Comments on: Is Inventory Still Evil?

By: Cam Beck

Cam Beck — Wed, 28 Jan 2009 19:57:52 +0000

“Might it have been prudent to have a risk mitigation plan for such a critical component? Lean is good and arguably preferred. That said, in a volatile economy where events often snowball and cascade into much larger challenges–isn’t it possible to over optimize?”
What I’m hearing is that risk mitigation is important in any circumstance; just make sure you identify the mission-critical risks. Is that fair?

By: Paul Barsch

Paul Barsch — Wed, 28 Jan 2009 18:55:29 +0000

Cam, you make a great point regarding shelf life and obsolescence. These are definite considerations when it comes to forecasting and inventory planning.
That said, there are some instances when such factors don’t come into play. I’ll give an example.
In 2007 a major Japanese automobile manufacturer was forced to shut down many of its plants and delay the delivery of 55,000 automobiles due to an earthquake disrupting one of its key suppliers. In fact, the closure of this one supplier of $1.50 piston rings, “forced nearly 70% of Japan’s auto production to temporarily shut down.”
Might it have been prudent to have a risk mitigation plan for such a critical component? Lean is good and arguably preferred. That said, in a volatile economy where events often snowball and cascade into much larger challenges–isn’t it possible to over optimize?

By: Cam Beck

Cam Beck — Wed, 28 Jan 2009 18:18:18 +0000

Can we have it both ways?
I would aspire for lean production processes. This is especially important in the case of electronics devices, where technology changes so rapidly that excess inventory must be discounted to be liquidated, if liquidation is even possible.
Excess inventory can be quite an albatross, if alternative uses for the inventory cannot be found.
This isn’t to say that all companies must start here (though it would be nice) — especially with new technologies. Process improvement is a lot of work. However, if companies don’t start here, they should at least have a plan in place for continuous, incremental improvement.

By: Paul Barsch

Paul Barsch — Tue, 27 Jan 2009 14:11:08 +0000

Randy, you make a great point about supply chain visibility, which of course is very data dependent. Consequently, for companies to become more “responsive”, they need to gain a core competency in enterprise data management to effectively track data throughout the entire supply chain. This then, helps them gain the visibility you rightly point out as critical to SCM success.
Sadly, most marketers (and the companies they work for) don’t have any idea what’s in their supply chain at any point in time. This makes it pretty difficult to effectively meet customer demand and keep appropriate inventory levels.

By: Randy Littleson

Randy Littleson — Tue, 27 Jan 2009 00:28:19 +0000

Great discussion. I generally come down on the “inventory is evil” side of the discussion. I strongly agree that SCM has a major impact on customer satisfaction – thus marketing. And, inventory availability is a tool to achieve this goal.
However, today’s supply chains are more globally distributed, are more complex “networks” and have to deal with increasing volatility of demand, supply and product (via shortening product lifecycles) and, thus, have lots of places where inventory collects and quickly becomes excess and obsolete.
In such an environment, inventory can become a huge liability. Too much inventory “handcuffs” the organization and prevents it from having the agility the marketplace demands today, which undermines marketing efforts to gain market share and grow top line performance.
I think the best route is for organizations to build responsiveness into their DNA – it must be a core competency of any supply chain organization. SCM professionals must be armed with the right level of supply chain visibility and the tools for proper risk tradeoff and response to deal with the inevitable unplanned events that are the hallmark of today’s supply chains. Unfortunately, most organizations don’t do this, so they are left to debate whether or not they are going to choose between low inventory levels or high customer satisfaction. Tough choice.

By: Paul Barsch

Paul Barsch — Mon, 26 Jan 2009 17:21:10 +0000

Eric, dairy, diary. I’ve had Homer Simpson moments in the past, but yikes! I’ll get Ann to fix this, thanks for pointing it out!

By: Paul Barsch

Paul Barsch — Mon, 26 Jan 2009 17:18:37 +0000

Kevin, as you rightly point out, the customer impact of supply chain management is huge! When I guest lecture at universities, I often bring up the topic of SCM and marketing. Invariably, I’ll see senior marketing students rolling their eyes, or questioning what SCM has to do with marketing.
Accurate forecasting and operations management for products and services has everything to do with marketing and our ability to get the right product, in the right place, at the right time, at the right price, to the right customer.
Thanks for commenting on this post!

By: Eric Welch

Eric Welch — Mon, 26 Jan 2009 17:10:55 +0000

Great post, Paul! One little thing, though. In the 5th paragraph, quoting Tim Cook, it says “diary” instead of “dairy”. I don’t think a diary can go beyond its fresh date.

