Inventory:  The Key to a CEO’s heart

Picture source: h2h.jobs

BY JAMES A. TOMPKINS

INDUSTRIAL ENGINEER – VOLUME 45 NUMBER 10

So, you reduce supply chain operating cost by 10 percent. Your boss emails you that you are doing a great job. Then your innovative supply chain work creates a 10 percent increase in revenue. The CEO emails to say you are doing a great job. Next, your work in the supply chain reduces finished goods inventory by 10 percent. You go to lunch with the CEO, CFO and chief supply chain officer.

Reducing operating costs affects the bottom line. Today, however, growth is more important that improving profitability. While increasing revenue may not have the same impact as reducing costs, it is very important to the “folks upstairs.” Even more important is free cash flow. Reducing inventory by 10 percent directly impacts the balance sheet and releases cash.

You can become a hero by focusing attention on the 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.
2. The inventory planning department usually is responsible for setting finished goods inventory targets and is most like to be charged for or own inventory.
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.
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 area for change, followed by policy changes.
7. Sales and operations planning (S&OP) is an accepted best practice for manufacturing firms.

As we move from characteristics of leading performers to world-class performance in inventory management, there is a lot of progression happening. Organizations should move their S&OP and MIOE processes beyond planning for the “link” and begin planning for the “chain”. They also need to enhance their planning processes beyond SIOP and MIOE to integrated business planning by integrating their multiyear strategic plan, annual operating plan, monthly SIOP/MIOE and daily replenishment plan.

To move to the peak of inventory management excellence, organizations need to deploy a demand-driven continuous planning execution process. A demand-driven value network lets enterprises pull product from the consumer all the way through the chain and synchronize supply to demand.

The journey to inventory excellence is worth the effort. Just remember that free cash flow is the key to the CEO’s heart.