As a risk manager, I have witnessed a good number of scenarios that drive me to confirm that, in a supply chain, the strongest link must be your inventory. Why? Because it is the trigger to take decisions about transportation, releases, materials handling, forecast, etc.
After research I found that I am not the only one believing that. Published in Financial Times Press “(…) the heart of relationships in a supply chain is inventory movement and storage. Much of the activity involved in managing relationships is based on the purchase, transfer or management of inventory” (Waller & Esper 2014). I liked the concept of inventory playing the role of pumping a continuous flow of decisions across the logistics chain.
Therefore, Your efforts to strengthen and make trustable your system to manage the inventory will gain a solid and more stable chain, which lead us to avoid overstocking, shortages, incorrect forecasting and duplicate inventory/orders, just to mention a few benefits (Prater 2004).
In words of John Toomey, inventory reliability problems are often the result of inaccurate records rather than supply and demand errors. (Toomey 2000). I have seen long downtimes due to a discrepancy in inventory, it´s very frustrating. Stressing the supply chain and expending money in expedited shipments are the normal reactions, but I am sure that you don’t want to live on the limit or activate the “survival mode” increasing your safety stock raising the cost of your inventory. So, the question is: are you doing the necessary to enhance inventory accuracy? What do you have to do? These are my recommendations.
Quoting again to Toomey, “maintaining accurate records requires a robust process of receipts and disbursements, trained personnel, an effective auditing system, error and cause correction” (2000). I will add measuring and monitoring to this list. Besides, I think that training is implicit in each part of the process; work in people´s development is not an option, it is mandatory. Without suitable personnel doing the job the process would be extremely weak.
Receiving and dispatching inventory
A MRP system seems to be the obvious answer to deal with inventory, but not all the companies have a robust development of this tool, in some cases the receipts are recorded in one system and outputs in other, by instance. In all cases, with our without a good MRP, the key to have an effective control of this process is to assure that every movement of your inventory is recorded. Sounds easy, doesn’t it? It’s a big challenge specially if materials pass for many stages or locations. I would consider as basic: transit for all traffic, floor for warehouse, work in progress (WIP) for production processes, finished goods (FG) for product ready to ship and the register of your sales/dispatches.
The weight of an audit in the process is huge; it is the first step in the detection of errors. The method used to manage inventory ideally should be self-auditable, the system itself must not allow to register duplicate receipts, to release shipping labels without a dispatch record or transfer material without being scanned. This will not eliminate human intervention but it will simplify it and decrease its frequency.
Per complexity of your inventory, some checklists or approval flows could fit to your necessity of audit the process. Adding questions related to inventory to layered process audits (LPAs) is a good idea, you will involve all organisation and everybody will care about it.
Error and cause correction
The quest for optimal inventory levels involves several interconnected decisions that must be made to maintain optimal flows and seamless exchange of inventories along the supply chain. (Waller & Esper 2014) In the middle, errors happen.
So, evaluating and correcting mistakes are probably the biggest weaknesses in many companies. It’s common seeing firms pursuing solutions to solve the wrong cause of problems, that action doesn’t solve the problem; on the contrary it could accelerate its occurrence. It’s important to support the search of root causes with techniques like 5 Why analysis or fishbone diagrams to guarantee that you are chasing real causes and in consequence implementing long term and definitive solutions. Keep a log of “lessons learned” is a good practice.
To measure the performance of your inventory it’s a priority set the goals, be sure that there are enough metrics to each target and make them visible for your team in all levels of your company. Metrics such as inventory turns, days of inventory, inventory accuracy (cycle count results) and cost of inventory are good to start. These inventory measures tell us, for example, how quickly inventory is moving through the supply chain, how likely the firm can handle the fulfilment of customer demands, how the firm’s liquidity is impacted by its investment in inventory, and may even signal how effectively supplier relationships are being managed. (Waller & Esper 2014)
When I talk about monitoring I want to touch three points. First, once you have started to measure your performance track your charts in a periodical basis, graphs can give you valuable information; this is known as statistical control (I will talk about it in another opportunity).
Second. Implement a cycle count calendar to evaluate the accuracy of inventory. Dividing your items in A, B, C classes, or more complex depending on size of your inventory, could help you to decide the frequency of counts. Don´t wait for the annual physical inventory to realise how good/bad are your numbers.
Finally, organise “inventory walks” in your warehouse; where planners get sensitiveness of volumes vs numbers in system, both have to match. The idea is that personnel figure out their “ownership” over inventory.
Well, thank you for reading again, good luck with your inventory, read me in two weeks!
Prater, E 2004, University of Texas at Arlington, viewed 06 July 2015, http://wweb.uta.edu/insyopma/prater/Inventory%20management.%20doc.pdf
Toomey, J 2000, Inventory Management: Principles, Concepts and Techniques, Springer. Science + business media, New York.
Waller, MA & Esper, TL 2014, The Definitive guide to inventory management: Principles and strategies for the efficient flow of inventory across the supply chain, 1st edn, Pearson FT Press, New Jersey, Consulted in http://www.ftpress.com/articles/article.aspx?p=2192703.