Webinar Notes: Inventory Management in a Market-Driven World
This week’s webinar notes are from an April 16th webinar hosted and presented by Supply Chain Insights. The webinar is already (!!!) available on demand.
Boy, did I pick a winner in this event. I originally attended to learn more about inventory management in the face of uncertain demand and fragile extended supply chains. What I came away with were some brilliant observations that will absolutely make their way into the book that Jon and I are writing on Procurement at a Crossroads in the form of quotes pulled from Lora Cecere’s Supply Chain Shaman blog.
Unsurprisingly, forecasting is getting harder and harder to get right. Specifically, the error rates and percentages associated with demand forecasting are growing. Traditionally, there were less items being sold in higher volumes with more regular, more predictable demand. Products were also being supplied and sourced closer to the point of purchase or consumption.
Cecere talked about helping companies and leaders move from demand driven supply chains and networks to market driven. So much change has taken place elsewhere in supply chain practice that inventory has been overlooked as an area for improvement. Technological innovations have improved productivity or output per employee but have done little to improve operating margin because they have not effectively tied in inventory management. And there is a correlation between inventory turns and market cap that easily justify the time and investment.
She also discussed the concept of the ‘Buy Make Deliver’ team – in other words procurement, production, logistics – and how for maximum effectiveness they should all report into Operations at a level that places them equal with Sales and Marketing. Brilliant! As Cecere wrote on her blog last November, “…we find in our research that companies with procurement and manufacturing reporting to the supply chain organization have stronger, and more reliable results on inventory, operating margin and Return on Invested Capital (ROIC). Today, 60% of sourcing organizations and 45% of manufacturing organizations report through the supply chain organization.” The thought brings tears to my eyes…
I know that this won’t perfectly for all organizations, but if given the choice to report to supply chain/operations or finance, who would you choose? I would choose ops in a heartbeat. And finance wasn’t off the hook, even in the webinar. As procurement professionals well know, finance sees everything (including inventory) as little more than cost. And what does finance want to do with costs? Cut them!! But it isn’t that simple, as many organizations are now finding out.
Inventory is the ‘buffer’ or ‘shock absorber’ in the supply chain, as Cecere explained, and while we don’t want to be wasteful, we can’t manage inventory as one thing to be addressed in one way. There is raw material inventory, work in progress inventory, and SLOB (or slow/obsolete) inventory, among others. Looking at the function of each inventory type will help us better understand how to manage its form.
Cecere’s advice? Don’t try to get started by adopting best practices. Inventory management is highly inventory and company specific. Start by better understanding the overall business strategy and allow that to drive the operating strategy – including inventory management.