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. What caused 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
5. Look Forward, Not Backward (This Article)
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 5, Look Forward, Not Backward, 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 looking forward, not backward are:
Clean Your History
Scrubbing anomalous data is important since many unplanned events that are not going to be repeated must be removed from any forward planning. Weather and other unplanned events occur all the time and can distort future statistical forecasts. If you don’t scrub your historical demand, inventory imbalances will undoubtedly occur.
Develop One Corporate Sales Plan
A single demand plan needs to exist for any given company. Too many companies have a corporate sales plan but the functional departments that can include sales, marketing, and supply chain are not directly and formally linked to the corporate plan. That causes all kinds of problems that result in imbalanced inventories.
Conversely, corporate plans can be completely disconnected from reality due to pressures to achieve un-achievable sales targets. That too causes all kinds of problems such as large amounts of surplus inventory, high levels of obsolete inventory, reduced margins, and higher operating costs.
If a number of functions are involved in developing a single corporate sales plan, there tends to be significantly more alignment. Unrealistic sales targets, shortages of needed products, other supply related obstacles, etc. can be discussed and debated so that everyone is working towards a common goal.
Institute a Formal, Multi-Department Planning Process
Demand plans need to be created, assessed, and managed through a monthly cycle. That monthly demand planning cycle should be owned by the sales & marketing group.
The business needs to be segmented so that different sales channels are formally recognized and specific strategies are developed for them.
Short terms sales plans (0-3 months) need to be separate from long term sales plans (3 months-3 years). That allows the meetings to be focused on either short term fire fighting or long term strategy, but not both. Trying focus on both at the same time will accomplish nothing.
Tight processes need to exist to get information from customers as close to real time as possible. Customer collaboration scope should include business planning, demand planning, operations planning, and performance management.
Related to our case study and as we have discussed in previous articles, if various departments were involved in the planning of the cable forecasts, the distorted forecast would likely have been caught and the surplus could have been avoided.
Consider Planograms in the Demand Plan
Whether you are a retailer or not, planograms must be considered. Demand for SKUs exposed in multiple locations within one store need to be beefed up since the purpose of multiple exposures is to drive more sales per square foot. For new SKUs, display quantities need to be factored in to any initial forecasts but must not be included in future forecasts since filling shelves is a one-time occurrence and if that initial demand to fill the shelves is not adjusted down (see Clean Your History section of this article), it will create artificially high forecasts until the statistical forecast establishes a true sell through rate.
Carefully Assess Promotions
Promotions cause spikes and valleys in demand plans. They can create incremental sales but can also stop sales of other products. Promotions that are repeated on a schedule are relatively easy to forecast while one-off promotions are more difficult. Segregate the promotions you are analyzing in to one of those 2 promotional types. If you are not using a statistical model to forecast, use similar promotional lifts for the repeated promotions, assuming the timings are comparable. For the one-offs or new promotions, determine if cannibalization will occur and make sure you reduce forecasts of non-promoted products for the same timeframes.
In our case study, the buyer had not considered what the impact of the introduction of the cable was going to have and did not adjust other the forecasts of related SKUs down. This caused the Inventory Planners to purchase more stock of the related items that they in fact needed which had a negative impact on overall turnover.
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:
- Tighten Your PLM Practices
- Get Your Lead Times Right
- Use Integrated Metrics to Drive Improvement
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 6 – Get Your Lead Times Right.
For more information, contact us at firstname.lastname@example.org or call 312.667.4654/905.454.8529.