Inventory management is a critical area for most companies. And breakthrough improvements require a process based inventory turnover improvement strategy.
Too much inventory, especially the wrong inventory, can negatively impact cash flow, return on investment, customer satisfaction, and profitability. Too little inventory, especially the wrong inventory, can result in lost sales, inability to delivery to customers, and also impact cash, ROI and profitability.
Despite these devastating and far reaching implications of poor inventory management too often this area is not given the respect and attention that it deserves. You cannot just wave a wand a wish inventory levels will be magically lower.
Brute force approaches will at best result in short term gains. In our experience the best way to systemically, and sustainably, optimize inventory is to take a process based inventory turnover improvement approach.
A Process Based Approach
A process based inventory turnover improvement approach requires consideration of what the main levers are that control the flow of materials. The reality is that there can literally be dozens, if not hundreds, of processes and sub-processes that define or impact how materials move in your business.
It is not typically practical to try to change dozens of processes at one time. Conversely just trying to change one process at a time in serial will usually make no too little overall change in inventory performance and it will take a long, long time.
While it may seem simplistic the best way to adopt a process based inventory turnover improvement approach is to identify a small number of the most impactful overarching inventory related business processes.
In identifying these processes we believe it is best to contemplate:
- What processes control the rate at which inventory moves into the company?
- What processes control the rate at which inventory moves through your company?
- What processes control the rate at which inventory moves out of your company?
If you can identify 1 or 2, or at most 3 major processes in each of these streams you will have identified the key levers that will enable you to make meaningful change in inventory turnover performance.
A Holistic, Process Based Approach
Many times I have seen people tackle making improvements to Inventory performance. Very, very smart people. But more often than not I’ve seen them fail to make the breakthrough changes that they are tasked to achieve.
Invariably they focus on a single area where Inventory is chronically and obviously doing poorly. It may be manufacturing lead times, it may be system parameters, or it may be aged inventory. Regardless of what area they pick to focus on they put all of their energy into this one area.
Worse yet they often pick a subset of that one focus area to concentrate on. It may be inventory of a certain kind, for a particular customer, or at a unique location. They then try to pilot their work on this very finite area. Their goal is to then prove out results in this localized example and then, with their pilot behind them, deploy those actions across the rest of the organization.
There are several problems with this approach.
First it takes a long time to run a pilot and then disseminate it on a larger scale. Second it ignores all of the other areas that are impacting inventory, meaning that their small scale results will never impact overall inventory performance. Third it typically focuses solely on technical improvements as opposed to considering the entire ecosystem (processes, organization, people, culture) that really shapes the ability to make improvements of any kind.
Our experience is that a holistic, process based approach will deliver the best short term and long term results. While this can be the more difficult and daunting approach it has the greatest potential to succeed and make company wide improvements in all respects.
Numerous examples of projects using this approach have resulting in the achievement of game changing, industry leading results. In areas ranging from Inventory turnover improvement to E-Commerce fulfillment we have achieved best in class results using a holistic approach.
The Holistic Approach Applied
I was given the task of turning around our Inventory turnover performance. Several people had tackled this task in the past but they all took a piecemeal approach and they all failed.
The financial viability of the company was at stake. As I considered how I was going to approach this problem I knew I needed to take a much broader, more holistic approach. I needed to address:
- Key business processes affecting the flow of inventory
- All stakeholder dimensions including all customers and operational locations
- Cultural behaviours and change
This was certainly going to be a much more demanding and risky approach but it was absolutely necessary. The company had been worst in the industry for inventory performance for years and years. It spoke poorly on the management of our business as viewed by customers and stakeholders alike.
So taking a holistic process based inventory turnover improvement approach was the right thing to do.
I identified the 6 most impactful global business processes controlling the rate at which inventory moved into, through and out of our business. For each of these business processes I identified an exceptional leader to be on the team to drive each respective process.
Additionally I enlisted leadership support from each customer team and from each manufacturing location. Triangulating these 3 dimensions (processes, customers, operational locations) would allow us to attack all of the issues from every possible angle.
And on top of that I provided the oversight and governance for the overall project, including a focus on changing organizational behaviours and cultural norms to create the performance we needed out of a high performance organization (HPO).
As the overall project progressed we saw continued and substantial improvements in all dimensions. Whereas some thought that this approach may result in conflicts we in fact found that the multi-dimensional focus resulted in complementary improvements at every turn.
The global Inventory management business processes that we focussed on made phenomenal improvements:
The gap in our ERP planning between demand and supply was reduced by 85%, resulting in a significant reduction in over ordering. Synchronized and strengthened ERP execution resulted in a heightened discipline contribution to better forecasting and tightened controls.
