Like most consultants, we ask a lot of questions when we begin an engagement. At the start of an inventory management project, our first question to C-level management is “who owns inventory in your company?” We are usually greeted with a blank stare, and sometimes we hear “no one person or function owns inventory” or “it’s a shared effort.” When we ask other functional leaders the same question, we hear responses such as “supply chain owns inventory” or “Operations owns inventory” or “Sales owns inventory” and sometimes “Finance owns inventory.” Although inventory is a major cost and maintaining proper levels is critical to meeting customer expectations, it is all too common that no one is assigned to efficiently manage it. In many cases, everyone feels responsible for inventory, but no one is accountable. Establishing accountability for inventory is the critical first step to improve inventory management.
At FortéOne, we believe that process and asset ownership, coupled with defined and documented roles and responsibilities, are critical first steps to defining how inventory will be managed within the company. We work with senior C-level executives to determine ownership and appropriate staffing to ensure inventory is properly managed. The decision of “who owns inventory” is highly dependent on company size, supply chain complexity, and current and proposed organizational structure. Once we have established the inventory owners and players, we work with Sales and Inventory Planning to determine inventory operational policies. Metrics such as Days of Supply (DOS) by SKU, Economic Order Quantity (EOQ), cycle counting scope and frequency, and physical inventory frequency are all examples of these operational metrics that allow the inventory owners and company staff to efficiently manage inventory. The objectives are (i) having the right inventory, (ii) available when needed, while (iii) minimizing the required working and warehouse space.
Inventory count accuracy is critical to managing inventory. It is not possible to effectively plan for the right amount of inventory, or to balance supply and demand if the inventory count is inaccurate. It is also not possible to plan and execute a manufacturing schedule or to deliver customers on-time and in full (OTIF) without accurate inventory.
At FortéOne, we work with our clients to create a dynamic, ongoing inventory management program that includes inventory placement (and if needed, warehouse management), physical stock profiling, cycle count management, and inventory reconciliation. Depending on the technology capabilities present within the company, our consultants work with the inventory management personnel to combine people, process, and technology to manage inventory more accurately. In some cases, clients will not have the technology capabilities to support inventory management. Our experienced consultants can use software tools that we have developed on an interim basis until an enterprise inventory solution (e.g., ERP) can be implemented. Ownership, metrics, and consistent discipline—irrespective of the technology tool—are the critical components necessary to manage inventory accurately.
We have learned over the past 20 years that few middle market companies have an obsolescence management program that establishes parameter for removing SKUs from inventory. What we find is that most middle market companies have an inventory obsolescence problem with excessive amounts of working capital used to support inventory that is unsaleable because it is out of date, obsolete, or no longer sold in quantities that justify maintaining that SKU. Obsolete inventory is the most expensive inventory because it consumes working capital, warehouse space and administrative time—while producing no value. And in many cases, the financial expense grows with charges for disposing of the inventory.
For middle market companies with an inventory obsolescence problem, there are proven processes to solve the issue and keep it from reoccurring. The first step is understanding the cause. Factors contributing to inventory obsolescence include new product development processes, lack of demand and supply balancing, and inaccurate inventory counts. Understanding and eliminating these will reduce obsolescence, but further steps are needed to prevent reoccurrence.
Like paying taxes, obsolete inventory is always present in an asset-based company. In one client company with 2000+ SKUs we discovered that 40% of the SKUs were no longer being sold in quantity, and 60% of the SKUs contributed less than 2% of the revenue but accounted for almost one-third of the inventory on hand. At FortéOne, we work with your inventory management personnel to create an obsolescence management process that reduces unsaleable inventory by working with new product development and sales to establish two processes: one for sunsetting low selling SKUs and another for moving inventory prior to it becoming unsaleable. Best practice companies hold slow-moving inventory sessions with Sales and Operations on a weekly basis to identify inventory that needs to be sold and shipped as soon as possible. Many times, price reductions and sales incentives are provided to the salesforce to motivate sales and customers to buy slow-moving product before it is no longer saleable. Or your company may sell SKUs in bulk to discount retailers. Whatever program is put in place, it is critical to manage obsolete inventory on a consistent basis and not just prior to doing your annual physical inventory. And the plan should be reviewed semi-annually as well.
Obsolete inventory refers to inventory that is past its product life or expired—an expected problem in food manufacturing but more frequent than you might think in other industries. Cosmetics, pharmaceuticals, and even things like rubber have a shelf life to consider. If your inventory is obsolete, eventually you will need to write it off—with accompanying financial losses.
Although the process, policies, and technology around inventory management seem rather straight forward, the change management associated with proactive inventory management is a significant cultural change for many middle market companies. Working with an experienced inventory and supply chain management consultant allows middle market companies to optimize their inventory availability and reduce inventory costs—with better near- and long-term results.
Contributor: Philip Franz