Careful, Comprehensive Inventory Management (Part 3)

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.  Below, is the third “A”.  Please see my previous posts for earlier points.

Accurately – calculate safety stock

We cannot know for certain what demand will be tomorrow.  Even organizations dedicated to consumption-based replenishment of “true demand” cannot know exactly how much will be required of which products, at which locations at which times.

Make-to-order businesses have an easier time of this, but, even then, orders can change and often do.

This is not only true of the demand, but also the lead time to meet the demand which is affected by variation in the ability of manufacturing to respond in a timely and accurate fashion (driven by batch sizes and setup times, by variation in the conversion process, and by other factors), and variation in the transportation operation (caused by traffic volume or accidents, road construction, weather, illness, and any number of other factors), not to mention the capability of warehousing to know what is exactly where and pick, pack and ship it in a timely way.

For these reasons, you must have more inventory than you will actually be needed if everything goes perfectly.

Any other approach implies the intentional loss of revenue.  Done poorly, this can put you out of business.

Fortunately, there are techniques for doing a good job of this through optimization.  Do a bit of research to identify the technique that fits the structure of your operations (single-tier distribution or multi-tier manufacturing, for instance) and get the analytical and software support (if necessary) to embed that technique into the normal planning process.  This can often yield a step-function improvement in both reducing the necessary investment of working capital in inventory as well as in improving customer service.

Combined with the set of decisions around supply chain flexibility with which inventory decisions are interdependent, decisions around inventory are essential to increasing the value of your enterprise.

You can find more on this in my published article, “Don’t Manage a Supply Chain, Lead a Value Network”, just published by the Journal of Enterprise Resource Management (http://www.apics.org.au/Default.asp?page=363).

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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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