Using the Stage-Gate process to choose an inventory management & supply chain strategy is an excellent way to isolate costs and reduce waste. However, how would one use the Stage-Gate process and what would the first step be? Would it include focusing on what you’ve read works for other companies in other industries? Would it include reviewing inventory best practices and success stories from larger competitors? Or, should you focus on matching your inventory strategies to your business model, your market and your customers' order frequency? Well, as enticing as it may be to emulate another company’s success, going down this road won’t allow your company to pick the inventory strategy best suited to your situation. No, in this case, it's never that easy!
First, start by defining your business model within the context of the market you operate in and the customers you sell to. Second, define your company’s inventory holding costs and track them over a given period – typically a month, quarter or year. Third, isolate your inventory’s biggest cost drivers from this aforementioned list. Finally, choose an inventory system that matches your business model, reduces the effects of your inventory’s biggest cost drivers and matches your customer’s order frequency.
Now, I’ve just ran through the four steps within a Stage-Gate process I’ve used with a large number of my customers and while each step sounds relatively easy, they aren’t! Each requires an in-depth analysis and review. Each is predicated on asking honest questions and using factual assertions to arrive at reasonable conclusions. Each needs quantitative data to support decisions. We’ll review each one of these criteria and provide a corresponding link to an article on that gives further insight into completing the given task.
1. Define Business Model, Market & Customer Order Frequency
Focus on your customers’ order patterns, your industry and market niche, as well as your market’s business cycles. For instance, does your company service consistent, constant and linear customer demand patterns? Or, do you service a cyclical & seasonal industry marked by customers with infrequent order patterns? Does your company work in an industry & market in growth mode or one in contraction? Clearing this first hurdle requires an honest assessment of your company’s abilities and it current market position. You could use a SWOT analysis, but it’s probably best to focus on defining your business model within your strategic planning process.
The above video explains why Min-Max is an ideal supply chain strategy in a cyclical market. You can learn about it in addition to JIT and Dell's Push-Pull by going to: Small Business Inventory Management: Match Inventory to Business Model
2. Summarize Inventory Holding Costs
Understand that your company’s inventory holding costs include far more than just the price paid for parts and raw materials. Included in these costs is the company’s daily cost of money, the costs of inventory obsolescence, damage & ruined inventory, the per-unit freight costs on incoming shipments of raw materials and outgoing shipments of finished goods, as well as several miscellaneous costs pertaining to electricity, storage & warehousing etc. Inventory is never just the price of consumables. It’s all these things and more and each is the reason inventory is more expensive the longer it’s held.
The above video is from the post: Sample Excel Sheet Calculating Inventory Holding Costs. The post includes a sample sheet that allows you to define your company's specific monthly carrying charges.
3. Identify Biggest Inventory Cost Drivers
Not mentioned above are the high inventory costs pertaining to lost sales & low customer demand. Most companies are shocked to hear that losing a sale is a direct cost of inventory, but it is. In fact, in some cases, it’s just as bad as holding too much inventory without any sales. Neither end of the spectrum is acceptable, but a large number of companies struggle with the constant concern of carrying too much or too little inventory. Pay close attention to obscure cost drivers like lost sales cost of inventory, which typically points to running the wrong inventory strategy. Watch for high holding costs on slow moving product lines. Identify your company’s biggest cost drivers and isolate their frequency. For further insight, please read: Supply Chain Management: When Inventory Doesn’t Match Customer Demand
4. Choose Inventory & Supply Chain Strategy
The final stage is the easiest portion of the Stage-Gate process. For instance, let’s assume your company services customers with cyclical & seasonal demand patterns, is a leader in a market with fluctuating growth cycles and your biggest holding costs are lost sales due to low inventory counts. Up until now you’ve been running JIT, but under these conditions, you should be running Min/Max. JIT is suited to high customer demand, linear growth patterns, a small & well-established product offering and a company who is their vendors’ highest priority. Do what comes naturally. No company is able to run Just in Time with vendors overseas or in extreme locations. It takes a lot for just in time supply chains to work and those companies who think they run it successfully, often have no clue of what their true costs are.
The above video explains how to choose between JIT, Min-Max and a version of Dell's Push-Pull. It is from the post: Choose the Right Supply Chain Strategy: Make it an Easy Choice
The Stage-Gate process is merely a tool. You must devote yourself to choosing an inventory system that best suits your needs. None of this is easy. I’ve simply provided an overview of how to go about choosing an inventory management & supply chain approach that meets your business model, your customers’ needs and best services your company’s unique market position.
Don’t try to emulate the success of another company without first making sure the strategy meets your company's unique criteria. The biggest mistake my customers make is to run an inventory & supply chain strategy that doesn’t meet these aforementioned criteria. In most cases, they run a system they’ve read works for others but can't possibly work for them. In the end, they do it simply because they have made too many guesses, and not enough factual assertions.
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