Inventory Optimization: Five Steps to Improve Process Effectiveness

Inventory Optimization:

Five Steps to Improve Process Effectiveness

Structured approach to global inventory planning and control helps manufacturers maintain high customer-service levels and reduce variable costs.

Inventory Optimization: Five Steps to Improve Process Effectiveness

• 1.  Take a business assessment
• 2.  Develop the inventory plan
• 3.  Execute according to the plan 
• 4.  Measure performance against the plan
• 5.  Ensure continuous improvement 

Amidst the recent continued economic volatility, C-level executives’ focus has shifted from revenue growth to profitable growth, and hence global supply chain performance has gained a great deal of attention. As global supply chains are devising ways and means to respond to unpredictable customer demand and increased competition, one of the greatest challenges they face is achieving inventory optimization while maintaining higher customer service levels and reduced variable costs.

In my experience of working with a number of clients in the energy and chemicals market within manufacturing, in addition to some in the consumer packaged goods (CPG) and pharmaceutical markets, I have observed some common challenges facing these industries, including:

·Ineffective Master Data Management: Data definition and data quality are common pain areas across industries, driven by acquisitions (multiple disparate systems) and lack of data management practices. These organizations are sitting on a pile of data, without being able to use this data for effective decision making. For example, almost all of the clients I worked with had inaccurate procurement and manufacturing lead times in their transactional systems, leading to judgment-based inventory planning. Inaccurate planning leads to frequent expediting and de-expediting and the resources were constrained by available capacity. To free up capacity, each component in the value chain buffers the lead time component and this lead to excess ordering and stocking to meet customer service levels.

·Individual goals not aligned to overall objectives: While all of the clients I worked with believed that cycle time reduction would bring a competitive edge to their business, and had an overall objective of reduced order-to-delivery cycle time, individual elements of the overall cycle time did not have any goals around lead time adherence. Similarly, procurement and logistics functions were measured on cost savings only, while CXOs’ objective was to improve customer service levels and working capital. There were no processes around supplier or freight forwarder performance management on fulfillment or lead time adherence, or the processes were so ineffective that it didn’t drive any actions or behavior.

·Lack of communication and collaboration: Whether it’s within the organization or between supply chain partners (customers and suppliers), lack of communication and collaboration was one of the top three challenges across industries. Here’s a typical example: New product development or R&D developed a new product without involving procurement, which resulted in procurement of customized parts from specialized suppliers, resulting in higher total cost of ownership. In some cases procurement was involved during new product development, but quality control were not informed of the raw material testing requirements.  This resulted in material rejections and a poor supplier relationship.

To address these challenges, I recommend a five-step structured approach to set up an effective global inventory planning and control process, as follows:

1.  Take a business assessment

Assess business functions and processes in their current environment. Start with an understanding of the current order-to-delivery (OTD) process. Devising a future state while identifying gaps and improvement opportunities will set the momentum to accelerate change acceptance among the cross-functional teams involved, including sourcing, planning, commercial operations, stockroom and manufacturing. Key activities in this stage should include:

• Study “As-Is” planning and execution process within the OTD process. Aim to have an unbiased assessment of current processes and practices. Start by interviewing a representative set of stakeholders who perform the same job within each function of the OTD process. Follow up with brainstorming sessions that involve key stakeholders from each function, which will help them understand their upstream and downstream process and address any issues arising out of lack of clarity of roles and responsibilities. These stakeholders should also voice their opinion on the desired “As-Is” state to establish a baseline against which improvements can be measured, and to effectively manage change through shared responsibility among their teams. Organizations should also consider conducting lean workouts among a cross-functional team of subject matter and Six Sigma process experts to understand redundant and non-value-added steps in the process due to multiple hand-offs between various functions within the OTD process.
• Summarize findings and gaps in data, process and practices. One of the ways to effectively capture the gaps in material planning and execution practices is through self-evaluation score sheets. A score sheet typically enlists the various planning and execution categories, and asks the functional owners to score according to the importance and effectiveness of each practice. Typical scoring criteria used is 1 (low), 5 (medium) and 9 (high) to clearly differentiate high impact gaps from lesser ones.  For a more robust and objective view,  third party service provider can also assist with benchmarking current processes against some of the best run companies in the industry.
• Devise “To-Be” planning and execution OTD process. Resource and system limitations may warrant a “To-Be Intermediate” state before moving to the ideal state. The objective is to outline a streamlined, robust and sustainable process that is aligned to the overall objective of optimizing inventory, customer service levels and variable costs. Organizations then begin to migrate to ideal state once resource and system limitations are addressed.
• Communicate to the whole group the identified improvement opportunities and goals. One of the biggest challenges faced during assessment is change resistance. Data-based inferences and identification of change catalysts is the key to driving fast adoption of more easily implemented improvements. By seeing immediate results, stakeholders will be better engaged to support additional and more sweeping process changes.

