I have applied the 9 steps to optimal ordering. Why is my inventory still out of balance?

Balancing Inventory

Will the diligent application of the 9 steps to optimal replenishment orders we discussed in a previous blog post result in perfect inventory balance, high customer service levels and minimum inventory investment levels?

The quick answer is no!

Placing the optimal replenishment order is only the first step. The reality is that many of those carefully considered demand and supply factors used in the replenishment decision are out of your control.

Once the order is placed, the focus must now shift to dealing with the consequences of the changes in those factors that are an inevitable part of the world we operate in.

Forecast management

  • Most of the time you will have no control over what your customers purchase and forecasts will therefore never be perfect. Adjust forecasts as soon as you know they are either too high or too low. This will result in more accurate identification of potential stock outs, emergency orders, surplus orders and excess stock
  • The longer the lead time, the more dire the consequences of forecast errors will be. You will wait longer to resolve stock outs. The build up of excess will be greater
  • By the way, when disposing of excess stock, the resulting increased sales will in most cases result in higher computer generated forecasts and there is a risk of triggering higher order quantities that could result in more excess. The forecasts from sales history resulting from the disposal of excess stock will require manual intervention to exclude the affect of the sale of excess stock

Supplier management

  • Suppliers have their own supply chain issues to deal with and do not always deliver on time and in full
  • Late deliveries result in stock outs. Is the supplier at fault or are you using a planning lead time that is too short?
  • Early deliveries create excess and impact cash flow
  • Managing suppliers is more complex when purchasing from a different supplier each time. You have less delivery performance history to work with and the expediting function in the business must monitor and take corrective action to ensure deliveries are received on time
  • Repetitive purchasing from the same suppliers results in a more mature relationship which usually results in more reliable delivery performance
  • Adjust lead times as soon as you know they are incorrect. Again, this will result in more accurate ordering, potential stock out, surplus order and excess stock management

A few of the less obvious factors resulting in stock imbalances are:

  • Incorrect supplier codes
  • Duplicate codes for the same item
  • Incorrect or missing bill of material links
  • Poor supersession management

In summary

  • The expression “the devil is in the details” applies to inventory; perhaps even more so than to most systems. The main reason being the many factors that influence the inventory balance that we have little or no control over.
  • In Inventory Management, the law of diminishing returns applies. Almost without exception, an 80% solution in inventory IS the perfect solution. The time spent on a more accurate calculation would have produced more value doing something else
  • It is very obvious that orders must be placed regularly and there is usually a “Buyer” whose job it is to do this.  The management of the corrective actions discussed above will usually involve more than one person who are often “too busy” and so these critical steps are not performed
  • A fundamental requirement is a Dashboard to identify “what went wrong yesterday”. To be effective, items must be displayed by descending importance
  • The persons using the Dashboard must clearly understand what they are required to do and when. One of the best ways to ensure this is to identify and document the processes required and then train the relevant people to use them
  • Their actions must be monitored to ensure the work is being done and is giving the required results
  • What can be done to reduce the risk of a re-occurrence of these issues?
    • Firefighting is easy – you focus on what is staring you in the face. It requires little thought
    • Getting to the cause takes more effort and requires us to step back and take a different perspective. It requires some thought, maybe input from others and so we usually do not do it

Knowing when to firefight, deal with the symptom and move on as opposed to getting to the cause and fixing the problem permanently is a key to using time effectively and in building a world class business

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