Know Your Products

Is your inventory balanced?

Unfortunately most companies do not have a balanced inventory.  They either have too much of a SKU or not enough.  This imbalance can cause customer complaints, lost sales, and higher operating costs.

 

If you recall from previous Articles, a buyer made the major mistake of overbuying a large amount of computer cables from the supplier. An initial forecast started at 100,000, quickly moved to 600,000, then dropped to 200,000. We all know that forecasts ebb and flow. So what’s the problem? The main problem is that the 10 Principles were not followed:

The 10 Principles are:

  1. Get the Left & Right Hand Working Together -
  2. Clearly Define Customer Service
  3. Tighten Your PLM Practices
  4. Know Your Products (This Article)
  5. Look Forward, Not Backward
  6. Get Your Lead Times Right
  7. Manage Your Partners, Don’t Let Them Manage You
  8. Manage By Exceptions
  9. Use Integrated Metrics to Drive Improvement
  10. Conduct Periodic Tune Ups

In this article, we explore Principle 4, Know Your Products, and how that Principle directly applies to this case study and what it can mean to you.

In our case study, the Buyer added the new SKU to his line-up with no discussion about what its impact would be to overall sales and more specifically to other SKUs’ productivity. The initial forecast was developed with no check and balance and all related inventory plans were executed without challenge.

Some creative, yet practical solutions for this problem that can be addressed in part by knowing your products well are:

Use POS to Recognize Trends

POS data can be very effective to identify sales trends and to develop good demand plans. POS data can also show overall sales trends and geographical differences. Top retailers provide extensive POS data and expect their suppliers to use it effectively to ensure the retailer is always in stock of key SKUs.

If your demand plan is based on your customers ordering patterns, there is likely a delay in reflecting the trend from POS to that of your customer orders. In our case study, the POS would have been an initial indication that the sales trend might be slowing. Some of the inventory plans could have been deferred which would not have solved the entire problem but could have dampened the effect. Be careful that you recognize any delays between POS data and customer orders and ensure you properly synchronize product flow.

Collaborate

In our case study, the new cable was being sold to support a new technology that had been introduced to the market. The new technology showed similar growth but over a number of weeks following introduction sales slowed very quickly then dropped. Since there is a direct relationship between the cable and the new technology, that slowing trend of the cable would have been caught or at least considered if the Buyer had been aware of how the new technology was selling. The sales trend of the cable mirrored or followed in the sales of the new technology in a slightly delayed fashion. The demand plan of the new technology was adjusted down by a Planner and the statistical model used to forecast was changed to reflect a heavily downward sales pattern but the Planner of the cable didn’t catch that.

Another example might be to talk to other vendors or other customers about their experience with this new type of cable. They may have introduced a similar product with similar results.

TIP-Using POS data and engaging the retailer/supplier in discussions about past sales results and future forecasts can result in a more collaborative way of ensuring you are generating the best possible future forecasts.

Use a Multi-Faceted ABC Classification

Most companies use an ABC method of ranking the importance of SKUs. Some companies make the mistake of ranking SKUs based on profitability, a selfish motivation that disregards their customers’ needs. Consider using at least 2 criteria such as unit sales and dollar sales. That will ensure that all important SKUs are ranked as “A”SKUs and are reviewed more frequently and have a higher safety stock component. It will also reflect that high dollar value SKUs and high unit volume SKUs are equally important.

New SKUs, unless they are direct replacements, can be assigned a distinct classification value until such time as the forecasts are stabilized and the replenishment model is clear. That will ensure someone is watching the trends and reacting to rapid changes regularly. After a probationary period, those new SKUs can be re-classified and included in the normal review and replenishment process.

Recognize the Effects of Cannibalization versus Incremental Growth

New SKUs can generate additional business or can cannibalize sales of other SKUs. Some SKUs are direct replacements and act exactly like their replacements. In other cases, new SKUs can provide incremental sales for the company.

In our case study, the new cable was introduced to support a new technology. Those sales would cannibalize some of the existing SKUs over time. Although this effect did not contribute to the inventory problem, the Buyer should revise his overall sales plans to reflect the cannibalization effect and the Planner should revise his granular demand plan to spread the overall forecasts over all SKUs including the new cable. If cannibalization is not recognized, the other SKUS that are impacted by the new cable will be over-purchased resulting in a surplus inventory situation.

A common mistake made is not to consider discontinued inventory when forecasting. The same cannibalization effect can result if discontinued SKUs are discounted to clear. Any replacement SKUs can experience slower than expected sales due to the sale of the discounted product. So, when you are generating a statistical forecast, consider forecasts of all SKUs and not just a sub-set. 

As you can see from this article, there can be many overlaps between the 10 Principles and how they can impact one another. Knowing Your Products is impacted by or impacts:

  • Clearly Define Customer Service
  • Tighten Your PLM Practices
  • Look Forward, Not Backward
  • Get Your Lead Times Right
  • Manage By Exceptions
  • Use Integrated Metrics to Drive Improvement
  • Conduct Periodic Tune Ups

We will discuss those impacts and identify the overlaps in each article.

If you are interested in achieving a balanced inventory, we offer a No-Charge Starter Stage.  During this Stage, we will help you assess your current inventory management practices, develop a preliminary business case, and start working your Balanced Inventory Blueprint.

If you have not read the previous article, it can be found at www.supplychainsystems.com/biparticles.

In 2 weeks, we will address Principle 5 – Look Forward, Not Backward.

For more information, contact us at info@supplychainsystems.com or information call 905.454.8529.

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