Inventory in any business is cash tied up that could always be put to better use. Business Leaders are under constant pressure to improve their working capital positions (Accounts Receivables + Inventory) – (Account Payables).
The most simplistic way this is achieved, although it does not always have the biggest impact and sustainable benefit, is by stretching your payment terms to suppliers and shortening (where possible) your payments terms from customers.
A better approach is to attempt to do this but actually, drive improvements within your macro supply chain. In my personal experience, the most important beginning to make meaningful change is to gain senior management alignment to decide what levers (Inventory Drivers) are available to change and what are non- negotiable to change. Operating the same system in the same way and expecting a different outcome will never deliver meaningful lasting change. However, the benefits can be huge. You release a one-time cash pick up for the business and you will also set a new baseline for inventory holding.
Understanding and Attacking the Key Inventory Drivers
Inventory is an outcome of Supply Chain Design, Operating Discipline and service commitments to your customers and not the driver itself of the system.
Let me explain…
- If you decide your DIFOT goal is to be 99% vs. 98% then you will hold more inventory
- If you decide you need another warehouse in your network in order to improve delivery speed, then you will need more inventory; more in transit and more in total will be held in safety stock.
- If your organisation does not have the ability to forecast well or demand shape then you will hold more inventory.
You can segment inventory into different buckets as I have in the illustration below. This enables you to assign accountability within your organisation and also measure at a more granular level, allowing you to attack where your biggest opportunities are.
A good approach is to break your inventory into dollar value within each segment and once plans are in place, repeat on a regular frequency to understand if what you are doing is actually making a difference in the areas that will deliver the biggest commercial benefit to the business.
With Anticipation Stock…
- Challenge current Initiative pipeline practices and “givens”
- Are action plans in place to improve initiative forecast accuracy?
- Do you have sufficient instantaneous capacity to respond to launch-in-launch period?
With Idle/Remnant Stock…
- Do you have effective runout plans for discontinuations?
- Do you have timely actions on remnants immediately after promotions?
- Are you conducting post-launch assessments to learn and improve?
In summary, good Supply Chain Managers are good cash managers and can see the forest for the trees. Inventory is an outcome of how the business has set it’s service expectations, the supply chain design and the operating discipline of the team working in the business. A change in one or all these areas will deliver step changes in the inventory outcome.