Management as the top level process for control of all materials. This includes the recognition of need, estimating requirements, purchasing, and logistics of supply. Some materials may be purchased for immediate use and so will not end up as inventory
Inventory
Inventory can be defined as: All materials and spare parts that are held for future use without knowing exactly where and/or when the item will be used. This definition is discussed further in Chapter 2.
Inventory Management
Inventory Management is the activity that ensures the availability of inventory items in order to be able to service internal and/or external customers. In an operational environment, the customer will be the maintenance and production departments; in a finished goods environment, the customer is the external customer. Inventory management involves the coordination of purchasing, manufacturing, and demand to ensure the required availability.
As inventory management aims to ensure availability, the focus, almost invariably, is on the minimization (or even elimination) of stockouts. That is, minimizing any occurrence where there is not sufficient stock to meet demand. The logic that drives this behavior is as follows: Running out of inventory has consequences and there always seems to be a need for blame. Being blamed for something is an unpleasant experience for most people and in extreme cases can be seen as ‘career limiting.’ Therefore, any stockout triggers an action, not only to restock but also typically to overstock, in order to avoid the negative consequences of the stockout. If the inventory is already overstocked, for whatever reason, there may not be a stockout to trigger a need to take action. Therefore, there is no signal that a problem exists. A company may be overstocked and never perceive that it has a problem. Hence, a specific program of activity is required to identify these items so that their stocking can be adjusted to more appropriate levels. The result of this approach is overstocked inventory.
From this description we can already see that the traditional approach to inventory management involves processes that drive behaviors that systematically overstock inventory. This is why so many companies are overstocked.
Right now, I know that the purists will be saying, ‘Wait a minute, we can put in signals to indicate overstocking such slow-moving stock indicators.’ However, the practical reality is that these flags are rarely acted upon until the overall value becomes too large to ignore!
Inventory Optimization
Inventory optimization is an analytical technique that uses historical data and theoretical formulae to calculate the required level of inventory for a desired level of availability. Inventory Optimization can be a very attractive approach because it is ‘fact based.’ However, this strength is also its weakness because quality data is so hard to achieve (more on this in Chapter 9).
Also, by its very definition, this approach must assume that all of your existing conditions and processes are fixed; otherwise, the calculations cannot be completed. This means that Inventory Optimization does not and, in fact, cannot address the process and behavior issues that actually drive your inventory outcomes. For these reasons, Inventory Optimization can never be a solution to your inventory problems. It can only ever be a tool that is used as part of a wider program of review and then it must be used with caution.
Inventory Reduction
Inventory reduction really is just a goal. It is not a technique or a process. For example, retailers many have an ‘Inventory Reduction Sale’ where they sell unwanted stock at low prices. With engineering materials and spares inventory, the goal might be to reduce the level of investment in inventory (that is, the working capital or cash that is tied up) without negatively impacting the operational results.
Inventory Process Optimization™
Inventory Process Optimization™ addresses all of the shortcomings from the above. By combining inventory management fundamentals with optimization techniques, and utilizing systems thinking (Chapter 4), double loop learning (Chapter 8), and hypothesis driven analysis (Chapter 8), this approach systematically addresses process and behavior issues while identifying the specific inventory items to work on to achieve the goals of inventory reduction.
Inventory Process Optimization™ challenges the constraints to improvements in inventory to ensure that the result is an improvement to ‘what could be,’ not just a recalculation of ‘what is.’ So, while, Inventory Management must eventually lead to an over-investment of cash in inventory as people seek to eliminate stockouts, Inventory Process Optimization™ results in a sustainable and lasting minimization of the investment of cash while maintaining the availability promise. Although this difference may seem subtle, the impact is significant. Chapter 9 of this book takes you, in detail, through the Inventory Process Optimization™ Method.
Modifying your systems to improve your materials and spares inventory management performance is of little value if the results don’t last. In fact, the use of resources in a program that doesn’t deliver lasting results could be viewed as a waste of company resources. Similarly, an inventory reduction in one year is of only minor value if the cash is then put back into inventory in the next year — this is sometimes referred to as a ‘yo-yo’ effect. That is, great initial results and then, without other changes in the management of inventory, the initial results are reversed as the inventory is restocked. The yo-yo effect is typically the outcome of attempts at inventory reduction that don’t focus on achieving lasting results through identifying and changing the real drivers of high inventory levels.
Ensuring that the gains achieved are lasting and sustainable requires the training of your team, consistent application of the process, a review of policies, procedures, metrics and measures, and changes in the reporting used for inventory management. It is only by following this path that a company-wide, lasting result can be achieved.
To assist you in achieving lasting results, Chapter 10 works through the execution of a program of inventory review and Chapter 11 works through some case studies showing short- and long-term results as well as some of the hurdles to implementation. Achieving lasting results requires more than just an understanding of Inventory Process Optimization™ techniques and processes. It also requires an understanding of the management systems that drive your inventory outcome and the implementation and tracking of the actions that you will develop from reading this book.
Henry Ford once said, ‘If you think you can do something and if you think you can’t, in either case you are probably right.’ If you genuinely believe that no change is possible, then you are unlikely to drive a successful result. Remember, though, that to believe that no change is possible is to believe that your system is perfect and unchangeable. How likely is it that this is true?
If you recognize that past assumptions may no longer be valid, that the world changes, and that your own efforts in supply chain or operational improvement have changed the dynamics of supply and demand, then the Inventory Process Optimization™ Method is for you.
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