Companies are
always asking me what the best inventory management and supply chain strategy
is and I have always replied with the same answer; it doesn’t exist. Now, most
immediately assume that my answer implies that there is no perfect way to
manage inventory – and there isn’t. However, that’s not what I'm implying. What I am stating is that no single strategy works all the time and in all business environments. Ultimately, success isn’t about choosing the “best” inventory strategy, but about choosing a strategy that works for your
enterprise and its customers.
Companies are constantly trying to improve their supply chain, constantly trying to lower costs and always looking for shortcuts. The truth is, there are no shortcuts. There are no "quick fixes," and there is no single supply strategy that works for all companies in all markets.
Ignore Outside Influences
Far too many of today’s enterprises are running their inventory based on the influence of outsiders; they adopt an approach based on what they have heard, read or seen works for other companies in other industries. In essence, they adopt a supply strategy without first asking if it meets their own needs. Instead, companies must simplify their selection process. To help, here are four essential criteria you should use when making that all-important choice, followed by a breakdown of different approaches to inventory management.
Your Market: Focus on identifying whether your company services an industry with linear and constant demand, or one that is defined by cyclical and seasonal demand. For instance, are you shipping a consistent volume of product day-to-day, week-to-week and month-to-month, or are you faced with uneven volumes, ones where customer orders fluctuate from one month to the next and from one quarter to the next? Understanding your market and its business cycles is the first and most important step.
Linear and Constant Demand for Products
OR
Cyclical and Seasonal Demand for Products
Customer Needs: What do your customers expect in terms of service? Focus on whether your company services a customer base that needs immediate delivery of product, or one where customers understand that a lead time often accompanies their purchase order. Understand the influence of competitors and whether maintaining safety stock is essential to closing sales.
Business Model: Focus on defining your business model relative to what your supply chain needs to be successful. For instance, are you an enterprise that manufactures product from a fixed bill of materials, or are you a manufacturer that uses a semi-fixed bill of materials and allows customers to pick customizable options? Are you a value-added reseller (VAR), or distributor, one that must maintain a minimum and maximum inventory count of product in order to close sales and increase market share? Answering these questions allows you to choose a supply strategy that is in sync with your business model.
Product Portfolio: Don’t just apply one approach for all products. Instead, analyze your supply chain requirements for each and every one of your product lines. One of the biggest mistakes companies make is to use the same inventory approach across their entire product portfolio. While your company may operate in a cyclical and seasonal demand market, it may still have a small number of product lines that exhibit linear and constant demand curves. Go a layer down and choose a strategy that best suits your individual product offering.
Understanding Your Supply Chain Options
Your options come down to running three primary inventory approaches; Just in Time (JIT), Min-Max, or a version of Dell’s Push-Pull. Each has its pros and cons.
Just In Time: The benefits of JIT include a low cost of capital, low financing costs, high inventory turnover rates and the ability to reduce the costs of inventory damage, obsolescence and theft. It is the perfect strategy for an imperfect business world. Unfortunately, it is the one supply doctrine that far too many companies try to run when they don’t have the requirements to make it work.
JIT works under the following conditions:
- Your company operates in a linear and constant demand market.
- Your manufacture or assemble products from a fixed bill of materials.
- You are your vendors’ most important customer and you use this purchasing power and economies of scale to dictate terms of service with your vendor base.
- You require extremely large volumes of raw materials and parts, and have contractual agreements on supply for all material requirements.
- The majority of your vendor base is in close proximity to your location, thereby allowing you to reduce your raw material lead times.
- You have a small product portfolio, but manufacture huge volumes across that portfolio. (Think automotive manufacturers – 5 car models, but millions of cars sold)
To read more, please refer to: What Are the Costs to Hold Inventory in "Just In Time" (JIT)?
Min-Max: There are predominantly two costs of inventory; high carrying costs and lost sales. The first defines the costs of holding product without enough sales, while the second defines the costs of losing sales because of not having enough product. One cost focuses on the company’s costs of financing inventory, the costs of obsolescence and costs of damage. The other defines the costs of lost sales and the eventual lost gross profit, lost customers and reduced market share that comes from not having sufficient product on the shelf. Yes, Min-Max includes high carrying costs. However, maintaining a safety stock allows your company to avoid lost sales due to inventory stock outs.
Min-Max is best run under the following conditions:
- Your company operates in a cyclical and seasonal demand market.
- Your customers’ order patterns are infrequent; some months you have too much demand and other months you don’t have enough.
- You have a large product portfolio and fluctuating volumes sold across that portfolio.
- Your vendors are in multiple locations.
- Your customers can't wait on long lead times.
- You need to maintain minimum inventory counts to close opportunistic sales.
- You offer "me-too" product lines.
To read more, please refer to: What are the Costs of Holding Inventory in Min-Max Supply Chains?
Dell Push-Pull: If your company manufactures or assembles custom-made finished goods, and works from a semi-fixed bill of materials, then you may benefit from running a modified version of Dell's push-pull. You can combine portions of JIT and Min-Max; "push" products to market by pre-manufacturing the majority of your product offering, and leave the remaining options to be “pulled” by your customer’s unique requirements.
Push-Pull works under the following conditions:
- You operate in a linear and constant demand market.
- You offer custom-made finished goods.
- You manufacture from a semi-fixed bill of materials.
- You need to reduce your product to market lead times in order to increase sales and grow market share.
- Your vendors are in close proximity to your location.
- You have a large product portfolio that is easily customized for different customer segments.
To read more, please refer to: What are the Costs of Holding Inventory in Dell’s Push Pull?
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