Inventory Management Stages of Planning Maturity and Growth

The challenge facing people and companies is they must work steadily at improving their inventory management. In order to improve, you need to know where you are today. First, is to determine what they have accomplished and how competent they are in their planning. Their level of experience and results must be measured to accurately and efficiently move forward.

The Stages of Inventory Planning Maturity and Growth model can help classify inventory planning capabilities now and help to indicate what should be tackled next. It is better to take a stepped approach rather than making quantum leaps. Making too large a leap in planning can lead to miscalculations, poor inventory availability and ultimately inferior customer service.

Invariably, there are four distinct planning stages. Companies and planners must pass through them in sequence to improve their policies, practices, and systems. Each stage improvement brings performance improvement in customer service and inventory reduction and stock availability.

In Stage 1 (Chaotic), the company doesn’t have a good idea of how much inventory it has and where the inventory physically resides. If their enterprise system (ERP) tracks inventory, it can be 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. Planning is done 100% in spreadsheets and guesswork.

To progress to Stage 2 (Managed), there must be a strong desire for inventory accuracy. 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 and lost customer sales.

Companies at the Managed stage usually utilize an Enterprise Resource Planning (ERP) or accounting system from providers like SAP, NetSuite or others. 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 (Dynamic), the company recognizes the need for solid financial and customer service improvements. 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 to do this, but quickly find their results would be much improved (and far less tedious) with a more advanced automatic approach.

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 automatic 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 my experience, the optimization criteria vary depending on the industry and can even differ for two companies in the same industry.

The Valogix approach for assisting companies in reaching Stage 4 is to provide a variety of optimization tools and techniques that enhance their dynamic inventory planning processes. Whatever Stage a company and planner have attained, new advances in technology, processes and people skills can continue to add value and dramatically increase ROI.