Generally, organizations are applying a very simplistic approach using rules of thumbs to a very complex problem. We believe that simultaneously improving service levels and inventory requires a multi-dimensional approach across the supply network. It is our belief that inventory management is governed by the laws of probability and statistics. Success is just a matter of putting them to use.

2.Integration

Fixing supply chain problems is challenging,  especially in the high complexity retail environment.  It requires advanced skills and new ways of managing across the supply network as well as the need to integrate across multiple supply chains per business unit in a global footprint

3.Execution

Inventory buildup also has an operational dimension – reducing execution cycle times and flexibility and supplier lead times will have a big impact on the inventory level.

4.Right product. Right place. Right time. Right cost

Inventory buildup and low service level performance are often a result of insufficient planning or planning tools; demand forecasting, SKU assortment management, supply and production planning/collaboration, inventory/replenishment planning and warehousing.  All are elements of a planning chain that requires integration.

5.Knowledge equal savings

Cost cutting and availability of products remain the primary goals. The key to achieving results involves developing systematic and collaborative approach that go far beyond simple bidding and price evaluations.

Benoit Ouellette

The “Miracle Department” reacts again and corrects the situation. The expectations of the organization are extremely high towards the inventory management department. It is expected that these individuals manually adjust min-max for 15,000 to 35,000 items without making any mistakes. They must consider seasonality as well as upward or downward demand trends. They know when an item, used twice a year, will be requested next.

A recipient of a master’s degree in Operations Research, I have over 30 years of experience and am recognized as a leader in Quebec in Inventory Management. However, even with my experience, I do not have the capability to manage 35,000 items and to manually determine the optimal min-max.

The good news is that inventory management is now a science. There are formulas and calculations which allow optimizing inventory management and automatically and dynamically setting (with automatic and computerized revisions at month-end) the min-max in order to achieve the organizational objectives of service while minimizing inventories. Min-max that are managed using this approach usually increase the overall rate of availability of parts or items with 25% to 50% less inventory.

Another positive point is that inventory management is also an art. The machine does not know everything. A good inventory management system will notify managers it is time to adjust a min-max when:
- there are sudden changes in the pattern of consumption;
- a new item has now enough history to use the automatic mode;
- the system has difficulty in establishing reliable consumption forecasts for a given item;
- there is an open order to the supplier for an item in surplus (a customer order might have been canceled, stock might have been returned from another customer or for any other valid reason);
- an item has not been consumed for six months;
- the calculated min-max for the coming month is quite different from the previous min-max;
- or for any other defined signal.

Put a talented and artistic inventory manager in command of a good scientific system and you will obtain the perfect balance for managing inventory. It’s a thousand times more effective!

Robert Lamarre

The ABC classification of their items is not frequently used.  Few tools are used to manage the delivery lead time.

There is no forecasting tool to predict future needs.

Communication with health-care units to determine what should be kept in inventory is still the only form of forecasting. However, there are ways to automating and optimizing the inventory management. Health care institutions in the United States have an edge over in this field.

It was significant to see more than 300 Supply Chain professionals of the health care sector meet and, among other things, discuss how they could improve inventory management in our institutions. There is money to save, but more importantly, the institutions are seeking greater control of their service levels and on the availability of the medical supplies.

We were proud to be invited and participate at this major event and which will undoubtedly have positive repercussions for the Quebec’s health institutions.

Robert Lamarre

Service wise, these objectives will take into account customer needs and the market positioning desired by the company in terms of service as well as its capacity to invest in its inventory to reach its goals.

It must be noted that the higher the service objectives are, the more the inventory level must be increased to guarantee the level of service.  The proper software can assist the company in linking its service objectives with the inventory required.

A trustworthy computer system dealing in inventory management should compute efficiently the parameters of inventory management in relation to the service objectives.  A good system will establish the level of buffer stock required in relation to the optimal service desired by the company.  The buffer stock should normally also take into account delivery schedules as well as the forecast of the demand or demand variability.

To achieve a sustainable level of service, it is imperative to establish variables such as the minimums and maximums on hand that will not only be dynamic but also correlate with the desired service goals.

Interestingly, there are companies today that offer services that provide dynamic calculations of the parameters of inventory management that consist in updating the Min Max according to the service objectives sought by way of dashboards, via the WEB, through a set of indicators that follow the evolution of inventory management.  The IMAFS system also offers exception reports on a pay-as-you-go basis for inventory management.  It is undeniable that an inventory management system will increase a company’s profitability, thus guaranteeing a return on its investment.

In conclusion, we have a better understanding of how inventory management and optimization of customer service go hand in hand.

Robert Lamarre

However, the reality is that companies function on a tightrope and expect their suppliers to fulfill their stock requirements faster than the supplier itself can from its own sources.  Customer satisfaction becomes the main goal in maintaining inventories.

