Inventory Management: Finding the Right Balance in this Storied Drama
Remember the familiar line from an old TV cop show: “There are 8 million stories in the Naked City”? As USC Consulting Group’s Vice President and Senior Operations Manager Paul Harker likes to point out, the same could be said about your inventory.
Like most dramas, the story of your inventory management can take unexpected turns. It’s very easy to get lost in the din of safety stock levels vs. Lean principles, order quantities, reorder triggers and the lead time to replenish the stock. Supply chain disruptions and shortages haven’t helped matters over the past few years. The plot unravels when these stories don’t add up to a single coherent tale.
Major characters in this inventory management drama:
Operations, which sees inventory as a buffer against fluctuating demand. But how much is too much? They don’t want an excess of stock, which would fly in the face of the popular “just in time” or Lean operating method, which, admittedly took a bit of a hit during the pandemic when people panicked about shortages and bolstered their safety stock.
Sales wants product at the ready at a moment’s notice, not “just in time,” but “all the time.” They’re not overly concerned with storage space, inventory investment or production efficiency.
Finance looks at inventory as a double-edged sword. They want to reduce inventory in order to free up cash and minimize carrying costs. But inventory is also collateral. High levels of production, whether the goods are sold or not, can absorb overhead and drive better month-end results, which are Finance’s Holy Grail.
Executives are focused on achieving quarterly corporate objectives and view inventory in terms of dollars.
At a fundamental level, all of these decision-makers speak different languages, have different perspectives and conflicting messages. Of course, everyone has the same goals: efficiency and profitability. But they may be at cross purposes getting there.
The Hero: SIOP
You might be thinking: “Is that a typo? Don’t they mean S&OP?” Yes and no. No, it’s not a typo. And yes, S&OP, the business management process that involves sales forecast reports, planning for demand and supply, and other factors, is the foundation of all of this. We just think S&OP is missing something: Inventory.
When you’re focusing on inventory, it elevates the entire planning process up a notch. When your inventory is optimized, things tend to fall into place. But it is not an easy mark to hit in these days of supply chain disruption and the sometimes conflicting goals of key decision-makers. With SIOP, you can circumvent these challenges and make your inventory work for you.
“A key to SIOP is to emphasize inventory as a strategic tool to help offset variation in either demand or production issues,” explains David Shouldice, Senior Vice President and Managing Director at USC Consulting Group. “One lever of control in the SIOP process is to make inventory harder working as a strategic tool.”
As Shouldice notes, it’s about having the right conversations about the right topics at the right time.
This isn’t a one-and-done process. The SIOP planning horizon should be at least a rolling 14-month period. We recommend that our clients update their plans monthly. Some do it more often than that. The point is covering a sufficient span of time to make sure the necessary resources will be available when you need them. The plans take into account projections made by the sales and marketing departments and the resources available from manufacturing, engineering, purchasing and finance. All of that together works toward hitting the company’s goals and objectives.
Using SIOP for inventory management
Sales, Inventory and Operations Planning helps your company get departments in sync, ensures that everyone is on the same page and realistic about the process, helps you manage and roll with changes, and measures performance.
One powerful component of SIOP is that the process involves all of the key players in your inventory drama.
Here’s who we typically see take part in the SIOP process:
- Vice President, Sales and Marketing
- Vice President, Operations
- Director of Logistics
- Vice President, Engineering
- Vice President, Finance
- Vice President, Information Systems
- Vice President, Human Resources
Different languages? You bet. But getting them all working together cuts down on the noise of those different languages. One reason SIOP is such a critical management tool is that key players from many departments are working from the same plan, and able to compare actual results to plan, evaluate their performance, and prepare updated plans going forward. SIOP: The universal translator, or C-3PO, for your business.
It is a powerful tool to help you wrangle your inventory management, achieve the optimal balance between not enough and too much, and settle back into Lean (or just in time) manufacturing principles that can eliminate waste and help ramp up your efficiency.
If you’d like to learn more about SIOP, download our (free) eBook, “Sales, Inventory & Operations Planning: It’s About Time.”