And the focus allowed for proactive identification of risks (both upsides and downsides) which informed demand loading and actions to secure or release supply.
Our focus here resulted in proactive reductions in lead times and delivery parameters. Negotiations and sourcing decisions were made which focused on just in time delivery, supplier/vendor managed inventory and greater flexibility conditions surrounding the delivery of goods and increases/decreases in supply.
This process included a focus on total cost of ownership, not just piece price levels. As inventory levels resulted in real costs not otherwise considered in pricing negotiations this allowed for more informed business level decisions on sourcing and ordering.
Raw Material Management
Buyers historically purchased materials in a very indistinguishable manner. High value, high cost parts were purchased with the same level of attention as very low value, low cost parts. The vanilla approach to purchasing meant that we were applying a lot of buying processes generically to our great disadvantage even though the 80/20 rule could have been applied.
We established an “A” Class Buying team. By picking our best and brightest Buyers to micromanage our most expensive purchases they were able to give incredible attention to these purchases. They could ensure that we only had on hand what we needed of these costly parts but also ensure that we could increase or decrease supply on a moment’s notice as circumstances dictated.
We made enormous reductions in inventory on hand, optimized parameters such as MOQ and order lead time, and reduced transit times significantly.
Excess and Obsolete Inventory
On the other end of the inventory spectrum from new material purchases is the disposition of inventory on hand, specifically aged inventory on hand. Changes in demand, functional changes, quality issues, and more can all result in inventory sitting on shelves gathering dust. Some of this inventory may be used in the future and some may never be used.
Liability for the excess and obsolete inventory varied. In many cases this inventory was on hand due to customer decisions yet historically the discussions with customers to get them to reimburse us for this expense was confrontational at best and downright nasty at worst.
Our actions on Supply Demand planning, delivery and raw material optimization would reduce the incidence of excess and obsolete inventory creation in the future. Customers and everyone involved would appreciate this. But the hard work of dispositioning what we had on hand was still necessary.
Through better education, training, investigation, coordination and planning we were able to develop much more robust strategies to take to customers. The dual approach of dealing with what we had on hand and preventing aged inventory creation in the future resulted in reductions of over 50% within 9 months.
Work in Process
As a manufacturing company all of our raw materials had to go through the production processes to be transformed. Poor historic delivery reliability of raw materials to manufacturing resulted in extra buffers and higher inventory levels between and before all operation steps. And inconsistent scheduling processes meant extra inventory was put in place and disconnected from a just in time approach.
A concerted focus on reducing cycle times, kanban sizes, inventory buffers combined with tighter scheduling and improved just in time delivery reliability allowed us to strip out a lot of inventory from the manufacturing floor. This meant more inventory was held in the warehouses which allowed the buyers to adjust future purchase orders and demand signals so that this inventory would be depleted naturally over time.
Work in process was reduced by 40% over this time while at the same time we improved our delivery performance to our customers and significantly increased our ability to react to any customer demand changes, up or down.
Most of our customers insisted on having us carry finished goods on hand. This was a result of many factors including their poor forecast accuracy and our poor ability to react to demand changes. Putting these buffers in placed gave the customers assurance that goods were there as required.
However this was a very costly approach in every respect. The highest cost of inventory is in finished goods wherein all costs have been incurred and all cash is tied up on warehouse shelves. The risk of getting caught with aged inventory was enormous. And any quality issues or engineering changes would require incurring very high costs to rework all of the finished goods inventory.
With all of the other business process improvements made we could demonstrate to customers our ability to react much more quickly and nimbly, dramatically reducing the need to carry expensive finished goods on hand. Our efforts allowed us to reduce finished goods inventory by over 45%.
Process Based Inventory Turnover Improvement in Conclusion
After 9 months from the start of the project in which we had elected to use a holistic, process based approach the results were in. We had gone from having the perennially worst inventory turnover performance in our industry to having the best inventory turnover performance in our industry.
Further the process based inventory turnover approach that we took, unlike a brute force approach, resulted in the implementation of both systemic, sustainable improvements and fundamental changes in organizational behaviours and the company’s culture.
It was hard work for everyone involved. There were steps forward and steps backward. But we were unrelenting in our approach.
We had achieved something across a large global company in 9 months which all past efforts and approaches would quite honestly never have achieved after 9 years.
A holistic, process based approach to making improvements, no matter what your challenge is, will give you the opportunity to make remarkable changes. It is not without risk and success is not guaranteed.
But as Wayne Gretzky is famous for saying, “You miss 100% of the shots that you don’t take.”