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Better Practice Inventory Management

These interviews were conducted on behalf of a client so I am unable to give you all of the detail or the quantitative results. But I do have permission to tell you what we deduced in a qualitative fashion.

During the interviews we identified the following similar practices that were consistent between the companies that performed well.

  1. Inventory decisions (range and quantity) were made at a local level. The locals were considered best placed to understand local conditions and requirements and therefore better able to get the inventory mix right. They had a better handle on forecasting because they were closer to the customer or demand. Centralized systems often missed the subtle changes or inside knowledge that helped stop the ordering of items (for example) when usage had changed but had not yet been flagged in the system.

  2. Requisition systems were used to order items through centralized purchasing. This approach creates efficiencies in procurement and provides greater control over terms of business and logistics. The purchasing people were concerned with all the purchasing issues not just the availability.

  3. Inventory items and codes were created centrally. This was used as a means of controlling the SKU count. Companies that did not do this experienced the death by a thousand cuts associated with managing a long tail of low value SKUs

  4. The better companies had moved to central ordering after trying local ordering. They found that this change had a positive impact on their inventory investment. The point is that they tried it one way and made a change and that this experience was consistent.

  5. Inventory management systems and practices were standardized. Each location or department followed exactly the same process. They used the same rules for determining what they should and shouldn t buy and had the same authorities, responsibilities and accountabilities at similar levels. Kind of like McDonald s only not involving hamburgers! This didn t remove individual decision making or initiative it just meant that the rules were consistent.

  6. Most of the better companies had an inventory process champion to work on continuos improvement and maintaining standardization. This person did not manage the inventory or own it any way. This person owned the process. I liken this to having a Quality Manager; they don t own the production just the process used to control quality. This was not necessarily a full time role

  7. Inventory was reported at a local level using local balance sheets. Local reporting and highlighting of inventory was seen as an important way to create visibility and therefore ownership.

  8. The better companies were quite aggressive in inventory management, setting and achieving aggressive targets rather than achievable targets. The better companies did not just want to manage availability they saw managing the cash investment as equally important and therefore set targets aimed at minimizing the cash investment without jeopardizing availability.

  9. Internal interest charges were included in departmental P&L reports as a means of providing immediate feedback on the impact of additional inventory (these items were reversed before any corporate reporting). This helped make the cash investment important at the senior levels that had to report on their P&L Statement on a monthly basis. Companies that didn t do this found that reporting a good profit was used to justify an over investment in inventory (that is an investment that did not really contribute to the profit). This approach forced them to mange both cash and profits.

  10. Slow stock was identified at a higher stock turn level in the aggressive companies than it was in the others. This was seen as a way of highlighting the approaching cliff of obsolescence and was used as a way to force action before accounting rules required items to commenced being written down.

  11. Virtual warehousing was used to separate stock purchased for different purposes. This is where a different warehouse code might be used although the material was in the same warehouse as other stock. This was particularly useful when stock was bought in especially for one off projects or events such as capital works or shutdowns. This approach enabled a heightened level of visibility of who had bought what and prevented mistakes being hidden in the general inventory.

Obviously the sample for this survey was small so the results are open to interpretation. However, the actions listed are not so radical that they cannot be implemented by almost everyone that is seeking ways to improve their inventory management. The 11 actions listed above were consistent across a number of the companies that were doing well and were noticeably absent in the others.