Effective Inventory Management Leads to Business Success

Aberdeen Research benchmarked the people, processes, technologies and metrics associated with inventory management and determined that Best-In-Class companies are able to continuously manage their inventory throughout their supply chain to improve customer service levels, forecast accuracies and perfect order metrics. They defined Best-In-Class as companies that had:

• 97% Average Customer Service
• 15 days Average Cash Conversion Cycle
• 95% Perfect Order Performance
• 87% Average Forecast Accuracy at the Product Family Level

These companies are able to continuously manage their inventory throughout their supply chain to improve what they deliver to the customer, which encompasses more than the specific product or service that they deliver. Other aspects of what is delivered that don’t show as specific items on the invoice, but are improved with effective inventory management, include total order lead time, product quality, ease of doing business and the ability to deliver changes to the product or service without having to go through major business changes.

Regarding inventory management, successful companies follow the principles of Closed Loop Inventory Management which include the ability to:

• Determine safety stock targets for inventory at critical nodes in the supply chain.
• Replenish inventory into distribution buffers based on customer demand.
• View end-to-end inventory while providing available to promise inventory.
• Respond quickly to market events while executing the inventory requirements.
• Segment inventory based on customer service requirements.

Although most involved with business management will admit that the above impacts on delivering to the customer are reason enough to make inventory management improvements a priority, there are also internal benefits to the organization from becoming Best-in-Class that should be mentioned:

• Best-in–class companies are 10 times more likely to have reduced their inventory carrying costs year after year.
• Best-in–class companies are 7 times more likely to have reduced their warehouse labor costs year after year.
• Best-in–class companies are 63% more likely to practice centralized transportation planning.

Whether it is via the successful pursuit of Lean Enterprise Performance or effective implementation of ERP or Supply Chain principles, improving the performance of inventory management will improve the organization’s total customer delivery performance.

A Roadmap to Lean: Integrate the Supply Chain

Part 9 of a 10 part series
In order for an organization to transform from its current state of operation to one of a Lean Enterprise Organization, a two phase approach – Planning and Implementation - can be utilized. The fourth step in the Implementation phase is to Integrate the Supply Chain into the lean ways of the organization. In this step, we want to:

• Evaluate Each Supplier and Customer as to Applicability of Lean Concepts
• Define “Quality at the Source” and “Pull” Demand Concepts
• Select a Few Key Partners for a Pilot Progra
• Build Mutually Beneficial Relationships with Supply Chain Partners
• Share Information and Synchronize Planning
• Develop and implement an Education Program for your Supply Chain Partners

To be most successful, organizations need to extend the lean thinking concepts from the shop floor to the entire supply chain including, the front office, customers and suppliers. Transferring the benefits of Lean to your suppliers and customers can greatly enhance the benefits of your own Lean efforts. By using your results and facilitator skills to motivate them, these supply chain partners will be able to improve their operations so that they can coordinate their activities with yours and accurately deliver what you need to improve your success. Key deliverables of this phase include:

• Definition of Mutual Benefits
• Lean Education Materials Adjusted to Each Supply Chain Partner
• Lean Education and Training for Facilitators of Partner Organizations
• A Roll-out Plan for Targeted Supply Chain Partners
• Key Metrics of Success Related to Quality, Cost and Delivery Performance
• Implementation of Lean Concepts and Techniques across the Entire Value Chain

To be honest, working with suppliers will be easier than working with customers because with suppliers, you are the customer and they may be more willing to listen. However, don’t let customers slip by the wayside. One of the key concepts of Lean is that of “Pull Demand”, and who better to include in this effort than the customer who pulls from you. Success in having your supply chain partners effectively implement Lean means that your organization can eliminate the wasteful buffers that exist between your organization and theirs. The next and last stop in this roadmap is to Measure Continuous Improvement.

Are you Best-in-Class?