Six Steps Up the Learning Curve for New Planners

The Smart Forecaster

 Pursuing best practices in demand planning,

forecasting and inventory optimization

If you are a new professional in the field of inventory management, you face a very steep learning curve. There are many moving parts in the system you manage, and much of the movement is random. You may find it helpful to take a step back from the day-to-day flow to think about what it takes to be successful. Here are six suggestions that you may find useful; they are distilled from working over thirty five years with some very smart practitioners.

 

1. Know what winning means.

Inventory management is not a squishy area where success can be described in vague language. Success here is a numbers game. There a number of key performance indicators (KPI’s) available to you, including Service Level, Fill Rate, Inventory Turns, Inventory Investment, and Inventory Operating Cost. Companies differ in the importance they assign to each metric such, but you can’t win without using some or all of these to keep score.

But “winning” is not as simple as getting the best possible score on each metric. The metric values that are most important vary across companies. Your company may prioritize customer service over cost control, or vice versa, and next year it might have reason to reverse that preference.

Furthermore, there are linkages among KPI’s that require you to think of them simultaneously rather than as a collection of independent scores. For example, improving Service Level will usually also improve Fill Rate, which is good, but it will also usually increase Operating Cost, which is not good.

These linkages express themselves as tradeoffs. And while the KPI’s themselves are numbers, the management of the bundle of KPI’s requires some wise subjectivity, because what is needed is a reasonable balance among competing forces. The fundamental tradeoff is to balance the cost of having inventory against the value of having the inventory available to those who need it.

If you are relatively junior, these tradeoff judgments may be made higher in the organization, but even then you can play a useful role by insuring that the tradeoffs are exposed and appreciated. This means exposed at a quantitative level, e.g., “We can increase Service Level from 85% to 90%, but it will require $100K more stock in the warehouse.” This kind of specific quantitative knowledge can be provided by advanced supply chain analytics.

 

2. Keep score.

We’re all a bit squeamish about being measured, but confident professionals insist on keeping score. Enlightened supervisors understand that external forces can ding the performance of your system (e.g., a key supplier disappears), and that always helps. But whether or not you have good top cover, you cannot demonstrate success, nor can you react to problems, without measuring those KPI’s.

Keeping score is important, but so is understanding what influences score. Suppose your Service Level has dropped from last month’s value. Is that just the usual month-to-month fluctuation or is it something out of the ordinary? If it is problematic, then you need to diagnose the problem. Often there are several possible suspects. For example, Service Level can drop because the sales and marketing folks did something great and demand has spiked, or because a supplier did something not so great and replenishment lead time has tanked. Software can help you track these key inputs to help your detective work, and supply chain analytics can estimate the impacts of changes in these inputs and point you to compensating responses.

 

3. Be sure your decisions are fact-based.

Software can guide you to good decisions, but only if you let it. Inputs such as holding costs, ordering costs, and shortage costs need to be well estimated to get accurate assessment of tradeoffs. Especially important is something as apparently simple as using correct values for item demand, since modeling demand is the starting point for simulating the results of any proposed inventory system design. In fact, if we are willing to stretch the meaning of “fact” a bit to include the results of system simulations, you should not commit to major changes without having reliable predictions of what will happen when you commit to those changes.

 

4. Realize that yesterday’s answer may not be today’s answer.

Supply chains are collections of parts, all of which are subject to change over time. Demand that is trending up may start to trend down. Replenishment lead times may slip. Supplier order minima may increase. Component prices may increase due to tariffs. Such factors mean that the facts you collected yesterday can be out of date today, making yesterday’s decisions inappropriate for today’s problems. Vigilance. Check out a prior article detailing the adverse financial impact of infrequent updates to planning parameters.

 

5. Give each item its due.

If you are responsible for hundreds or thousands of inventory items, you will be tempted to simplify your life by adopting a “one size fits all” approach. Don’t. SKU’s aren’t exactly like snowflakes, but some differentiation is required to do your job well. It’s a good idea to form groups of items based on some salient characteristics. Some items are critical and must (almost) always be available; others can run some reasonable risk of being backordered. Some items are quite unpredictable because they are “intermittent” (i.e., have lots of zero values with nonzero values mixed in at random); others have high volume and are reasonably predictable. Some items can be managed with relatively inexpensive inventory methods that make adjustments every month; some items need methods that continuously monitor and adjust the stock on hand. Some items, such as contractual purchases, may be so predictable that you can treat them as “planned demand” and pull them out from the rest.

