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

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