Inventory management was moving towards a just-in-time approach until the supply disruptions of the last year. Now there are forces arguing for a return to a just-in-case approach. Whatever inventory management methodology is chosen, the realization that supply chains are vulnerable will require a re-assessment of practices and KPIs in order to keep goods flowing in a predictable and manageable way.
Why inventory management is important
Active inventory management is a major contributor to manufacturing success. Manufacturers who still do inventory management and planning on spreadsheets will have found major problems during the pandemic. In normal times it takes time and effort and a monthly review is just about manageable, let alone trying to keep up during this current period of upheaval.
Turbulence has become the “new normal”, it happens more frequently, volatility has increased, and it persists longer than in the past. Demand is less unpredictable. Pandemic-induced supply and demand shocks have demonstrated the fragility of the old order. During these last 18 months, in order to keep track, it has become increasingly important to know in real-time what’s happening with raw materials and parts coming in, with work-in-progress and finished goods.
With greater visibility of inventory through the value chain, many businesses have been able to increase efficiency and revenue, and improve customer service. Areas where modern inventory techniques and solutions have shown benefit include:
- sales: higher order fulfilment and on-time delivery;
- manufacturing: keeping manufacturing operations going, leading to improved plant efficiency;
- warehousing: greater cost-effectiveness through more efficient use of space, and reduced obsolescence;
- management: better, more informed decisions.
Just-in-time or just-in-case
The just-in-time inventory management approach focused on using capital more efficiently but relied on accurate demand forecasting and supplier reliability. Any errors or shocks, as has occurred during the pandemic, led to significant problems with incomplete or late supplier deliveries, over-stocking over items that weren’t ordered as expected, and when unexpected new orders arrived, a build-up of back-orders and customer dissatisfaction.
The original purpose of keeping inventory was to act as a buffer against uncertainties from upstream (suppliers) and variability downstream (customer demand). Although just-in-case may have been considered expensive in the past, it has paid dividends to those companies using it who have been able to keep factories running with enough stock, shopfloor staff working, holding prices steady, and customer orders fulfilled. Inventory strategies that promoted redundancy, rather than super-efficiency, have been shown to be more effective.
To cope with new realities, manufacturers will need to re-imagine their supply chain and inventory management approaches, re-engage with suppliers, and ensure they have visibility of operations no matter where they are.
Inventory in the supply chain process
The Supply-Chain Operations Reference model (SCOR), a process reference model for supply chain management, provides six high-level processes that a company must execute in order to meet the primary objective of fulfilling customer orders.
Plan, Source, Make, Deliver, Return, Enable
While some say it’s a little out-of-date in the modern technological business world, it enables businesses to identify the data, processes and KPIs that need to be addressed at every stage. So if changing your inventory management to adapt to new situations is a priority, the different process levels of SCOR will offer useful and appropriate guidelines.
The Plan stage is where existing inventory management and supply chain processes are reviewed, and opportunities and capabilities explored. One of these will be to adopt new digital disciplines and the tools to sense, collaborate, optimize and respond. In terms of the internal value chain, this may require investing in technologies that provide real-time tracking of items. Supplier communication can be digitized via a portal so that suppliers can electronically track and update the status of orders and delivery schedules. This not only makes these processes more efficient but also reduces errors and improves order accuracy.
If changing the sourcing strategy is required, such as near- or alternative sourcing, the organization will need to look at better ways of managing suppliers and monitoring their performance. To guarantee that inventory arrives in time and in the right quantity, the company may want to consider blanket orders. To improve the management and costing of imported goods, a system may be required to track shipments, monitor the estimated arrival times, and establish a reliable estimate of costs. With quality control becoming ever more important at every stage, a system should be implemented to ensure materials are receipted and quality checks performed before being accepted into the warehouse.
The role that inventory management can play in helping production is to make the process of finding and picking parts and materials as efficient as possible. This means knowing where items are used in the production process, their precise location in the warehouse, and when they need to be re-ordered. For certain industries, this may also entail recording and tracking serial and lot numbers for quality control or compliance purposes.
Once a product has been manufactured, it needs to be recorded as a new inventory item and allocated to a finished goods warehouse. This may be in a different location (e.g., to be closer to customers) so tracking goods in transit will be required. As with other parts of the value chain, this is increasingly being done using digital technology to get real-time updates. Knowing the precise location of goods in the finished warehouse is also required to make picking and packing more efficient.
There are a number of manufacturing sectors where managing the returns process can still be improved. When a customer returns a product it should go into a returned goods warehouse for inspection prior to determining the next step – repair or return to supplier – and to prevent the product from accidentally being reshipped to another customer. Active inventory management in this process would also identify if the returns were part of a lot or set of serial numbers that may require a larger recall process.
In the current state of flux and uncertainty, this stage could be seen as the key to a more efficient, flexible, and resilient inventory management function. One area of focus would be to strengthen internal controls around inventory to ensure it is safeguarded, replenished and maintained. Another focus area would be to automate processes to improve accuracy and completeness of inventory tracking. The best way of implementing these is by through an ERP system that integrates and unifies processes throughout the organization. In addition, it ensures accurate master data those that decision makers have a real-time view of quantities and their locations.
Data-driven inventory management
In the new normal, a data-driven approach to inventory management provides the basis for better and faster decisions. This cannot be achieved by simply changing processes but requires investment in technology. The technology entails tools that provide real-time tracking and applications that automate and streamline the inventory management process. The need for this investment is because inventory is no longer considered ‘evil’, in terms of cash management, and at the same time ‘lean inventory’ is unlikely to return as a popular word for a while. This process of re-imagining how inventory should be managed will not be quick or simple, but the benefits will be substantial.