Inventory Management

One Size Does Not Fit All!

If there is one great myth in inventory management it is that one single technique will solve all inventory problems. Not that people believe that one technique will solve all problems in all situations but that in any given company one approach is all that is required to manage all inventory.

For the inventory manager this is very attractive as it means that there is only one approach to manage. For the software vendor, consultant or advisor it means only one solution to sell.

There is a wide range of techniques and approaches that people use to manage inventory. These include JIT, MRP, DRP, SCM, Risk Management, safety stock and EOQ’s Sometimes they are used on a stand alone basis and sometimes in conjunction with each other. All are worthwhile techniques when used appropriately.

Problems arise however when the approach to identifying the appropriate solution starts by looking at the solution rather than the inventory. This approach starts from the assumption that because solution x works at company y it must be good. Or because the software suits our enterprise wide planning system it is appropriate. In fact it is often assumed that inventory software packages are much of a muchness. Have you ever heard someone say ‘and it has an inventory module’!

The fact is that not all inventory is the same and consequently not all inventory requires the same approach to management. Without trying to be exhaustive it is easy to identify that some inventory is made to order, some is made to stock, some is perishable, some have characteristics that change with time, some are part of assemblies and sub-assemblies and some are stand alone items.  These, and many other variables, lead to a huge number of different requirements for inventory management.

While the differences between inventories in different industries are well documented (for example, the requirements for managing inventory at a large retailer will be different to managing in-process inventory at a petro-chemical plant) what is not widely recognised is that the requirements for inventory management across a single business can vary significantly.

The single biggest error made in inventory management today is to select an inventory management technique and apply it universally across a business. The ‘one size fits all’ approach can lead to significant inefficiencies in the results of inventory management. This might not be an ‘out of stock’ as that situation is always dealt with urgently. More likely the result will be the holding of excess inventory and tying up valuable funds unnecessarily.

A better approach to inventory management is to start by looking at the inventory rather than the solution and identifying the characteristics of each type of inventory being held. When this is done, an approach that is appropriate to the demand, supply and cost characteristics of the inventory can be selected and the inventory holding optimized for its characteristics.

Consider a manufacturer that has a total inventory made up from raw materials, work in progress, finished goods, a distribution network and engineering spares. Applying a universal mindset or solution across all of these inventory types is unlikely to deliver an optimal result. For example, dealings involving suppliers (as for raw materials and engineering spares) provide a different range of opportunities compared to internal supply situations (WIP) and even finished goods. The ability to forecast, the ability to control the supply chain, the ability to source on consignment, the requirements for buffer stock, the impact of a stock out all vary. Unless you allow the flexibility to pursue opportunities related to different inventory types your business is likely to be over investing in inventory.

Inventory management is about more than just logistics and getting the right thing in the right place at the right time. It is also about the efficient and effective use of capital. Taking a singular approach to managing all types of inventory without fully considering the different characteristics and opportunities of that inventory leads to overstocking and obsolescence and the waste of capital resources that might be better directed elsewhere.

About The Author

Phillip Slater is the author of the book Smart Inventory Solutions and the developer of the Inventory Cash Release^TM System - ICR^®06, a world’s best practice approach to inventory management and reduction. For more information visit his website at http://www.InitiateAction.com.

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