Careful, Comprehensive Inventory Management (Part 1)

Manufacturers and distributors usually spend most of their cash on inventory.  In fact, many service organizations like utilities and health care delivery organizations spend lots of money on materials.  But in the case of manufacturers and distributors, just look at the cost of goods sold as a proportion of sales, compared to any other item.  Given that reality, the better part of wisdom mandates a careful and comprehensive approach to managing inventory.

As a memory aid, I use A56σ to represent such a careful, comprehensive, and corporate approach to inventory management.  Each component of A56σ is essential for achieving sustainable, continuous improvement in inventory efficiency.  There are five concepts which I will alliterate with the letter “A” and the tools of six sigma.  Here is the first “A”.

Anticipate – anticipate market requirements

The more you are able to accurately anticipate the demand by your end customer in the marketplace, the more you will be able to move, make, buy and store the inventory that will sell quickly.  This may seem like a self-evident axiom, but this is not easy and the benefits of incrementally better anticipation go directly into additional revenue as well as more efficient inventory and use of cash. Large bodies of knowledge have been built around this subject from rigorous quantitative models for forecasting to methodologies for collaborative forecasting, both within an organization and across organizations.  The point of diminishing returns can be reached fairly quickly, but if you are not there, it’s worth making more of an effort.

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About Arnold Mark Wells
Industry, software, and consulting background. I help companies do the things about which I write. If you think it might make sense to explore one of these topics for your organization, I would be delighted to hear from you. I am employed by Opalytics.

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