Most of the pre-pandemic Inventory Management strategies were centred around improving inventory turnover, keeping inventory levels as low as possible, and reducing the amount of cash tied up in inventory. The backbone of all long-standing philosophies such as Just-In-Time, Lean manufacturing, and Kanbans were all designed around minimizing the amount of inventory on hand in any Supply Chain.
But it took a global pandemic to turn all of those paradigms and approaches on their heads. Systems and processes designed to minimize inventory levels proved to be inadequate to withstand the unprecedented disruptions in both supply and demand that the pandemic would instigate. Look no further than the fact that we ran out of toilet paper, of all things.
Before things start to getting back to “normal”, it’s important to ponder whether these low inventory business models should be continued, adjusted, or even abandoned as we look to the future of inventory management. What should our post pandemic inventory priorities be?
Pre Pandemic Inventory Management Priorities
Throughout my career I have had many experiences with managing inventory. Regardless of the situation, the company, or the industry, the fundamental objectives in inventory management were to:
- Always have the right inventory on hand
- Never run out of inventory and minimize (and mitigate) materials shortages
- Achieve the highest possible turnover results
- Keep overall inventory levels (and in turn storage requirements and cash demands) down
Overarching programs shaping inventory levels and turnover performance were predominant. Lean management viewed inventory and storage as a “waste”. Just-In-Time delivery meant that inventory was to be brought in consistent with actual demand, and only when actually needed. ABC inventory classification and ordering, minimum order quantities, economic order quantities, drop shipping, order lead times and replenishment lead times, safety stocks, cross docking, and vendor managed inventories are some of the most widely used techniques to effect inventory levels and performance.
Regardless of how well, or how poorly, inventory management optimization programs are put in place, these priorities are always consistent and seldom change. Underlying all of these philosophies is the drive to keep inventory levels low.
Inventory Management Headwinds
Despite whatever metrics, business processes, resources, systems, relationships, and contingencies you may have in place, achieving your overall inventory performance objectives is far from easy. There are so many different influencers on inventory, and so many variables at play, that keeping the appropriate levels of inventory on hand is a herculean feat. All of these influences create an enormous juggling act challenge for Supply Chain professionals.
The day to day pressures, internal forces, and external dynamics conspire to make you short of the right inventory, overstocked with the wrong inventory, consuming too much cash, using too much storage space, and not having the inventory you need on time.
These pressures are real and often not within your control:
- Customer demand and forecast fluctuations (often with lead time)
- Design and engineering changes
- Supply delays (raw material shortages, quality problems, delivery delays)
- Cycle counting discrepancies including theft, spoilage and other losses
- Disaster and weather related disruptions in supply lines
- Manufacturing and distribution processing and capacity issues
- Unoptimized, conflicting or inaccurate parameters
- Warehouse processing and storage issues
- Erroneous data and communication errors
- Lack of visibility
- Poor or ineffective employee training and education
Whatever inventory optimization programs you may have in place, such as Just-in-Time delivery, there are no processes that are bullet proof. Even automotive companies, who presumably have great just-in-time programs in place, still have real monetary penalties in place for any supplier who causes even an hour of disruption to their throughput. These penalties are meant to be very strong deterrents but they don’t provide a 100% guarantee that there will be no disruption.
There are too many forces at play to assure the seamless achievement of inventory performance objectives. And none of these forces comes close to matching the impact on inventory levels caused by the global Coronavirus pandemic.
The Pandemic Is Reshaping Inventory Management Priorities
The Coronavirus pandemic turned the world’s Supply Chains on their heads. Very few commodities or industries were untouched, and the level of disruption will not end before 2022. Toilet paper, masks, healthcare essentials, ventilators, lumber, steel, rubber, automobiles, computer chips, appliances, tires, furnaces, and clothing are just a small number of the commodities that the pandemic has upended.
Strategic national stockpiles, particularly of essential healthcare items, proved to be inadequate. Despite the fundamental objective of having sufficient safety stocks on hand, these stockpiles were insufficient to cope with the pandemic, underscoring the poor implementation of this approach.
Past paradigms of inventory management designed to keep inventory levels low, such as Just in Time, now seem antiquated given the context of all of the pandemic created supply disruptions. Holding bare bone inventories is not sufficient to withstand any meaningful changes in supply. Further low inventory levels cannot adequately react to demand shifts.
We expect that prudent companies, and those with a strong strategic vision, will build more robust Supply Chains by deploying greater inventory contingencies plans and tactics:
- Strategic inventory safety stocks of high valued, longer lead time materials
- Dual sourcing across multiple tiers and all aspects of their supply lines
- Proactive identification and qualification of substitute materials apart from the primary goods
- Diverse manufacturing, distribution and logistics solutions
- Onshoring AND Offshoring utilized simultaneously, reducing dependency on any single geography
- Less stringent use of Lean and Just In Time programs
- Relaxed metrics on inventory and inventory turnover levels; greater emphasis on continuity of supply in any scenario
- Deployment of Digital Supply Chain strategies based on electronic connectivity and real time visibility across the entire Supply Chain
- Control Tower deployment enabling real time decision making based on supply and demand dynamics
- More aggressive downstream supplier management (eg. performance, disaster recovery effectiveness, robustness, etc.)
The pandemic should have caused a fundamental shift in thinking in regard to inventory management. Programs, processes, training and measurement all designed to keep inventory low are now insufficient to deal with the future. Our post pandemic inventory priorities have changed.
Companies will need to keep more inventory on hand, somewhere in their Supply Chains. The pandemic should be lesson enough to show that keeping inventory levels too low and too tight will only result in much greater costs and losses, jeopardizing the very survival of any given company.
And companies must proceed with deploying Digital Supply Chain strategies aimed at provided real time electronic end to end connectivity and visibility across their entire network. This level of connectivity is the future and it is not optional for anyone who hopes to survive and thrive in the future.