This observation brings to mind that it is essential to be fully aware of customer service issues if an optimal inventory is to be maintained.  One of the most commonly used methods to evaluate customer service consists of drawing up the ratio of customer orders delivered on time versus the total quantity required by the client in relation to the number of lines on all its orders.

It is surprising to learn that most companies have difficulty in establishing this guideline.  Many computer systems, including some reputable ERPs, are not helpful in this regard.  Also, a number of administrators have not understood the importance of this measure that greatly accounts for their customers’ satisfaction.  Another challenge for administrations is the recordkeeping of their lost sales.  The client that checks stock availability but does not place a backorder request is as important as the customer that accepts a late delivery.

A certain discipline is required to maintain records of lost sales especially when clients have Internet access to stock availability.  Stock levels are checked online but no orders are placed.  Some companies have developed ways of assessing these stock inquiries and classify them as lost sales.  This procedure is ideal for establishing service levels.

When a company’s service level is unknown and no tools are in place to assess it, it can resort to a simple procedure for evaluation purposes.  First, a snapshot of the inventory in hand is necessary.  Afterwards, for the items that have no stock when the snapshot was taken (excluding seasonal items, obsolete or no stock), a compilation of the number of requests for these no-stock items during the previous year is performed (note that it is the number of requests and not the total quantity requested).  We establish the proportion between the number of requests for no-stock items in relation to the snapshot versus the total quantity of requests during the year and we obtain the estimated service rate.

One could even go further by measuring the level of service according to the ABC classification of the items or by family of items.

In order to break into today’s global markets and to challenge an ever-increasing competition, supply chain managements must explore all opportunities available to them for self-improvement.  If you want to succeed in a highly-competitive environment such as ours, you must continuously upgrade yourself.  To gain ground, you must first assess the current situation of your organisation by implementing the best measurement tools available.

The role of a Key Performance Indicators

Key Performance Indicators are specific tools that provide the necessary information for benchmarking purposes.  They will appraise the current situation of your stocking department by identifying the strengths and weaknesses of your organization and will signal the strategic areas that require intervention to make your business more competitive.   These tools will serve as a starting point to evaluate the progress accomplished in your supply chain.

Key Performance Indicators will be your follow-up tools to establish realistic objectives for your business and will monitor your progress towards your company’s goals.  The efficiency of all your departments can benefit from these measurement tools by assisting them in their self-evaluation, providing motivational impetus and by assessing progress made.  Good performance indicators can also identify early on any operational problems.

The development of Key Performance Indicators

Based on the strategic planning and the objectives of a business, key performance indicators function according to the unique characteristics inherent to each company.  All key performance indicators must:

Coincide with the strategy and objectives of the company

Represent market trends and progress achieved by the company

Agree with the other departments

Include financial and non-finance related information

Determine what is important for the client

In order to develop good key performance indicators, a data base must first be set up to establish various measurements.  The necessary information to this effect should be found in your management systems.  Prior to implementing the data base, it is essential to perform a thorough review of your supplies, finance, sales and operations’ departments.  All information gathered must be exact.  The integrity of the resulting data will be decisive in ensuring the optimal performance indicators for your business.  Since the setup of the performance indicators is based on the accuracy of this information, an analysis of the data results will be a definite prerequisite.

When evaluating a supplies department, it is imperative to take into account the level of your customer service.  The supplies department functions as a support for your sales, production and maintenance capabilities.  Thus, the evaluation of this service must take into account its capacity to meet its fill-rate needs by assessing the supplies department’s response time to purchasing requisitions or by evaluating the ratio of purchasing requisitions necessary to render a product or service available within the required delays.

Additional indicators should also be established to determine the level of supplies required to manage supplier accounts as well as their numbers.  The type of agreement, product availability and level of cooperation are also elements that should be taken into account as part of these tools.

Furthermore, the organization should also put in place a series of performance indicators that are cost-related.  Among these added indicators, are to be included the costs of maintaining stock and order placements as well as determining a ratio on acquisition costs and savings realized during the course of negotiations.

Performance indicators should also be set up for lead times, of which consideration should be given to timely as well as late and premature deliveries as well as product surplus deliveries.

Finally, the work accomplished by the personnel of the supplies department should also be accounted for when implementing performance indicators.  Measurements such as the service level per customer and the number of transactions as well as purchases per customer must also be included.

In conclusion, it must be noted that the implementation alone of these measurement instruments know as KPI will not affect the performance of your supply chain.  However, the combination of good performance indicators coupled with an effective action plan and an employee-motivated environment will certainly improve your supply chain and ensure that your business will remain competitive.

Benoit Ouellette