Lowering inventory levels is easy, the tricky part is keeping them low and not affecting service.
Without a doubt, one of the most pressing factors for organizations today is related to their inventory levels. Why? Because in them is perhaps one of the largest investments that the company has. Inventories are like having money in the bank, since in it, you have cash, coins, bills, financial flow, and in warehouses or distribution centers you have the same money, only translated into goods already purchased or manufactured.
In my professional experience, I have had to collaborate with companies that the first thing they ask me to do is to lower the inventory level, without reducing the current service level and, on the contrary, increasing that service level. This can be achieved? Definitely yes.
What does it depend on? From the planning, organization and commitment that each one of the company's actors acquires and executes in a synchronized manner and with a common objective.
I list four strategies (without this necessarily being the order of importance) that I have applied and that have helped me to achieve this balance of service level and inventory investment.
The first. It has to do with the "forecast" or sales forecast. How assertive are your forecasts? Surely it happens to you like me, that they predict 100 pieces of sale and end up selling 200 or do not sell anything, on the other hand, in the mix of products they end up selling the volume they promise (since the sales quota has to be reached) but in the mix they sell some products of more and others of less.
This effect has a special impact on inventories, since those products that are forecasted and not sold increase the inventory level and those that are oversold, decrease it but affect the level of service. So here the first step is to measure that forecast accuracy to determine the level of assertiveness and focus on those products or product lines that are significantly affecting both inventory and service levels. So, the first strategy is to make forecasts into true market demand prediction tools, to move inventories according to that demand.
The second. It has to do with the inventories themselves. What is your inventory policy? In an organization I collaborated on, I stumbled upon an inventory policy of 30 days. Why? Because someone at one point in the history of the organization decided so and stayed as part of a culture and a process. If there are products that are sold constantly, with a constant demand and your supplier gives you 8 days of delivery time, why save 30 days of inventory? You are incurring an unnecessary financial cost. In the maturity curve of a product (basic marketing lesson) you will notice that there are new products, products in growth, mature products and products in decline or output.
It is NOT possible to establish the same inventory policies for all products, on the one hand, the launch of a new product will have a very erratic demand behavior, a mature one will have a very stable behavior and the exit behavior will have a downward trend, Imagine that these last products insist on keeping 30 days of inventory! They will end up obsolete and will be the perfect candidates for auctions and with the consequent financial loss. For this reason, the second strategy must be focused on inventory policies, paying special attention to levels and fluctuations in demand.
Products lifecycle.
Third. This is focused on inventories throughout the supply chain. It is very common for company departments to "protect" themselves against fluctuations in demand. If this story sounds familiar to you, it may be a coincidence, since it is the product of my imagination. The one who produces the goods for you, as he finds fluctuations in his demand and does not want to lose you as a customer, protects himself with several additional days of inventory, you as the owner of the inventory planning, like the same story as your supplier, you add others days to inventory, and at the same time as the remote warehouses you have do not believe in the data, because what do you think they do? obviously not? and finally, as your wholesale or distributor client, you don't want to miss the final consumer, why not? it also increases inventory days in your warehouse.The result? You guessed it, an excessive accumulation of inventories throughout the entire supply chain. My recommendation for the third strategy is to map the entire process, quantify the levels throughout the chain and take action based on that information, with this you help the client to lower their inventory levels, gain credibility and stay in the market because you You see yourself as a responsible supplier that adds value to the supply chain and you go from being a supplier to a supplier and that makes a lot of difference, and finally.With this you help the client to lower their inventory levels, you gain credibility and permanence in the market because you see yourself as a responsible supplier that adds value to the supply chain and you go from being a supplier to a supplier and that makes a lot of difference, and Finally.With this you help the client to lower their inventory levels, you gain credibility and permanence in the market because you see yourself as a responsible supplier that adds value to the supply chain and you go from being a supplier to a supplier and that makes a lot of difference, and Finally.
The fourth.Have a planned supply system. When you face the issue of supplying demand, it is common to find fluctuations that it presents over a period of time, statistically it is important to calculate how demand is adding to the passage of time, that is, if we have a planning horizon of a month, it is necessary to know at least statistically how the demand falls week by week, for example, if the first week falls 30% of the demand, it is imperative at least to have sitting the first day of the week the amount equivalent to the demand of that period, if the second and the third is 15% in each one, well, act in that tenor, and for the fourth week that we know that the remaining 40% is coming, ensure that this level of inventory is established in the store. In this way, during the month,You do not carry the total value of the inventory, you manage to give it more laps and the financier will surely thank you. This fourth strategy is a little more complicated to implement because it has to do with statistical analysis of demand, but it is also not impossible to achieve, it is enough to have reliable records and an Excel program (which, as far as I know, does not present failures at the time of do addition and subtraction).
Put these four strategies together, quantify the data, make historical analyzes, invite all the actors in the chain to participate actively and with commitment in this task and you will see how in a short time you will not only lower your inventory levels, but also increase your service level. I did it and it worked, we went from 90 days of average inventory to 30 days and the service level went from 80% to 98%.
Believe me, there are no impossibilities, it is a question of attitude, commitment and a lot, a lot, but a lot of data analysis and, go dust off your old statistics and probability books because you are going to use them again.
I wish you the best of luck and I invite you to visit www.cadenadesuministro.com.mx to learn more strategies applicable to the supply chain.
