Management Blog and case study

Here's a recurring management theme, even though the concept covered at the first level is basically just a question of moving material in and out. Pluses and minuses, as they say!

So why so many publications on the subject? Why this constant search for the magic tool that will give you rigorous physical and accounting control over your inventory?

As you can imagine, the question is more complex than it appears. The field of knowledge is vast and, in this article, I shall confine myself to the basic aspects most frequently encountered in the field.

I propose a reflection structured in three parts:

• A reminder of the tactical and strategic pivot that inventory can represent in a company
• The influence of the nature of your company's activities on the definition of an improvement project
• A few key points and pitfalls to keep in your rear-view mirror

 

THE TACTICAL AND STRATEGIC IMPORTANCE OF INVENTORY MANAGEMENT

The question is legitimate: why worry so much about inventory management?

Obviously, if inventory management isn't at the heart of your day-to-day financial and logistics operations, this article probably isn't of interest to you. For example, if you're a pure service or expertise company, and product sales represent little or no part of your turnover.

But if inventory can have a direct impact on your productivity and the quality of the services you provide to your customers, and therefore ultimately on your profitability, this post will offer you some food for thought in planning a project to improve this aspect of management.

In fact, the first pitfall of inventory management is precisely the innocuous appearance of the subject when it is approached quickly at the outset. Once again, when it comes down to it, all we're talking about is the input-output of equipment, and if there's a mistake, we just correct it, right?

By analogy with the damage that a community of termites can inflict on your house, a single termite, a single erroneous item input-output, probably won't cause any management damage to your company, but thousands of erroneous transactions can hide some very nasty surprises at the end of the financial year.

Here are some classic symptoms to look out for, strongly linked to poor inventory management:

• The inability to sell and deliver a good or service within an agreed timeframe. The result is a potential loss of revenue, customer satisfaction and competitiveness. With all that follows, such as possible customer erosion, forced price cuts and a direct impact on company profitability.
• A situation of "overstocking" and artificial inflation of inventory value for no apparent or justified reason, such as in relation to explicit market demand. Basically, "overstocking" automatically increases the pressure on operating credit (bank financing) when associated with the costs of physical space, heating, electricity, transport crystallized in fixed equipment, etc.

If, unfortunately, this unjustified increase in inventory is associated with the obsolescence of certain items, and if it becomes necessary to clean up and cancel outdated inventory on a company's balance sheet, operating credit can be drastically reduced in one fell swoop. As operating credit is the air intake of most companies, the consequences can be very significant, even serious.

• A periodic physical inventory that results in substantial adjustments to computerized item quantities due to discrepancies with their physical quantity on the floor. This control activity, a classic annual historical event, should not generate any major financial upheaval for the company.

Whether or not there are deviations from a high volume of transactions, a margin of maneuver must be tolerated for unavoidable phenomena such as data entry errors, data entry oversights and so on. There are also the less pleasant phenomena of loss, breakage or theft, the extent of which can also be detected and quantified by a physical inventory. The symptom to watch out for here is the relative importance of the overall discrepancy detected between physical and IT quantities. Or, to put it another way, if hardware I/O control is minimally effective, this overall discrepancy should remain below a threshold that has little or no operational or financial impact on the business. If this is not the case, these deviations should be analyzed more closely.

 

IMPORTANT NUANCES DEPENDING ON THE NATURE OF YOUR COMPANY'S ACTIVITIES

Publications abound on the subject, but most neglect to mention an important aspect to integrate into your thinking - an aspect which, if omitted, may lead to a sub-optimal definition of your management improvement project. A project that may become ill-adapted to the main objective of your approach and the desired results. The whole thing can become a bit like an inappropriate drug for a given medical diagnosis.

For example, a number of articles address the subject in the context of manufacturing management, from the link between production optimization and supply chain management to concepts such as "Just In Time", with all the variations of operational theory that apply, and then some.

Obviously, the point here is not to discredit the operational theory in question; it's tried and tested and essential in more complex manufacturing and large-scale inventory contexts.

Rather, my point is to highlight an important step to insert upstream of any project to improve your inventory management:

Make sure you have a clear understanding of your key management processes involving inventory, i.e. those specific and adapted to your business domain, your vertical sector of activity if applicable. Make sure you have a clear vision of the operational points where inventory management plays a critical role in your productivity and competitiveness.

