(Part 3)

In Parts 1 & 2 of this article we have been exploring why inventory optimization doesn’t actually optimize.  So far we have identified that the real issue is that so called optimization techniques are often just a recalculation of the inventory needs within an existing set of constraints.  To truly optimize we need a process that challenges those constraints. The suggested process is known as the Inventory Cash Release^TM Process.

The first step in applying this process is to focus on the SKUs that will have a real impact on the inventory value, not the long tail of inventory items that hold little dollar value. This is an application of the Pareto Principle.

The next step is to apply the ‘7 Actions for Inventory Reduction’ – and there are only 7 actions!

Now, in Part 3, we discuss steps 3 and 4.

Step 3. Address The Systematic Issues

As mentioned previously there are systematic issues such as policy, procedures, measures and reporting that drive your inventory outcomes.  I am sure you have seen the situation where a company has conducted an inventory review, cut their inventory and then seen the reductions they made slowly reverse over the next 1 –2 years.  Addressing the systemic issues prevents this.

By way of example compare the approach for reviewing maintenance procedures. In maintenance you can keep fixing breakdowns but it is usually better to address the policies, procedures, measures and reporting so that you can truly address the problem and achieve a lasting solution – a reliable operating environment.  Inventory management is no different. For lasting inventory reduction you must review your policies, procedures, measures and reporting to identify and fix the issues that have previously driven your excess inventory investment.

Step 4. Be Implementation Focussed

The problem when you buy a ‘tool’ for inventory optimization is that usually only one person uses the tool (after all we can’t all sit around the same computer screen!) This means that other people are necessarily excluded from the improvement process and decisions. We all know that this, in turn, reduces the likelihood of ownership and therefore minimizes the chance that the change will be permanent.

When you stop to consider the number of people that actually influence your inventory outcomes the single tool approach seems wholly inadequate. For example, with MRO inventory the people who influence the inventory will include: the engineers who execute the daily tasks, the manager that determines policy, the planners that plan what to do, the accountants that determine and enforce your accounting policy, purchasing personnel who place orders and negotiate with suppliers, and storeroom personnel who issue parts and place requisitions with purchasing. With OEM and industrial supplies you can expand this to include sales people, production planners, and regional management.  Obviously adopting a single tool approach is unlikely to engage this entire group in any meaningful way.

What is needed is an approach that engages the key decision makers, the key influencers and those that actually do the work!  This will enable you to develop a common understanding of the issues and actions required to produce a lasting result.  When it comes to reviewing and changing the policies, procedures, measures and reporting this approach builds ownership. Ownership maximizes the chance that the changes will last.

Some people will think that involving a range of personnel is excessive but you should consider what is actually at stake here. The organizations that consider taking action on their inventory will have an investment of many millions of dollars, sometimes tens of millions of dollars. Even if you do not have that level of investment, the money tied up in your inventory is important to your company.

So ask yourself what other projects you have right now that will produce the type of return that a program of inventory reduction can generate – with no capital investment! When viewed from this perspective a program of inventory reduction may be the most financially lucrative initiative that you can undertake.

Conclusion

For many organizations the promise of traditional optimization is hard to ignore.  The promise of reducing inventory based on ‘hard data’ of past activity can be very attractive, especially to the analytical mind.  But this approach is flawed in its thinking and limited in its application. Anyone that adopts this approach needs to be aware that traditional optimization doesn’t truly optimize.  It will, at best, produce limited results through recalculation but these results will be neither complete nor sustainable.

These shortcomings can be addressed however through the application of the Inventory Cash Release^TM Process. This process utilizes the principles of both Double Loop Learning and Systems Thinking to ensure that the solution is both complete and sustainable.  By taking this approach you can identify all of the actions for inventory reduction and the requirements for changes that will drive a lasting result, and release cash back into your business.

Click here to read Part 1

Click here to read Part 2

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.

Note: You are welcome to reprint this article online on the condition that it remains complete and unaltered (including the ‘About the author’ info at the end) and you send a reprint to enquiries@InitiateAction.com 

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