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November 02, 2010

Eliminate, Simplify, Integrate

Meeting service standards and inventory targets

In the course of working with a number of firms in the past years, I’ve noted that while supply chain management has evolved, there is still much room for further improvement. One specific example is production and inventory planning.

Not a few firms have deployed state-of-the-art information technology hardware and software to integrate their inventories, points-of-sale data, vendor receipts, and production output in an effort to improve the flow of communication between functions through harmonized, real-time access.

At the same time, companies have placed greater priority in sales and operations planning (S&OP), in which key representatives from the marketing, sales, manufacturing, purchasing and logistics divisions work together to form and execute coherent strategies to ensure that there is always enough finished product to meet anticipated demand.

Yet, experience has shown that despite their efforts at streamlining the S&OP process, many firms have yet to significantly reduce incidences of out-of-stock and excessive inventories, particularly of the wrong products.

There are a few potential areas for improvement which would help companies upgrade their planning systems to reduce stock-outs and excessive inventories:

Data Accuracy.Many firms have failed to refine their data gathering and recording processes. Low data accuracy is a symptom of poor inventory management, which in turn results in higher inventory. Neither does this help meet customer service standards, as the organization is likely not even aware that inventory exists.

Companies must make sure to have 95% of their inventory records in place before they can run an effective planning system. This means that 95% of the inventory records match what is physically present in the warehouse. Having less than this percentage would result in users spending more time putting a lid on problems caused by wrong inventory recording instead of serving customer requirements.

Manufacturing Capabilities.The planning system must be able to capture the output capabilities of the firm’s production lines. In most instances, these are not properly documented, or different versions of it exist. Having just a single and accurate description allows an organization to pinpoint bottlenecks in the production process and enables management to allocate the needed resources to increase the firm’s ability to serve customer demand.

Sales Order Skewing. Significant order surges at the tail-end of a selling month versus low sales in the month’s first weeks lead to higher inventory coupled with high product stock-outs: Inventory builds up as the month progresses because of minimum demand, but gets depleted quickly as more orders come in, eventually resulting in out-of-stock incidences by the month’s end.

Logistics Network Design. Having improperly designed distribution networks significantly impacts the firm’s ability to meet customer demand while keeping inventories within a manageable level.

Once a product has been sent to a particular location, it would be difficult to transfer it to another one should there be a sudden surge in demand. While a centralized network design would help eliminate this problem, its distance from some of the locations might make emergency deliveries untenable. A distributed logistics network is more responsive as it is closer to customers, but it requires higher inventory levels to operate. The ideal balance is company- specific, and would be dictated by each firm’s value proposition.

Planning Organization and Training.Some companies assign entry level personnel who have little experience in manufacturing, purchasing, and sales as its planners. Meanwhile, other firms confine the scope of a planning department to finished goods production, excluding materials scheduling and product deployment to warehouses. The planner’s goal is to balance the firm’s inventories of materials and finished goods in a manner that serves customers at a satisfactory level without compromising the company’s working capital effect on cash flow. Simply put, organizations should focus more on a planner’s credentials and in the structure in which he or she works.

Meeting customer service standards while at the same time targeting lower inventories are achievable if companies focus on areas such as data accuracy, production capability, sales skewing, logistics networks, and training and structure. Companies would do well to establish excellence in these areas to remain competitive in their line of business.

Jovy Jader is a management consultant and regional speaker on Supply Chain Management. He has directed and implemented Supply Chain Management projects both local and international which have resulted to company-wide improvements in inventory, total cost, customer service, response time, quality, and on-time delivery. Mr. Jader was formerly with Procter & Gamble Philippines and Coopers & Lybrand/PricewaterhouseCoopers. Should you have questions or comments email to jovy@highimpactasia.com