THE current economic tailspin has not been kind to supply chain practitioners. Everywhere you go, business leaders are caught in the cross hairs.
There appears to be a unique confluence of negative economic factors that seem to be pulling everyone back. It is unfortunately a sad reality of our present circumstances.
The current business environment is characterised by an endless minefield of obstacles. With the global supply chain waking up to the realities of razor-thin margins, a robust inventory management system could easily be the nearest answer to profitability.
Building a robust inventory management system is not just a requirement; it is an opportunity, its table stakes. The head and the heart must work in tandem to produce the desired results.
It is increasingly evident on a global scale that inventory management is the linchpin of cost reduction and liberalisation of working capital. Supply chain professionals, therefore, regard inventory management as a real success differentiator in an increasingly competitive business environment.
Despite the complexity associated with inventory management, it is often argued in procurement cycles that the focal point and perhaps the hallmark of successful supply chain management could easily be inventory control.
In many organisations, inventory could easily be the single most significant and expensive liquid asset and often times the largest.
According to the sentiments of many procurement leaders, inventory control is slowly proving to be the next decade’s critical pressure point for many procurement professionals the world over.
With high inventory levels in the supply chain, something will always go wrong, and usually more than once, costing organisations dearly in both dollars and opportunity costs.
Too much inventory has got a negative effect of creating supply chain risks such as the risk of obsolescence, unnecessary accumulation of insurance costs, high inventory carrying costs, and potentially high pilferage costs.
On the other hand, too little inventory has got the negative effect in that marketing and sales can easily miss a significant sales window due to short supply, which unfortunately, may never be recovered.
Procurement should, therefore, maintain an optimum balance of inventory at every supply chain node. It can be argued that inventory and communication can be substituted for each other, what with access to information about inventory levels lowering the total amount of inventory in the supply chain, leading to optimal material utilisation across product lines.
Supply chain professionals are fully aware that in a highly competitive business environment, someone’s gain is certainly someone else’s loss. We are operating in a business environment that prizes profits and the alignment of inventory management strategies to marketing strategies give organisations positions of potential possibilities.
The world is a true classroom. The most rewarding and important type of learning is through experience. It may be important to take a page out of experience’s playbook and make it count. Using experience through demand sensing is very critical in inventory management.
Real-time provision of information, it is said, can be an inexpensive substitute for inventory. It will assist procurement professionals in preventing unwanted products from reaching the inventory pipeline.
A robust inventory management system enhances the organisation’s capacity to simultaneously improve customer service, reduce inventories, shorten customer lead times and control costs.
Benefits associated with collaborative inventory management include decreasing working capital requirements, improved forecasting accuracy, reducing transportation costs, optimising logistical infrastructure, decreasing order expediting costs and the improvement of customer satisfaction.
Collaboration becomes a strategic imperative in an economic age where demand volatility remains high with the larger risk for supply chain professionals being the inability to sense an upturn.
Today’s inventory management strategies call for more continuous, dynamic forecasting techniques with a view to respond to sudden market changes.
Supply chain professionals can easily be likened to weather forecasters. It appears they rarely get credit for doing their work correctly. In fact, they are only noticed when they get their forecasts wrong.
Supply chain professionals will often find themselves in a back-against-the-wall situation whenever they miss their forecasts.
Inventory problems could emanate from the fact that decisions on inventory related issues are solely based on meeting financial objectives without necessarily looking at variables that seem to drive inventory levels in the first place.
The traditional key drivers of inventory should be the focal point. Inventory problems emanate from variables, such as market demand variability, seasonality in demand and use, supply chain disruptions, supply chain lead times as well as in transportation and logistics.
Therefore, the procurement department in conjunction with user departments should closely work together to ensure that such variables are constantly monitored.
While others would argue that inventory management forecasts can never be the panacea to solving inventory build-up challenges, other authoritative sources will argue that “it is better to be approximately correct than precisely incorrect”.
Failure to acknowledge inventory build ups will overtime become a reality that will continue to grow and chew financial resources.
Poor inventory management strategies are reflected in excess inventory consuming cash and space, stock-outs delaying customer orders, ultimately affecting customer service levels.
It will result in frequent expedited orders which will drive up operational costs. Poor inventory management strategies will, therefore, result in poor customer service, poor cash flow and failure to meet planned business targets.
