When we talk with people who want to improve inventory management at their company, we like to find out what they have accomplished already. The “stages of planning growth” model helps classify their situation and indicate what should be their next step to improved inventory planning.
Invariably, there are at least four distinct stages. Companies must pass through each one in sequence to properly improve their policies, practices, and systems. Each stage of improvement brings performance improvement in customer service and inventory reduction.
In Stage 1, the company doesn’t have a good idea of how much inventory it has and where the inventory physically resides. If their enterprise system tracks inventory, it is highly inaccurate. Warehouse organization is messy and shrinkage is problematic. Getting stock from vendors and shipping orders to customers is primarily a costly expediting exercise. Spreadsheets and maybe a few reports are used.
To progress to Stage 2, there must be a strong desire for inventory accuracy and efficiency. A cycle counting program (randomly sample actual SKU inventories and compare them with system numbers) provides an excellent framework for the accuracy push. Warehouses need to be cleaned up and shrinkage needs to be addressed head-on, with causes and remedies identified. Most companies today have already reached Stage 2, because companies in Stage 1 tend to be blown away by their competition. Also, customers are dissatisfied due to the lack of correct and adequate stock. Excess inventory of the wrong items tends to be relatively high at this stage.
Companies at the this stage usually utilize an Enterprise Resource Planning (ERP) or Accounting system from vendors like SAP, Oracle, NetSuite, Sage or from other vendors. Among its many functions, the system maintains inventory status. When current inventory of an SKU falls below a minimum level, the system orders enough to get up to the maximum. Setting the min and max levels is mostly a manual, painful process, so it is not done often—perhaps once per year. As a result, Stage 2 companies have a relatively static approach that does not respond to dynamic changes in demand or supply.
To progress to Stage 3, the company recognizes the need for solid financial and customer service improvements. They also realize that dynamic demand responsiveness is critical to success. Sophisticated enabling technologies like those offered by Valogix fit the bill. These solutions automatically review each SKU’s past demand history, forecast future demand, set optimal stocking quantities, and recommend the amount to order. Most companies are using a spreadsheet and reports to do this, but quickly find their results are too static and time-consuming and too error prone. An advanced automated approach is desired.
Stage 3 companies who have implemented a good set of dynamic policies and tools can still improve their performance. Inevitably, their inventory management has key cost and service level drivers that can be optimized for maximum value effectiveness. That is, an automated process needs to search through a large number of possibilities in order to select the best. Here are some examples:
- When shipping ocean shipments from the Far East a large number of possible replenishment options should be examined to figure out how to load full containers, while meeting demand.
- There may be a decision of which supplier to order from when one has higher cost and lower lead time than another.
- Suppliers may offer quantity discounts, so an important decision is “How much do I buy now, at a lower price, beyond what I need for the near future?”
- Positioning inventory properly across the supply chain and across items may be a major need. Centralizing inventory allows “pooling” of demand and a smaller total inventory quantity. However, sending inventory out to regional and field sites enhances responsiveness to customer demands.
To reach stage 4 (Optimized), companies need first to make a careful assessment of what factors they should optimize. Then, they need to set policies and utilize appropriate techniques and tools to meet their optimization criteria. In our experience, the optimization criteria vary depending on the industry and can even differ for two companies in the same industry.
The approach for assisting companies in reaching Stage 4 is to provide a variety of inventory optimization tools and techniques that enhance the dynamic inventory planning solutions.
Whatever Stage a company has attained, new advances in technology, processes and people skills can continue to add value and dramatically increase ROI.