It's a clear understanding of the nature of your business that will prevent you from getting lost down a theoretical inventory management path, in an improvement game plan that won't produce the results you're looking for, for a variety of reasons.

For example, simply because the operational context favoring the levers of a given theory is not really, or sufficiently, present in your company for the theory to generate its levers. Forcing the application of a method or the implementation of a computerized system based specifically on an inventory theory unsuited to your context will only waste time and miss the target.

So, a plan and project to improve your inventory management must first involve a sufficient understanding of the key hot spots and processes in your specific inventory management, within a vision of the business practices and specificities of your sector.

All that said, these are a lot of words and a lot of vague notions. To give you a better grasp of the concrete behind my proposals and the importance of placing this analysis upstream, here are a few business context questions that demonstrate how the answers to each of them can strongly nuance or differently align your improvement game plan:

• Am I a distributor (buy/sell) of products I don't manufacture?
• Do I manage a minimal inventory to support and complement professional services?
• Do I manufacture and market my own standard products?
• Do I manufacture to order (custom-made) or do I manufacture for inventory?
• If I manufacture to order, do I operate little or heavily with standard "sub-assemblies" (semi-finished)?
• Do I have to manage an inventory by project (e.g. a construction site)?
• Are my annual revenues associated with a large volume of small sales in value terms, or with a few high-price sales per sale?
• Do I sell and/or rent out my products?
• Do I manage a large consignment inventory with distributors (multi-warehouse)?
• Do I have a high volume of international purchases and/or sales?
• Do I need medical-level traceability?
• Etc.

My aim is to highlight the fact that your specific answer to each of these questions automatically influences the definition of the key points to be targeted by your improvement plan. And by associating your thinking with the possibility of acquiring or changing a computerized management system, all your answers also serve to establish a framework of key features that your next IT tools should possess.

 

BLIND SPOTS AND KEY ELEMENTS IN INVENTORY MANAGEMENT

The peculiarities of your company and your sector of activity may therefore lead to the monitoring and improvement of very specific aspects of your inventory management. However, in keeping with my previous comments, I'd like to offer a few generic points of reference, so that the widest possible audience can pick out an element or two to analyze or potentially work on in their own context.

Rigorous I/O management

Let's start with the classic of classics:

A lack of rigorous physical control of inputs and outputs. It's not complicated: no movement of material in or out of your inventory should take place without being automatically associated with rigorous traceability, a computerized transaction.

It's not for nothing that I raise this simplistic point. I've lost count of the number of times I've heard people say, "Everything we do is rigorously tracked, nothing gets by the system". Two minutes later, an emergency caused someone to run to get a part from inventory without conciliating their operation in any way. The part disappeared into thin air. Of course, you never have delivery or production emergencies ;-)

What's clear here is that certain working methods and/or technological choices need to frame your inventory management to raise the threshold of control over "input-output" to the maximum in your business context.

The collateral effect of this first blind spot is that if you are unable to implement rigorous control of your inventory's inputs and outputs, any inventory management software or goodwill will not be able to produce the quality of results you want.

Minimum quantity management

You don't have to be a product manufacturer to associate importance with this highly useful and effective concept in inventory management. If you don't already use this concept in your business, and it's applicable, I recommend that you look into it.

With the right product in hand, the simple recipe for optimizing your opportunism and business revenues is to be able to deliver quickly to a customer and satisfy demand. Talk to Amazon, who have understood this concept particularly well. They've even taken the creative approach of making us, the consumer, pay if we want to be even more satisfied with their "Amazon Prime" offer!

From this comes the simple logic of always having on hand the minimum necessary to satisfy demand in X% of cases, a satisfaction threshold that you determine. Assuming that your management software supports the item-based concept, defining a minimum quantity to be kept per item will enable you to meet demand at the satisfaction threshold you've set, simply by triggering the necessary purchases, or production orders, when the quantity of inventory falls below the defined minimum.

