The multidisciplinary nature of the search for inventory balance

In recent months, I have interacted with executives from large industries through projects and courses and the pains have been very similar: extremely high stock levels to the point of lacking storage capacity and, at the same time, high stock-out rates damaging sales. This made me reflect on some causes for this phenomenon and my biggest conclusion is that it is not possible to blame just one area of ​​the company.

Inventory imbalance means that stocks are allocated to the wrong products. While products with low demand have excess stock, taking up space in warehouses and consuming working capital, products with high demand have undersized stocks, generating lost sales and customer dissatisfaction. Perhaps the excess stock of some products is even causing a shortage of others, as the excess limits space and capital to invest in stocking the correct product. But why are stocks allocated to the wrong products? I have 4 hypotheses:

1. Uncalibrated parameters

The parameters of safety stock, minimum stock, target stock, order point, order lot are defined according to expected supply and production lead times and deviations, demand forecast and its accuracy, inventory accuracy, duration of supply cycles. decision, cost of working capital and strategic importance of each product. Although these variables are fundamental inputs for parameterizing inventory decisions, they are completely outside the control of the inventory planner. The purchasing, storage, transportation, planning, commercial, financial and management areas influence these variables, directly impacting inventory decision parameters. If the targets and records of these variables do not reflect reality, stock parameters are automatically out of calibration, generating an excess of slow-moving products and a lack of items in high demand. 

2. Unbalanced portfolios

The variety of products has been growing for some time, with many launches of brands, colors, flavors, features, packaging sizes and few product discontinuations, generating a general increase in portfolios. Demand is limited and is diluted among different products, generating successful items and others with low demand, known as C or long-tail items. Production logic, in turn, makes use of scale to dilute its fixed and set-up costs, defining minimum production batches, which result in high stock coverage of items C. The marketing and production areas are protagonists in this effect, being responsible for portfolio imbalance and excess inventory for low demand items.

3. Tight delivery times for customers

Service demands are increasing and customers are requesting increasingly shorter delivery times. To be able to meet these deadlines, the industry needs to review its distribution network, installing advanced DCs and increasing the number of stock points. To maintain the level of availability in a network with more stock points, it is necessary to increase the level of general safety stock. This is a strategic decision taken by management which, in order to offer shorter delivery times, increases the number of supply points and ends up generating excesses and shortages of stock of the same product in different locations. 

4. Whiplash effect 

The bullwhip effect represents the distortion of demand perception throughout the supply chain, caused by the difference between sales to customers and orders to suppliers at each link. The minimum batches established in the chain, supply deadlines and supply and demand uncertainties cause peaks and valleys in the movement of products in the chain, generating excesses and shortages of stocks that are not synchronized between links and products. The main responsible for this effect are the transactional relationships between customers and suppliers. The purchasing and commercial areas, with their traditional negotiation relationships between links, create isolation and decisions focused on local benefits, generating a bullwhip effect in the chain. 

As we can see, even if the inventory manager keeps his data updated and uses the best inventory methods and policies, he has little influence on the final inventory result if he does not influence other areas of his company or even other companies in his supply chain. Inventories make up decision trade-offs in different areas such as marketing, commercial, purchasing, finance, customer service, planning, production, transportation, storage and management.

The solutions to these 4 possible causes of stock imbalances are multidisciplinary in nature. It is necessary to increase the frequency of reviewing parameters, updating master data and records. IT needs to be involved in data integration and visibility. Different areas need robust and well-executed processes to keep data accurate and updated. It is also important to clean up the portfolio, maintaining profitable or strategic products and discontinuing those whose minimum batch greatly exceeds demand. Another initiative is to review the service policy, paying attention to customer profitability (reducing deadlines requires increasing stock levels, consequently increasing costs, which need to be reflected in the price so that the margin is not harmed). Finally, it is necessary to invest in collaboration and visibility in the chain to reduce the bullwhip effect.

Finding the best inventory balance is essential to keep the company's costs under control and not harm revenue. Although companies generally have an area responsible for the health of stocks, this area alone does not have total influence over them. Figure 1 shows different sources of influence on stocks and the different areas involved, proving the complex and multidisciplinary nature of the search for stock balance. No online inventory management course, we discuss how to make the best decisions about stocks, considering all these interfaces and trade-offs inherent to decisions. The discussion is very rich with examples of projects, exercises and exchanges between participants. 

Figure 1: the different influence relationships in the search for stock balance