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Is Inventory Waste or an Asset?

I am shutterstock_138793661sitting in seat 4E on an evening flight to San Francisco thinking about my day. It is Labor Day weekend in the United States, and the plane is full. While many have a three-day holiday this weekend, I will celebrate this Labor Day by working.
Next week is the annual Supply Chain Insights Global Summit, and summit preparation is on my agenda for the weekend. At the summit it will be great to network with old friends, and share insights, but there will be no play for me this weekend.
In the preparation phase for the summit, I schedule planning calls with the speakers and panelists. This is a series of preparation calls. This morning, I unexpectedly found myself in the middle of a debate between my two panelists on the Planning Benchmarking panel for the Summit.  We were discussing the results of the planning benchmarking work that we have just finished, and I was sharing some insights on inventory management when one of the panelists emphatically stated, “Inventory is a waste to manage. We feel so strongly about this that we do not have an inventory planning role.” The other panelist retorted disagreement. His feeling was that inventory is an asset to manage. A heated debate ensued. The answer, I feel, is that “It depends.” Inventory is both. Companies need to carefully manage the asset and mitigate the waste. The successful answer depends on supply chain strategy and the building of strong processes to manage supply. Each company is different. Planning is not planning.
My Insights
While I agree that companies need to right-size inventory to maximize ROIC and improve customer service, there are many underlying decisions that I feel many companies do not make consciously. The goal is to become consciously competent in managing the role of inventory in supply chain strategy.
Inventory management is a complex subject. Recently, through my analysis of the planning benchmarking work, I have become fascinated with the role of inventory in the market-driven value network. Before the benchmarking work, I believed companies that were better forecasters would be better at inventory management. This is no longer my belief. Let me tell you why:

  1. Shifts in the Form and Function of Inventory. While forecast accuracy, if used well, can reduce safety stock, what I find in the study of the global multinational is the rise of cycle stock due to increased item complexity, and the increase of in-transit inventories due to longer freight lanes and longer cycles in ocean transportation. Most supply chain leaders hear the word inventory and instantly think about safety stock management, but this is too simplistic. The management of form and function of inventory is essential to improve inventory turns in this increasingly complex world.
  2. Cycle Stock is an Opportunity for Most. Cycle stock is most effectively managed through the successful implementation of production planning. (Cycle stock is the management of stock required to cycle through production runs and procurement buys effectively. It involves complex logic on batch size, change-overs and production sequencing.) This planning technology is tricky to implement and many of the technologies are not up to the task. With many companies adding items to the product line, the management of the production rhythm wheel increases in importance. The modeling of a feasible plan including buffers and constraints is also critical.
  3. Inventory Is the Most Important Supply Chain Buffer. There are two buffers in the supply chain: inventory and manufacturing capacity. The reduction of cost and improving asset utilization is usually the charter of the supply chain team. As assets become more and more utilized, manufacturing loses the ability to buffer volatility through manufacturing capacity optimization. In parallel, with more and more manufacturing outsourcing, companies lose the capability to buffer through the use of manufacturing capacity. As a result, inventory becomes the critical buffer to absorb demand and supply volatility.
  4. Technology Cannot Help If We Don’t Support It Organizationally. More and more companies are purchasing inventory technologies, but failing to give planners time to plan. There is more and more need for an inventory planning role to manage the form and function of inventory and develop inventory strategies. Buying the technology and not having clear processes and accountability does not help. We are still in our infancy in the use of multi-tier inventory optimization technologies.
  5. Rising Volatility. Most companies are not measuring and adapting with volatility. Analyzing forecastability of the item portfolio is a good starting place. The second analysis is the measurement of the long tail of the supply chain. As items proliferate, and markets shift, the demand plan becomes more volatile. This is the case for most, but it is not recognized. Embracing demand and supply volatility is critical. Learn to dance with uncertainty.
  6. Forecast Consumption Logic Is an Opportunity for All. The variation in error at the distribution level in forecast consumption logic  in the benchmarking analysis was higher than I thought. It was shocking to this old gal.  I recommend that all companies measure the MAPE of the forecast at the item level for the distribution center, and then ask themselves the question “Why have we not implemented demand sensing to improve replenishment?”
  7. Executive Understanding. One of the surprises for me in the benchmark data is the gap in understanding of inventory strategies by the supply chain executive team. The concepts of planning and the management of form and function of inventory are not well understood. It takes training. The strategy requires careful definition with finance. However, it is worth it. Inventory turns correlate to market capitalization.

Join the Debate…
Twelve bloggers will cover this year’s conference, and we will push all of the videos live the week after the conference. If you cannot join us live, check out the presentations and join the debate on social media. I love an active debate and look forward to hearing your feedback on the supply chain planning benchmarking work.
The Supply Chain Insights planning benchmarking work for next year kicks off in January. Let us know if you want to be a part of the second year study.
Summit_video_cameraLife is busy at Supply Chain Insights. We are working on the completion of our new game—SCI Impact!—for the Supply Chain Insights Global Summit in September. We would love to see you there! Our goal is to help supply chain visionaries around the world break the mold and drive higher levels of financial improvement.
About the Author:
Lora in italyLora Cecere is the Founder of Supply Chain Insights. She is trying to redefine the industry analyst model to make it friendlier and more useful for supply chain leaders. Lora wrote the books Supply Chain Metrics That Matter and Bricks Matter, and is currently working on her third book, Leadership Matters. As a frequent contributor of supply chain content to the industry, Lora writes by-line monthly columns for SCM Quarterly, Consumer Goods Technology, Supply Chain Movement and Supply Chain Brain. She also actively blogs on her Supply Chain Insights website, for Linkedin, and for Forbes. When not writing or running her company, Lora is training for a triathlon, taking classes for her DBA degree in research at Temple or knitting and quilting for her new granddaughter. In between writing and training, Lora is actively doing tendu (s) and Dégagé (s) to dome her feet for pointe work at the ballet barre. She thinks that we are never too old to learn or to push an organization harder to improve performance.

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