Inventory Planning - An Art and a Science
In a business that sells physical products, the most important thing a supply chain team can do is make sure the company has inventory to sell. This is a simple concept that is not easy. In order to have that inventory, you must have a solid plan, which can be both an art and a science.
The Science…
When I started my most recent job, I knew I wanted to begin by building a strong inventory planning model. In order to build this model, I needed to first understand the facts and assumptions about the supply and demand of our products. So I asked some questions…
To get a sense of the demand, I asked:
How many finished good items do we sell? (FACT)
How many of each item have we sold? Which items were the top sellers? (FACT)
Which are our newest items? (FACT)
What is our future sales forecast for each item? (ASSUMPTION)
Who are our biggest customers? (FACT)
Are there any new major customers coming on soon? (FACT & ASSUMPTION)
How volatile is our demand? (FACT)
Then I asked questions about our supply:
How many raw materials do we manage? (FACT)
What is the bill of materials for all items? (FACT)
What are the scrap rates? (FACT & ASSUMPTION)
What are the costs of our items? (FACT)
What are the lead times for all our items? (ASSUMPTION)
Who are our suppliers? Who is good to work with and who is tricky to work with? (FACT & ASSUMPTIONS)
How much inventory can we hold? (ASSUMPTION)
What is the shelf life of the product (if any)? (FACT)
This is a great starting point. Answers to these questions, and understanding the facts vs. assumptions will help you build out inventory replenishment models (more to come…). You can’t argue with math… unless your assumptions are incorrect. And that’s where the art of planning comes in…
The Art…
An old boss of mine once told me there is only one good thing to do with inventory: Sell it. As an inventory planner, you will never be 100% perfect. You can think you have a perfect plan based on your numbers in a spreadsheet, but I guarantee that things will not go exactly to plan. See the assumptions above? Those are almost always going to be different than what you planned for. In my experience the things that are most likely to mess with your plan in major ways are sales volatility (in either direction), production lead times and delays, and higher scrap rates than expected. There’s a common saying in planning, “Forecasts are always wrong” … and that goes for any type of forecast. So what do you do when you know you’re going to be wrong from the start? This is the art of planning. By constantly monitoring your plan, updating all of the inputs, and managing your supply chain partners closely, you will gain a gut sense of how things are going. You should be monitoring sales channels closely to know what you are actually selling. You should be closely monitoring production of all materials to make sure you are getting what you need. You’ll start to get a feel for your risks. Once you identify the risks, you must come up with contingency plans to mitigate those risks. Here are a couple of examples of contingency planning:
Issue: You sell 50% of what you thought you would. You are now going to be stuck with extra inventory.
Contingency Plan: Usually if you have a major drop in sales, if you don’t keep producing, eventually you’ll sell through the product (pending extremely short shelf life products). In this scenario, you should be watching sales closely already, and always be ready to push out the next production run if your sales fall off so you aren’t even more over stocked. Figure out what the cutoff date is for when you’ll still be able to push out production. Communicate to your supplier that you are selling below forecast and you might need to push things out. Track production and sales, and be ready to pull the trigger of pushing things out if you need to.
Issue: Your raw material supplier continues to deliver late. For whatever reason, they confirm a delivery date, but always go quiet right around when it is due and deliver a week or so late.
Contingency Plan: Plan for this by adding a buffer for when the material will arrive (i.e. plan for it arriving 2 weeks early). You can also order more to be heavier stocked on that material and account for delays. Or you can find an alternate supplier who can be ready to provide the same material if needed. More to come on alt suppliers soon…
A word to the wise: If you had to choose, it’s almost always better to have more product than less product. If you don’t have the product to sell, the business cannot make money. But if you find yourself in an overstock situation, your sales team can go out there and work harder to sell the product. Over time, if you make a consistent effort to stay close to the details of your supply chain, you will get better and better at the art and the science of planning, and your company’s inventory will be an extension of yourself. A lean mean machine.
