Jane B.

Lee is Vice President,

Supply Chain Solutions,
Supply Chain Consultants
jlee@supplychain.com • 302-738-9215
THE MAGAZINE FOR DEMAND-DRIVEN LOGISTICS

ITMATTERS
by Jane B. Lee

8 Common-Sense Rules for Inventory Management

I
nventory management is a hot inventories is critical to effective inven- rial as well as wasted production time.
topic. Books about the subject tory management. It is imperative that new products are
abound and there are many detailed 2. Make what you can sell. An inte- not developed in a vacuum, but rather
techniques and practices, which vary by grated sales and operations (S&OP) through a collaborative effort between
industry. When looking at the big pic- plan will naturally take expected sales and production employees. This is
ture, however, you can reduce much demand into account during produc- all part of a well-run S&OP process.
of the philosophizing about inventory tion planning. Inventory is not an 4. If you can’t sell it, stop making
management to the following eight independent variable – it is the direct it. If demand for your product does
common-sense principles. result of demand and supply. The less not materialize, you need to identify
1. If you don’t know where you accurate the forecast, the more inven- that gap quickly to avoid a buildup
are going, no road will take you there. tory you’ll have on hand which is not of non-moving inventory. Numerous
Enterprise resource management sys- “working” capital but “non-working” mechanisms can be put in place to
tems are designed to tell you about capital – costing you money but not identify such trends. An effective
today’s inventory. With some work, contributing to the bottom line. S&OP process must include the abil-
you can also access information about Paying careful attention to improv- ity to identify these deviations and
past inventory. To manage inventory ing the forecast and ensuring your allow for re-planning, before you build
proactively, however, you must know production group follows the S&OP with a bulldozer an inventory moun-
projected inventory levels for the plan is a must for meeting the goal of tain you will have to dismantle with a
future. having the right inventory in the right teaspoon.
Projecting inventory levels means place at the right time. 5. If you can’t stop making it, get
combining anticipated and open orders 3. Sell what you can make. Too often, out there and sell it. Another category
with planned shipments, production, a disconnect exists between sales and of “can’t sell” inventory exists in the
and bills of materials to determine pro- marketing desires and the reality of transition material or unavoidable by-
jected supply and demand. You also production capabilities. What if, for products and co-products of goods that
need to calculate appropriate safety- example, the sales team promotes – you do need. Properly managing this
stock levels for each location and each and successfully creates demand for – a inventory is a tougher nut to crack.
product based on forecast error, supply product with such stringent production Technical teams must continu-
variability, restock lead times, quantity specifications that your plant can suc- ally strive to reduce such material. At
increments, and a number of other less cessfully produce it less than 50 percent the same time, the sales department
tangible variables. of the time? should try to develop a market for
The ability to take these factors into The result is an enormous amount it. Successfully finding an outlet for
account when planning your target of off-spec, probably worthless mate- unavoidable materials can make a big

Reprinted from Inbound Logistics magazine • Five Penn Plaza • New York, NY 10001 • Phone (212) 629-1560 • Fax (212) 629-1565
Visit www.inboundlogistics.com for free subscription information.
 ITMATTERS
difference to your bottom line and your
level of “non-working” capital.
6. Safety stock is not a paperweight.
Business leaders sometimes ask, “What
level of inventory should we never
fall below?” The answer is zero. Safety
stocks are only useful if they are used.
The whole point of safety stock is to
protect against expected variations in
demand and supply. If you never use
your safety stock, you have too much.
On average, you should be below the
safety-stock level half the time when
replenishment is available, and above
it the other half. If this is not the case,
you need to re-examine what products
you keep in each location to get the
most from your inventory dollar.
7. Worthless inventory does not
improve with age. Why do businesses
retain inventory they know won’t sell?
Often, they have an unrealistic hope
that they can find a way to sell off-spec
material. As a result, these products
become “just-in-case” inventory.
More often, companies hold on to
worthless inventory for financial rea-
sons: until inventory is written off,
it is carried on the books as an asset.
Downgrading the material results in a
hit to earnings, which those responsi-
ble for earnings wish to postpone as
long as possible.
Executives responsible for inventory,
however, recognize that disposing of
non-saleable material promptly leaves
more warehouse space and working
capital for inventory you need and
can sell. Once again, you should make
these decisions at the S&OP level for
the good of the whole company, not
individual departments.
8. You can’t improve what you can’t
measure. Metrics are essential to a well-
run supply chain. Metrics for their
own sake, however, are worthless. The
purpose of a metric is to drive change
when the variable you are measuring
trends in the wrong direction.
A number of different metrics are
useful for inventory management. Days
supply by product and location based
upon forecast is an excellent metric at
the SKU level.
When analyzing roll-up numbers for
a product line, warehouse, or any other
higher level, however, days supply is
misleading because the lows cancel the
highs and hide imbalances. At the higher
level, inventory velocity is a much better
measure of inventory health.
No metric is useful, however, unless
it is acted upon. Constant vigilance and
early response to imbalances are the
keys to ensuring best-practice inven-
tory management. n

www.SupplyChain.com
302-738-9215

Reprinted from Inbound Logistics magazine • Five Penn Plaza • New York, NY 10001 • Phone (212) 629-1560 • Fax (212) 629-1565
Visit www.inboundlogistics.com for free subscription information.