Saturday, May 14, 2005

Inventory Targets: Good Gun, Bad Aim?

Even companies that have invested significant amounts in Supply Chain Management solutions do a poor job of keeping the right material in the right quantity at the right place to achieve the customer service level they desire. Why? Not because the supply chain tools are bad, but because they are not focused on setting the right targets. They have a good gun; they are aiming it wrong and so they do not achieve the customer service level they could. Some leading companies today are starting to focus on the target setting process and achieving great results in market-share and revenue growth.
How do you get the maximum customer service level from limited inventory? When you set inventory targets you have to
  1. profile order lead times - if some of your customers give you more time between when they order and when they expect delivery, leverage that and keep your inventory further upstream.
  2. segment your customers & products - have differentiated customer service level based on strategic importance, cost of servicing a customer and profitability of each customer & product.
  3. shorten your manufacturing & procurement cycle time - evaluate where you are spending time in getting material to inventory points and reduce where possible.
  4. lower supplier variability - analyze each case where the plan was missed, understand root cause and put in fixes to avoid them in the future.
  5. lower demand variability - analyze spikes in demand; most probably that is bull-whip effect (or here) and not end consumer behavior. If bull-whip, work with your customers through incentives, knowledge sharing.
You will be surprised by the results. You might end up adding inventory for certain items while decreasing overall inventory. With less inventory you will end up with better customer service level. I am sure you can live with that.
You are a reliable vendor, not because you deliver to your customers when you promise, but because you deliver to your customers when they want it! What do you think?
Karthik Mani

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