2.  Develop the inventory plan

Complete and accurate data is fundamental to developing an inventory plan. Start with the data gaps identified during the assessment phase. Next, determine data availability and data quality along with their operational definitions for effective inventory planning and control. Having clear operational definitions is extremely important for process standardization and improvements, specifically if the business has grown through acquisitions and has multiple data sources and nomenclatures. Inventory planning is driven by accurate data pertaining to:

·         On-hand inventory

·         Open orders (sales, production and purchase)

·         Lead time

·         Standard or average cost

·         Bill of material (BOM)

Developing an overall inventory plan should involve the following steps:

·Classify parts into three segments: raw, work-in-process or sub-assembly, and finished goods.

·Categorize each segment into stock and non-stock categories (purchase to order or make to order).

·Plan for each segment, independent of the other others involved in the process.

·Classify raw material stock using multi-criteria inventory classification to lay a good foundation for success.

·Calculate safety stock and minimum order quantities by part to optimize inventory and transaction costs while achieving service targets. Develop a theoretical raw material inventory plan based on calculated safety stocks and order quantities.

·Repeat the exercise for other segments and come up with an overall inventory plan to meet the desired service levels.

·Identify initial inventory impact and planned inventory investment.

·Once a plan is developed, upload the planning parameters into transactional systems.

3.  Execute according to the plan 

Once the inventory plan is developed, it is important to execute to the set plan. Any exceptions to deviate from the set plan needs to be approved by management to ensure discipline. Executing to the plan involves the following steps:

·Ensure tight adherence to inventory planning and ordering policies at part level.

·Establish process controls to ensure data quality and consistency.

·Synchronize production schedules to the materials plan.

·Establish a robust supplier performance management process that captures effective contract management, performance measurement and metrics, performance review and control mechanisms, and recognition systems. Timely raw material availability is the key to optimal inventory planning, as poor quality of materials could lead to poor yields and costly reworks.

·Simplify, standardize and digitize the process globally to minimize efforts in routine execution.

·Set up a process around Delegation of Authority (DOA) to ensure disciplined and

4.  Measure performance against the plan

Organizations can’t improve what they don’t measure. Ongoing monitoring and control is key to sustain improvements, organizations should focus on near real time visibility into supply chain performance measures to proactively root cause for deviations from plan, and to take corrective actions. This step should involve:
* Establishing key performance indicators (KPIs) and metrics for each process. For example:

(a)    Planner metrics provide visibility into a planner’s performance on service levels: safety stock investment, ordering costs and total excess inventory value.

(b)    Supplier scorecards with delivery, costs, quality, responsiveness and reliability related metrics highlight top and poor performing suppliers.

(c)    Workforce productivity to drive “first time right” culture and to minimize rework and associated wastes that would consume quality time of workforce.

(d)    Production span measures overall production variations and identifies root cause variations in each work-center.

* Establishing process controls through periodic monitoring and reports.
* Empowering and encouraging people to document and share best practices and recognizing people delivering exceptional results.

5.  Ensure continuous improvement 

To meet complex and volatile customer demands, while ensuring profitable growth, organizations should focus on continuous improvements leading to faster movement of materials and information. This step should involve devising a mechanism or practice in order to:

·         Capture root causes for variations in the plan.

·         Conduct periodic reviews to discuss impact areas, assign ownership and establish timelines to facilitate resolution.

·         Run continuous improvement programs such as Vendor Managed Inventory (VMI) and consignment stock agreements with key suppliers.

·         Reduce cycle times and lead times within the order to deliver cycle, to minimize forecasting errors.

·         Minimize the ordering quantities and safety stocks.

