TEN WAYS TO IMPROVE INVENTORY MANAGEMENT
CFOs and other senior executives already know the importance of inventory management. And yet even the most attentive managers often find it difficult to get it right. In our work with clients, we've found that decision makers often rely on external benchmarks that seldom deliver expected insights. And they make operating assumptions that send them down the wrong path. Two of the classic misconceptions: improving the accuracy of sales forecasts is the best way to reduce inventory and beefing up customer service requires keeping more inventory on hand. The fact is, both assumptions can lead to inventory gluts or shortages.
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2) Is your company using the most effective method to calculate your safety stock levels?
* Are you using statistical formulas that incorporate the accuracy of sales forecasts, required production lead times, manufacturing schedule adherence and service-level data for each SKU?
* Or are you using a simple rule of thumb such as "all products made in factory ABC need 15 days of safety stock."
The problem with the rule-of-thumb approach is that typically it's based on products with the most uncertain delivery histories. Efficient operations use a standard statistical formula that looks at historical data for individual products.
3) Do you recalculate safety stock levels on a regular basis to ensure they are up to date?
Supply-savvy operations update their calculations about every three to six months to ensure that decisions are based on the most accurate information.
4) Who decides key inventory-related policy such as striking the right balance between customer service and cost-effective product inventory levels?
Many decisions about inventory levels are strategically important. So instead of relying solely on the supply organization to decide, executives need to have a major say in the fundamental issues that impact inventory management—everything from determining the right breadth and complexity of product offerings to optimal plant and distribution footprints.
5) Who determines the optimal frequency for producing or ordering products?
* A cross-functional team or
* Only production planning or sourcing managers?
Several factors impact effective inventory planning. For example, marketing campaigns can play a role alongside sourcing. So a cross-functional team should set production and ordering schedules. Production alone determines lot sizes, usually based solely on minimizing production costs. By weighing all factors and using a sales and operations planning process (S&OP), cross-functional teams often reduce the company's replenishment stock by 50 percent and ensure that the right products are available for big promotions.
6) How do you determine the frequency for ordering and inventory production if it's not set solely by factories or the supply organization?
Ideally, there are two factors: companies should consider calculations that minimize the overall cost such as inventory and changeover costs. They also should base frequency on negotiations between the different parties involved and factor in upcoming events such as promotions and uncertainties like bad weather.
7) Is the optimal order or production frequency calculated on a regular...