Setting this minimum quantity per item is a fairly vast subject in itself, and I'm only touching here on the usefulness of integrating it into your day-to-day management. The concept involves, among other things, complementary notions such as :

• Products associated with the majority of my income
• Demand forecasting
• Supplier delivery times
• In-house production lead times, if applicable
• Economic purchasing and manufacturing quantities

 

Stock rotation and utilization statistics

Directly involved in the establishment of "Minimum Quantities", periodic analysis of inventory usage and turnover is a simple and effective approach to rapidly improving your inventory management. Here, we'd like to find out more about some key aspects, such as :

• Which items do I sell the most?
• How quickly should I track and manage my most strategic items?

We can use the basic reports present in most management software to apply a technique such as "ABC" classification, a technique linked to the famous Pareto principle (80-20). The technique is simple: you divide your inventory into three groups of items (ABC) on the basis of criteria, the most common of which are the associated inventory value or the revenue generated:

A - The 20% that generates 80% of the value or revenue
B - The 30% that generates 15% of the value or revenue
C - The remaining 50% associated with 5% of the value or income

Common sense then dictates that you should first focus your efforts on improving the management of the items making up the 20% with the greatest potential impact on the company, group "A".

In other words, if I have the same amount of time available to optimize my inventory management, it makes sense to focus this time on what can have the greatest impact and results.

As a significant complement, the same analyses and usage statistics can become a pivotal point of strategic thinking for your company: Example:

• A classic use of these analyses is to quickly identify the state of obsolescence of your inventory, i.e. to identify items that have not been used for a long time. These items will eventually have a negative financial impact if they are completely unusable, in addition to taking up unproductive space in your warehouses. To lessen the impact, with the list of obsolete items in hand you can consider a promotion to dispose of them, possibly quickly and at a discount. Of course, if your software allows you to define an expiry date for each item, your management will be all the more proactive.
• Item usage volume and turnover rate provide you with valuable information for analyzing and defining the notion of "Economic Quantity" per item. On the basis of this information, you can not only work to optimize the satisfaction rate (on-time delivery) of the items in your "A" group, but also intervene and optimize their gross margin on sale by negotiating lower purchasing costs on the basis of a higher average purchase volume per order. If item group "A" is associated with 80% of your revenues, you understand the potential magnitude of the positive impact on your profitability.
• Before these analyses, you might have thought that your best-selling, flagship product was product "X", but your analyses might show that it's product "Y" instead. Caught up in a broader vision of corporate annual reflection, you may decide to reorient your marketing strategy after discovering a niche that was flying under the radar or that is growing rapidly in your sector of activity.

 

Permanent physical inventory

The annual physical inventory, the famous annual moment of truth. To caricaturize, the moment we wait for to get the answer to the fundamental question: "Did we make money this year, a lot, a little or did we lose some?" Or, "Did we have a lot of theft or breakage this year?"

However, why wait until the end of the year to detect situations with a high potential impact and make adjustments to the way things are done, to intervene at the level of necessary adjustments to the rectitude and synchronization of the physical inventory and with the computerized one.

As of today, all the necessary technologies are available to implement a perpetual inventory approach. This approach consists of constantly rotating inventory by section of your warehouse, every day of the year. A smart barcode reader, either classic or QR, integrated wirelessly into your central management software, enables you to scan an item on the tablet and confirm its physical quantity.

In the event of a discrepancy between the physical and computerized quantities at the central office, adjustment transactions are automated. At the end of a short period (week, month or other), the manager can see both the adjustments made and who initiated them. This makes it much easier to analyze the origin of the variance. Of course, this is a possible approach, provided your management software supports this type of transactional interaction.

In line with my first section on "A reminder of the strategic importance of optimal inventory management", the accuracy of your inventory in terms of quantity is crucial to responding effectively to demand and offering an optimal customer experience. It's always a shame to find out that, after a sale has been made on the computer, the item is not physically available, and that the lead time initially communicated to the customer will be doubled or more.

This is a bad marketing image that we want to avoid, and the perpetual inventory approach, complemented by priority targeting of our "A" group of items, enables us to achieve this objective.

CONCLUSION

As I like to say:

In general management, and particularly in inventory management, complexity is more a question of "Number", i.e. a high volume of transactions, than a question of "Nature", i.e. the complexity of the operation behind each transaction as such.

As explained in the introduction, an inventory transaction is, after all, a "+" and a "-". In order to maintain control over the incredible potential volume of transactions, it's essential to be well-equipped with management methods and software.

We welcome any comments or questions you may have. We'll be happy to answer them.

Good management!