Inventory: The Key To a CEO’s Heart

Picture source: www.compupawn.com

BY JAMES A. TOMPKINS

 INDUSTRIAL ENGINEER – October 2013 Volume 45 Number 10

Sometimes in a company you might get different responses for something you have achieved for the company. The different responses could come from your colleagues, boss and even the CEO. For examples the different responses:

1. Your boss emails you saying you doing a great job because you reduce supply chain operating costs by 10 percent.
2. Your CEO emails you saying you doing a great job because your innovative supply chain work creates 10 percent increase in revenue.
3. You get an invitation to lunch with CEO, CFO and chief supply chain officer because your wok in the supply chain reduces finished goods inventory by 10 percent.

The different responses above are caused by a reason that for reducing operating costs usually only affects the bottom line. Today growth is more important than improving profitability. Increasing revenue gets a little bit better appreciation because it is very important to the “folk upstairs.” Even more important is free cash flow, which reducing inventory by 10 percent directly impacts to the balance sheet and releases cash. There is no music sweeter to an executive’s ears than available free cash flow.

For those who want to excel in inventory reduction, there are seven characteristics of leading performers in inventory reduction, going beyond best practices and achieving world-class inventory management. The seven characteristics are:

1. Finished goods inventory management is performed at the corporate level. However, division wide management is often found in very large organizations. Rarely is organizational responsibility defined geographically.
2. The inventory planning department usually is responsible for setting finished goods inventory and targets and is most likely to be changed for or own inventory. At times, various supply chain functions share these responsibilities, including procurement, finance, manufacturing, and forecasting.
3. Inventory balances, inventory turns and days of supply are the top three measurements used for finished goods inventory.
4. Overall, companies indicated reductions in finished goods inventory dollars as a percentage of sales in 2012. Sales growth, better tools and technologies for managing inventories and improved forecasting were primary drivers for the reductions.
5. Customer satisfaction levels as measured by fill rates also have increased, thus cutting finished goods inventory does not harm customers.
6. Improvements in processes are the greatest are for change, followed by policy changes.
7. Sales and operations planning (S&OP) is an accepted best practice for manufacturing firms. Retail firms have been reluctant to embrace S&OP but are beginning to jump on bandwagon under the banner of merchandising, inventory and operations execution (MIOE).

As we move from characteristics of leading performers to world-class performance in inventory management, there is a lot of progression happening. To move to the peak of inventory management excellence, organizations need to deploy a demand-driven continuous planning execution process. The journey to inventory excellence is worth the effort. Just remember that free cash flow is the key to the CEO’s heart.

The full version of the article is available in IIE Laboratory. It is also readable online for IIE member through accessing the iienet.org website. Contact Maya (President of IIE BINUS University Chapter) at mayarininta@yahoo.com for more information on the IIE membership.