we need to consider the following three principles.
Inventory must be visible to be managed.
When it comes to inventory, if you can’t see it, track it and touch it, then you can’t manage it. A client of mine was seeking to expand its warehouse because of a lack of space. The owner found that fast-moving inventory was scattered across the floor and, because the shelves were full, was considering investment in an additional building. Upon review, however, it became clear that the shelves were full of either slow-moving or obsolete inventory. By reviewing a combination of historic and forecast customer demands, we were able to identify inventory consumption patterns and better align inventory storage to consumption within the constraints of the existing warehouse space. No additional investment was required. Is your inventory visible? Visible management is a key to effectively managing inventory and maximizing your investment.
No technology can be better than bad technology.
If you have lived through the launch or upgrade of an enterprise resource system (ERP), then you have likely found inventory management often suffers. Inventory becomes the buffer to ensure customer needs are met while system glitches are corrected or adapted to. Unfortunately, when inventory discrepancies are uncovered, the default solution for many is to introduce new technology. This is not the best approach. The focus should first revolve around improving existing processes; this is where the predominance of inventory issues exist. With processes improved upon, technology then becomes an enabler, rather than the only solution. In essence, having no technology is often better than bad technology.
Misaligned priorities
I was approached by an inventory cost accountant following a speech not that long ago. As a manufacturer of computers, his company was struggling with component obsolescence, meaning that before it could consume inventory, the component was quickly replaced by a newer model or version. The company was losing in the range of $250,000 per year just in obsolescence. Not a write-off that the CFO was happy to see. We spent some time discussing the company’s inventory management and replenishment program, and after some brief discussions I asked a simple question. “What do you think is causing your obsolescence problem?” “Well, I’m not sure,” said the gentlemen, “but if procurement would stop ordering everything in bulk, I am confident the situation would improve.” It turned out that procurement was rewarded for keeping the costs of components low, to which it responded by buying in large volume to achieve a reduced piece price. Unfortunately, procurement was buying more volume than would ever be consumed. The solution sounds too easy, and it is. Priorities across the business must be aligned to support the effective management of inventory; this includes consideration of the process from the point of customer order to fulfillment. After all, inventory is not meant to provide a buffer or to support individual objectives, it is meant to ensure customers are satisfied.
Inventory serves to meet customer needs. Too little inventory and we can’t effectively meet needs in a reasonable time frame. Too much inventory and we risk passing along the cost of waste to the customer. By considering the purpose of inventory, and aligning processes, priorities and technology, we can reduce waste and maximize value to the customer. Sounds like an appealing proposition to me.