·         Establish a data-driven decision making process.

·         Enhance and retain workforce materials knowledge.

Inventory Management Techniques and Their Importance

Inventory Management Techniques and Their Importance

An inventory is a warehouse or storage location where a business maintains stocks of its products so that it can ensure swift delivery of those products on the order. With the ever increasing demand in products, more and more management practices have evolved to ease the process of product procurement by the customer. Highly efficient delivery systems and supply chains are developed to ensure efficient delivery of the products to their consumers. In the current scenario when customer satisfaction and service have become a prime reason for a business to stand apart from its competition, the need for effective inventory management is largely seen more as a necessity than a mere trend. Project management is a field of management that deals with the effective management of various types of projects. To understand the various inventory management techniques it is crucial to know why it is important.

• First, a mismanaged inventory can lead to an unnecessary increase in the working capital. The excess funds could have been fruitfully directed to fuel the company’s growth initiatives or research and development efforts.
• Second, effective inventory management would lead to low storage costs, which will in turn lead to an increase in the company’s profits. Storage space is expensive; if you are able to manage your inventory well and able to reduce the amount of goods that you need to store, then you will require less space, which will in turn lead to low warehouse rental costs.
• Third, it can help you satisfy your customers by providing them with the products they need in the swiftest manner. Poor inventory management leads to lower availability of goods and higher delivery time. Hence, if you want to gain those service satisfaction stars, you need to manage your inventory well.
• Fourth, goods stored in inventory over a long period may spoil. This leads to unnecessary overheads in operating a business. Hence, proper inventory management can help you reduce those costs greatly.
• Fifth, if you have inventories scattered in various locations, you need a proper system to manage those inventories on the basis of demand and supply. Inventory management techniques can help you go a long way in managing multiple inventories.

Various businesses have employed the basic inventory management techniques or inventory control methods to keep their inventory costs in check. Inventory management has become an intrinsic part of supply chain management. There are various methods that an organization may use to manage its inventory:

Just in Time (JIT)

 As the name suggests, the JIT inventory management technique says that the item will be ordered only if it is needed for shipping or manufacturing. The item may be ordered a few days back depending on the delivery time promised by the supplier. A mandatory requirement of this approach is the proper identification of each item before the manufacturer or reseller requires it. Since, there can be many goods required by supplier or manufacturer at any time, each and every future requirement should be properly identified and timely ordered.

Another crucial requirement for this technique is the timely delivery of the order by the supplier. Since the item is ordered just before it is needed, any delay in the arrival of the item may delay the whole production process; this may be treated as a drawback in the approach. The JIT inventory management technique helps reduce the size of the inventory and leads to low storage costs. Although, early identification and order of all items required in the future should always be there to make this approach effective. Early identification of risks is also a prime concern in managing a business properly;

 There are several components to JIT that deserve mention in the text:

• Production in Small Lots: The philosophy encourages production in smaller lots rather than bulk production. Bulk production takes much time, whereas smaller lots need less storage space and less manufacturing time than large lots.
• Short Business Setup Time: If a business agrees to produce in small lots, it will require less time for setup. Since, the production is less, little inventory space is needed which leads to lower costs.
• High Quality in Delivery: Since, the goods are produced in smaller lots and as-and-when they are needed. Businesses can ensure high quality standards by inspecting each and every one of their products. Quality control is very difficult in case of bulk productions, which may make it very difficult to inspect each and every product after arrival in the warehouse or manufacturing. That is why JIT inventory management systems are very efficient in maintaining high quality standards in their inventory.
• Excellent Preventative Maintenance: JIT approach makes it possible for the application of an excellent preventative maintenance strategy. Since, business downtimes can lead to irreparable losses, JIT is essential to maintain a good inventory management system.
• Commitment of Supplier on Timely Delivery: Since JIT is highly dependent on the close cooperation and close coordination between suppliers and the procurers, each and every supplier should be committed to making deliveries on time. Since untimely delivery of orders can lead to delayed production or low customer satisfaction, a level of commitment is necessary for the suppliers to make timely deliveries.
• Employees with a Flexible Attitude: The employees of the business should be able to respond proactively to the changing business scenarios. Flexible attitude of employees is essential to make the JIT approach beneficial for business.