By: Kevin Horne

Kevin Horne — Mon, 26 Jan 2009 16:33:59 +0000

Apologies if I skipped this detail in your post, but I didnt see much mention on the customer impact. Yes inventory is a financial burden, but the loss of sales due to outages runs significant risk to a business in my humble opinion, especially when consumer dollars are scarce.
Back when i was still blogging, last Feb i went thru every rack in a menswear shop in vain – the most-common size of black dress pants was out of stock. The manager told me no new delivery could be scheduled – the store was replenished on a two-week frequency no ifs ands or buts. And no purchase from me.
And, just this past holiday season, a local Gap was completely sold out of its best looking striped sweaters (even tho the mannequins were still outfitted with them). The throngs of people picking thru the remains (myself included) leads me to believe Gap forfeited a lot of revenue.
But the guys in the backroom in Finance won’t see that. All they will see is that there is no “excess” of striped sweaters. Well done, guys. Nice financial management.
Poor customer management in my book, however.

By: Paul Barsch

Paul Barsch — Mon, 26 Jan 2009 15:32:52 +0000

Claire, thank you for the terrific insights. Both you and Jonathan make great points, and they are well aligned with Dr. Schuster in regards to the need for information management of supplier and customer feedback.
To be sure, there are many supply chains that have slack because they are not optimized to begin with. For these supply chains there is lots of room for improvement to remove “excess” as you aptly point out.
There is also the flip side, of over optimized supply chains with minimal to no slack. For these supply chains, everything must run perfectly to meet market demand–a dangerous route in an extremely volatile world.

By: Claire Ratushny

Claire Ratushny — Mon, 26 Jan 2009 14:40:16 +0000

Paul,
Excellent post. Inventory is something I don’t have to think about these days and thank goodness for that. For those who do: constant monitoring of the business and feedback are more essential than ever. Monthly forecasting reports are not sufficient. Companies selling basic commodity items, may find it necessary to build in more inventory than the norm. . .but that depends on their lines of credit, doesn’t it? And it depends on the nature of the products, as well. Can’t lay in too much inventory on short-coded products, for example.
For companies in the business of selling non-essential goods, the forecasting task is daunting. The economy is contracting and will continue to. Money is tight and discretionary dollars are being carefully spent. “Excess” is now a dirty word. Added to that, well-heeled consumers are purchasing fewer luxury brands, as well. As sales slow down, factories on the manufacturing end do too. Or they completely shut down. We see that happening in China. Fewer suppliers are able to fill orders and they will want tighter lines of credit. Jonathan Betts is right; back-up plans have to be put in place as other suppliers are found. All of this, as you point out, has repercussions up and down the supply chain and all around the world. There are no easy answers.
We’re living in an extraordinary period and historical data is of limited use. Regular communication with suppliers to gain information about marketplace trends should be the norm–in good times and especially in bad. Staying on top of customer demand and feedback day in and day out is more critical than ever. It’s important to provide service to the customer now more than ever. The cream is going to rise to the top here: every company and every company’s competitors are in the same boat with supply chain and inventory issues. Which ones will use this as an opportunity? Which ones will work to improve customer service and responsiveness?

By: Paul Barsch

Paul Barsch — Mon, 26 Jan 2009 14:29:56 +0000

Steven, I appreciate your comment. I also see from your blog that you just finished reading the Black Swan. I must admit, Mr. Taleb’s writings were the inspiration for this post as I started to link the need for companies to effectively counter those “rare and unexpected deviations” with some slack in their processes–in this instance supply chain management.
In a world in which people, companies, countries, economies are more highly correlated and intertwined, sometimes the old rules need rethinking. Can the “past” still effectively model the future? And if not, what then?

By: Paul Barsch

Paul Barsch — Mon, 26 Jan 2009 14:11:08 +0000

Jonathan, thank you for commenting. I believe your approach is right on, in that suppliers should be constantly monitored regarding their importance to your company’s supply chain and their financial health. That said, this involves and assumes a degree of trust and transparency in the relationship, especially for suppliers that are private and don’t report their financial results. Net it out however, I like your idea of having a Plan B and possibly Plan C for suppliers deemed to important to your company’s success…

By: Steven Woods

Steven Woods — Mon, 26 Jan 2009 13:15:52 +0000

Paul,
I think you captured the essence of the challenge in that one tiny paragraph in the middle that says “historical data can no longer be trusted to accurately model and predict the future”. If it ever could. Historical data models the future only as much as the future is a replica of the past. Although some trends may repeat, there are always system shocks (larger as we get more interconnected) that are unpredictable based on history, by definition.
Thanks for a thoughtful post on a topic I don’t end up thinking about much lately (inventory in a SaaS software business is not as much of a challenge…)

By: Jonathan Betts

Jonathan Betts — Mon, 26 Jan 2009 12:56:49 +0000

I believe the B-school fundamentals are right. Inventory is a cost to the business; but it’s an insurance against not delivering to your customers’ expectations. The right level of stock also ensures efficiency in the supply chain. One answer to managing supplier risk is effective analysis of the supply base. Marketers would approach this through segmentation: suppliers should be assessed as to how critical they are to the supply chain and then as to their financial standing. Clearly, those that are important but unstable need to be monitored and a contingency plan put in place. This might involve additional stock cover, finding alternative supply sources and the like.