Being inventory rich and cash poor is not a position of strength. A delicate balance of demand and supply is a function of strategic inventory management.
However, it appears the continued use of spreadsheets and rules of thumb to set inventory and customer service targets remains a significant limiting factor to realise the ultimate target of a demand-driven inventory management system.
Reliance on error-prone excel spreadsheets should be avoided at all costs. The realm of supply chain management seems to be evolving quickly, what is in today is out tomorrow.
The absence of a robust inventory management system can result in an unexpected spike or drop in demand with the capacity to wreak havoc on production schedules, leading to stockouts and inventory pileups.
It can also lead to unnecessary markdowns, and write-offs, poor capacity utilisation and declining service levels. Such supply chain profit margin sappers are increasingly avoidable as the demand driven supply chain finally becomes a reality.
Without a robust inventory management system, there is always a time lag before changes in demand are detected at various supply chain nodes along the chain.
Procurement should also work very closely with the marketing department in order to optimise the cash conversion cycle for the benefit of the business.
The cash conversion cycle is important in that the faster the inventory is used or sold for economic gain, the better for the business because every dollar tied up in inventory is never available for use. Organisations will, therefore, be forced to resort to short-term borrowing to fund short-term financial obligations, what with the current prohibitive and unsustainable interest rates in most economies.
Compressing the purchase to cash cycle is more important when you are dealing with relatively high value goods and services because of the impact that it has on the working capital requirements.
Apart from the challenge of cash flow management, there is also the challenge of the opportunity cost of carrying excess inventory since inventory has got a negative effect of increasing the organisation’s upfront costs, especially where the possibility of opportunistic sales is far and in between.
Procurement should, therefore, keep “their lights on” in order to have a helicopter’s view of what is happening on the inventory management side.
The need to create a buffer against demand uncertainty has often seen procurement professionals relying on holding high inventories as safety stock. This has a negative effect of soaking up working capital.
However, where there is a close collaboration between suppliers, procurement and user departments, there may be no need to keep buffer stocks at all since it is feasible to rely on demand-driven replenishment strategies based on near term consumption patterns.
To achieve inventory visibility in motion within an organisation’s spend structures, there is need to rely on real time demand data.
Unusable inventory can also have a negative impact on space utilisation. It will continue to occupy rented space, blocking more usable inventory.
As a way of avoiding unnecessary inventory build-ups, most companies are now adopting the distribution centre bypass model where inventory items are being moved from the manufacturer direct to the customer without passing through other supply chain points like distributors and retailers.
This will reduce the distribution costs and shrink the fulfillment cycle to the barest minimum. Such a strategy works best where there is a close working relationship with supply chain partners.
The number one priority for supply chain professionals today is the raising of customer service levels. This shift in focus implies that cost reduction, the key marker of inventory efficiency, now runs a distant second to improving service levels.
Every dollar saved in inventory control drops straight to the bottom line, underscoring the efficacy of inventory management in the achievement of profitability.
In conclusion, it could be argued that overstocking in inventory management often leads to bloated inventory and a waste of valuable resources for the supply chain. Overstocking could easily be found at the top of the heap when it comes to some of the waste associated with procurement.
It is a brazen statement but not entirely without justification. It is indeed a cruel confirmation of the inevitable. Such kind of poor inventory management strategies will sort of inspire a variety of reactions from optimism to pessimism and everything in between.
It may be necessary to pull all stops to avert a potential crisis by introducing a robust inventory management system. The merits of such a strategy can be a subject of debate long into the night.
The strategic importance of inventory management has fuelled decades of debate and discussion with very little end in sight. It appears there are no easy answers and supply chain professionals will continue to grapple with hard choices.
However, leading thinkers across the procurement fraternity see continuous favourable results from robust inventory management strategies, giving the fuel of hope to achieving procurement excellence in the management of finite resources.
Inventory management is slowly regarded as an X-factor in the quest to achieve profitability. With globalisation stretching supply chains, the renewed interest in a systematic inventory management system is, therefore, well founded.
The need to deliver on your customer service promise remains top of the mind for every supply chain organisation that stands out from the pack.
The new playing field demands greater investment in inventory management for sustainable success. The verdict is out. Inventory management is the soul of any organisation.
Nyika is a supply chain practitioner based in Harare. — charlesnyika70@gmail.com