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:
- Get the Left & Right Hand Working Together
- Clearly Define Customer Service
- Tighten Your PLM Practices
- Know Your Products
- Look Forward, Not Backward
- Get Your Lead Times Right
- Manage Your Partners, Don’t Let Them Manage You
- Manage By Exceptions
- Use Integrated Metrics to Drive Improvement (This Article)
- Conduct Periodic Tune Ups
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.
In this article, we will explore “Use Integrated Metrics to Drive Improvement ", and how that can greatly improve your efficiency.
Translate Operational Metrics in to Financial Terms
A common mistake made my many companies is tracking performance without understanding how many dollars are associated.
Take in-stock position as an example. Most companies closely track the in stock position of A and B SKUs. What they don’t do is calculate how much sales are lost, if as an example, they are currently at an in-stock on A items of 90% when the target is 95%.
Another example could be related to on time receipt of PO’s. Most companies track on time fill rate but don’t look at the cost of non-compliance or the direct costs related of late/early shipments.
Associating costs with operational metrics is a great way to communicate performance with trading partners since most don’t fully understand the impact of their individual performance and what it means to your bottom line. Leading edge companies share this information with key trading partners on a very regular basis.
In our case study, the cost of carrying excess inventory caused by a poor forecast and an out of control purchasing practice would be valuable.
Limit the Number of Metrics
People tend to over analyze their performance. They can have a metric for every function.
For inventory management, you can limit metrics to a handful. That way, everyone is focused on a manageable group of metrics. That doesn’t stop you from having more reports but the focus is kept on those select metrics that really measure your performance.
Start with metrics such as lost sales, inventory turnover, order fill rate, inventory accuracy, and lead time accuracy. Each of those can be quantitatively linked to a specific financial impact.
For related functions such as warehousing and transportation, select a handful of metrics and begin to track your performance.
Develop a Common Dashboard
Dashboards are an easy way to ensure everyone related to the supply chain is aware of its performance. Dashboards include a combination of numbers, charts, and colorful indicators (green, yellow, and red). The indicators allow the reader to hone in on problem areas.
In our case study, three dashboards could be used, those being inventory management, warehousing, and transportation. The inventory and warehousing dashboards would clearly point out the problem with excess inventory, forecast error, warehouse space constraints, high labour costs, and so on. With those dashboards, the problems would have been visible and the Buyer would have been held to account much sooner.
Have a Single/Master Source for Performance Data
Leading edge companies use a data warehouse to pull data that is used to generate metrics. Data warehouses are typically well l managed and have clear, detailed definitions of data elements. That ensures there is very consistent data being used.
We worked with a company that had individuals pull data from various sources. When the Director asked 3 separate managers what the sales were for the previous quarter, they each gave a different answer.
As you can see from this article, there can be many overlaps between the 10 Principles and how they can impact one another. “Use Integrated Metrics to Drive Improvement” is impacted by or impacts:
- Get the Left & Right Hand Working Together
- Manage Your Partners, Don't Let Them Manage You
We discuss those impacts and identify the overlaps in each article.
The Balanced Inventory Program™ will help you to achieve all your inventory objectives. 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 articles, they can be found at www.supplychainsystems.com/biparticles.
In 2 weeks, we will address Principle # 10 – Conduct Periodic Tune-ups
For more information, contact us at firstname.lastname@example.org or call 312.667.4654/905.454.8529