The Opinion Page
News and comments about the issues facing today's SCM and Inventory Management professionals.
No matter what technique, or combination of techniques are used by the firm to forecast demand, it is of critical importance that future marketing plans be incorporated into the forecast.
Most retailers, many wholesalers, and some manufactures promote certain sku's and in doing so spin demand away from past trends and absolute values. History is the planner's best friend. When the value of historical data is reduced, the planner is faced with a difficult challenge.
It is necessary that a formal process, such as Sales and Operations Planning (S&OP) be established to allow marketeers to articulate their expectations of demand. This demand forecast becomes a shared responsibility, as the planner will execute procurement decisions based on these promotional sales forecasts.
Further, it is necessary that the forecasts be "rolled up" and a sanity check versus budget be performed.
It can be done!
Planners hate uncertainty.
In the Operations Management Body of Knowledge, there is much discussion about lead times, time fences, and the length of time goods spend intransit. Of course, such discussions are valid, as it is in the best interest of the firm to reduce inbound lead times from suppliers within expense constraints. (Two days inbound lead time is always better than two months, but we must not blow our brains out on air freight bills in order to achieve that goal!) Short lead times allow the firm to be more flexible, respond more quickly to changes in downstream market demands, and to reduce safety stock.
Of equal importance to the absolute lead time, however, is the degree of variability in inbound lead times. If I, as a planner, am faced with a European supplier who ships to Canada by sea, and the total order turnaround time is consistently four weeks door-to-door, I am a pretty happy camper. I can plan purchases with confidence that goods will be delivered in full, when I expect them to arrive. And I can keep safety stock at a minimum.
But, if the actual lead time is 4 weeks one month, then 6 weeks the next, then 8 weeks, then 7 weeks, I cannot plan appropriately. The result, in order to protect customer service levels, is inflated safety stock.
There are things to watch for as indicators of this problem. The objective is OTIF ("On Time In Full"). There are ways to correct it.
It can be done!
One aspect of inventory investment that is frequently, and surprizingly overlooked is the cost of display inventory. This is particularly relevant to retailers. Stores need to achieve a nice "full bin look" to make the shopping experience pleasant to customers. Have you ever walked in to a retail store and wondered whether these guys are going out of business because their shelves are bare? My first reaction is to turn around and shop elsewhere.
I once worked for a retailer who fell into the trap of ignoring display costs. Our inventory turnover target was, on average, 6. The company could never seem to achieve higher than 2 or 3 turns per year. This was a company who was, wisely, committed to high levels of customer service and presenting attractive stores. Once I conducted a thorough analysis of what it would cost to fill all of the display shelves in every store, and achieve 100% in-stock, we concluded that we were doomed to 1 turn per year.
Turning inventory once per year is, of course, is unacceptable. There are creative ways to achieve a "full bin look", without making the maximum inventory investment. By employing some appropriate space management principles, Pareto Analysis, creative visual merchandising, and looking upstream in the supply chain to exploit efficiencies, we were able to achieve, and exceed our target of 6 turns.
It can be done!
John Skelton is the Principal Consultant and founder of Strategic Inventory Management.