 Accurate Response

The inventory management approach of accurate response is an excellent mechanism that helps businesses manages their inventory, which may get overloaded due to improper forecasts. Businesses greatly manage their inventory on the basis of future demand predictions. It has become increasingly important for these forecasts to be accurate for a business to keep itself alive in the cut-throat competition. Since more and more companies have come up with sophisticated inventory management systems that give accurate forecasts on product demands, the need for accurate response is highly needed.

Bad forecasts lead to businesses storing huge amount of inventory due to expected future demands. This leads to many storage costs and bad management of inventory. With the accurate response inventory management practice, one can reduce the unpredictability in the markets by making more accurate predictions. The underlying principle in making an accurate response strategy is identifying the products for which demand can be forecast. Then the product whose demand can’t be predicted is kept away from the predictable products.

The accurate response method helps businesses better manage and predict their inventory. First, all the items that were not available and lead to a drop of sales are incorporated in the total costs so that these products are available for maintaining customers. Second, products are classified as predictable and unpredictable so that proper inventory stock can be maintained for the predictable products.  The various benefits of the accurate response inventory management techniques are:

• Delivery Success: By maintaining an inventory of the predictable products, businesses can ensure successful delivery of products that would otherwise have resulted in a loss of sales. An inventory of predictable products can be maintained for the future to ensure swift delivery and unpredictable products can be kept on a deliver-on-order basis. This helps in reducing inventory storage, delivering products proactively, and reducing costs.
• Lower Costs: Inaccurate forecasts can lead to an increase in the price of goods stored because retailers, wholesalers and distributors incorporate the overheads incurred due to storage of these products into product costs. Accurate response can prevent this and help the sellers lower the cost of such products and gain a competitive advantage.

Dropshipping

The method involves a seller making a dropshipping contract with another company. The best part of the technique is that there is no need to bear the cost of inventory; the seller can directly transfer the order to a dropshipping company, which will then take the responsibility of delivering the item to the customer. The seller receives a certain percentage of the sales that he can make. The downside to this method is that the seller does not have any control over the shipping of the item and cannot cross check the quality of the shipment.

Procuring Bulk Shipments

This is an age-old method of managing inventories; the method relies on the principle that if you purchase goods in bulk, you are able to procure them in much lower costs. The method can only be employed if a business is sure that he will be able to sell that product. If a product is in high demand then you should consider using this inventory management technique which is sure to save you much money.

Apart from these practices there are many techniques that will help you manage your inventory. As businesses are becoming more competitive, more and more inventory management practices have come into the light. However, there are a certain pointers that should always be kept in mind if you really want to successfully manage your inventory:

• Do not maintain too much inventory in your warehouse. If a certain quantity of product is needed after a year, do not go forth and unnecessarily bear its storage costs for one whole year. Make use of the different accurate forecasting methods to help you efficiently procure the goods in a timely manner before demand escalates.
• Make sure that you track your inventory items properly. Using bar codes and inventory tracking software you need to make sure that there are no counting errors that were incurred while accessing an inventory. Inaccurate tracking can lead to a false promise to customers, who will give you a difficult time if you are not able to fulfill your promise of delivering the order on time.
• Order products on the basis of priorities. The products that are in most demand should be ordered first and so forth. If you keep on randomly storing products in your inventory, then you will unnecessarily incur huge storage costs.
• You should always use proper inventory management software to manage your inventory. Even if you own a small business, you will need to have the proper software with data backup modules to help you manage inventory efficiently.
• You should always have a backup plan in case of system failures. Also, you should backup your inventory data into remote systems so that there is no accidental loss of inventory data. A good backup plan can go a long way in making your inventory management more efficient process.

In a nutshell, inventory management will lead to low storage costs, ample usage of funds and timely delivery to customers. The various approaches to inventory management may depend on the requirements of the business.

Know more....

 

Top Ten Ways to Manage Inventory 

Inventory management is a system used to oversee the flow of products and services in and out of an organization. A company may decide to incorporate one key inventory management technique or combine a variety of techniques to meet organizational needs. Businesses utilize inventory management strategies to create invoices and purchase orders, generate receipts and control inventory-related accounting.