Once you have formed sensible item groups, you still have decisions to make about each item in each group, such as deciding their reorder points and order quantities. Here advanced analytics can take over and automatically compute the best choices based on what winning means in the context of that group.  

 

6. Get everybody on the same page.

Being organized is not only pleasing, it’s efficient. If you have a system for inventory management, then everybody on your team shares the same objectives and follows the same processes. If you don’t have a system, then every planner has his or her own way of thinking about the problem and making decisions. Some of those are bound to be better than others. It’s desirable to standardize on the best practices and ban the rest. Besides being more efficient, having a standardized process makes it easier to diagnose problems when things go wrong and to implement fixes.

 

Volume and color boxes in a warehouese

 

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    Here are six suggestions that you may find useful; they are distilled from working over thirty five years with some very smart practitioners. Cloud computing companies with unique server and hardware parts, e-commerce, online retailers, home and office supply companies, onsite furniture, power utilities, intensive assets maintenance or warehousing for water supply companies have increased their activity during the pandemic. Garages selling car parts and truck parts, pharmaceuticals, healthcare or medical supply manufacturers and safety product suppliers are dealing with increasing demand. Delivery service companies, cleaning services, liquor stores and canned or jarred goods warehouses, home improvement stores, gardening suppliers, yard care companies, hardware, kitchen and baking supplies stores, home furniture suppliers with high demand are facing stockouts, long lead times, inventory shortage costs, higher operating costs and ordering costs.

    The Trouble With Turns

    The Smart Forecaster

     Pursuing best practices in demand planning,

    forecasting and inventory optimization

    In our travels around the industrial scene, we notice that many companies pay more attention to inventory Turns than they should. We would like to deflect some of this attention to more consequential performance metrics.

    Recall the definition: Turns = Annual dollar cost of goods sold / Average dollar value of inventory. If you sell $1 million of stuff in a year and have an average of $100,000 of stuff on the shelf each day, you are running at an impressive 10 Turns (Walmart runs at around 8). Supposedly, having high Turns signals efficient management, and keeping your Turns higher than competitors’ signals competitive advantage.

    But as happens with most performance metrics, there is more to the story. Turns may be very salient to the CFO, but they can be a straightjacket to the COO. This is because Turns are not directly related to customer service; in fact, high Turns can be synonymous with low service levels and fill rates. S&OP consultant Darrin Oliver calls Turns his “pet peeve metric” because “the customer doesn’t care about Turns.”

    Suppose you are unhappy with your current Turns value. What can you do to boost the number? Since Turns is a ratio, you can increase it by either increasing the numerator (goods sold) or decreasing the denominator (inventory). Increasing sales is more difficult because it requires the cooperation of the customer. Decreasing inventory is easier because it’s completely under your control: just make smaller replenishment orders, which also saves money in the short run. Indeed, you can get very enthusiastic and cut inventory to the bone. You end up with a better looking number for Turns—and a serious problem with stockouts, backorders, lost sales, lost customer good will and lost market share. Who’s sorry now?

    Here’s a lightly edited version of a story on this topic told by a very wise practitioner. “Back in my other life they were all about improving Turns. Why, I have no idea. So I pointed out the risks that you run. And they really weren’t interested. So we took our global inventories down to [a lower level], and then were breaking on stock left and right on a daily basis. Our turns were great, but we weren’t making any money, because we couldn’t get anything out the door, because we didn’t own it. The higher your turns, the lower your inventory’s going to have to be, or you’re just going to have really good flow. And in our industry that’s a very, very difficult thing to achieve. So if we can have reasonable Turns but still be in stock, I think that’s what we want to do. It can be very frustrating in an operations world to try to explain what we do every day and what the risks to the business are when the financial people are just looking at one or two metrics. They’re basically trying to plan the business in a vacuum, and it’s very difficult and very risky to do that.”

    Thomas Willemain, PhD, co-founded Smart Software and currently serves as Senior Vice President for Research. Dr. Willemain also serves as Professor Emeritus of Industrial and Systems Engineering at Rensselear Polytechnic Institute and as a member of the research staff at the Center for Computing Sciences, Institute for Defense Analyses.

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