Supplier Assistance

An effective way to manage inventory is to solicit the help of suppliers. Supplier-managed inventory gives the vendor access to the distributor's inventory data. The supplier generates purchase orders based on the distributor's needs. Distribution-intensive companies utilize vendor managed inventory controls to eliminate data-entry errors and to effectively manage the timing of purchase orders.

Inventory Control Personnel

An efficient method for managing inventory is to hire a dedicated inventory control specialist. Inventory specialists manage all merchandise items that are on hand and in transit. They also perform adjustments, manage returns, validate received merchandise and implement inventory reporting strategies

Lead Time

Lead time is the amount of time it takes to reorder inventory. Suppliers deliver products at varying times after an order is placed. A useful way to manage inventory is to establish lead time reports to understand how long it takes to replenish your inventory.

Monitor Inventory Levels

Having high levels of inventory adds to expenses and increases overhead costs. An effective way to manage inventory is to determine the inventory demands of the business. Limit seasonal inventory and cut back on inventory that does not sell.

Customer Delivery

An effective way to manage inventory is to measure inventory turnover and delivery turnaround time. This involves measuring how often your inventory sells and how long it takes to get into the hands of your customers.

Inventory Consultant

Many organizations hire inventory consultants outside the company to develop and manage internal inventory systems. Inventory consultants are responsible for maintaining accuracy, cycle counting, shipping and receiving, and managing order-picking operations.

Purchase Software

Many businesses manage inventory by designing an inventory management database or purchasing inventory management software. Inventory management software enables distributors to customize the database to fit their individual needs.

Product Turnaround

All businesses have products that sell and products that sit on the shelves. A helpful way to manage inventory is to establish a system that pinpoints which products move quickly and which products take more time to sell.

Tracking System

Many businesses develop a tracking system to manage inventory and monitor turnaround times. Inventory tracking system formats range from spreadsheets to computer programs. They provide complete inventory control allowing business owners to organize item levels and take cycle counts in distribution centers or stock rooms.

Work in Progress

Businesses successfully manage inventory by tracking units as they move through different operational stages. Many businesses utilize some inventory to create other products. Establishing a system to track "work-in-progress" materials allows businesses to adjust order amounts before the inventory gets too low and slows production

Inventory Control Records

Inventory Control Records

Inventory control records are essential to making buy-and- sell decisions. Some companies control their stock by taking physical inventories at regular intervals, monthly or quarterly. Others use a dollar inventory record that gives a rough idea of what the inventory may be from day to day in terms of dollars. If your stock is made up of thousands of items, as it is for a convenience type store, dollar control may be more practical than physical control. However, even with this method, an inventory count must be taken periodically to verify the levels of inventory by item.

Perpetual inventory control records are most practical for big- ticket items. With such items it is quite suitable to hand count the starting inventory, maintain a card for each item or group of items, and reduce the item count each time a unit is sold or transferred out of inventory. Periodic physical counts are taken to verify the accuracy of the inventory card.

Out-of-stock sheets, sometimes called want sheets, notify the buyer that it is time to reorder an item. Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted.

Open- to-buy records help to prevent ordering more than is needed to meet demand or to stay within a budget. These records adjust your order rate to the sales rate. They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels. An open-to-buy record is related to the inventory budget. It is the difference between what has been budgeted and what has been spent. Each time a sale is made, open-to-buy is increased (inventory is reduced). Each time merchandise is purchased; open-to-buy is reduced (inventory is increased). The net effect is to help maintain a balance among product lies within the business, and to keep the business from getting overloaded in one particular area.

Purchase order files keep track of what has been ordered and the status or expected receipt date of materials. It is convenient to maintain these files by using a copy of each purchase order that is written. Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates.

Supplier files are valuable references on suppliers and can be very helpful in negotiating price, delivery and terms. Extra copies of purchase orders can be used to create these files, organized alphabetically by supplier, and can provide a fast way to determine how much business is done with each vendor. Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal and/or resolve future potential problems.

Returned goods files provide a continuous record of merchandise that has been returned to suppliers. They should indicate amounts, dates and reasons for the returns. This information is useful in controlling debits, credits and quality Issues.

Price books, maintained in alphabetical order according to supplier, provide a record of purchase prices, selling prices, markdowns, and markups. It is important to keep this record completely up to date in order to be able to access the latest price and profit information on materials purchased for resale.