That tends to be the reaction of most people until the moment before inventory appears on the company's books or arrives in the form of a bill for excess and obsolete inventory. Long before one of these moments of unpleasant surprise, you have an opportunity to avoid the problem. Now is the time to understand the risks you face and address them. When it comes to being proactive with respect to inventory, there are two parallel levels of activity you should consider.
Immediate
The first step is to limit the potential damage. Using the projected available inventory calculation from your ERP and/or your EMSÕs ERP, you can look at the ending inventory in future time buckets and quickly determine the trouble spots based on current forecast projections and current planned supply. Pay particular attention to custom parts and non-cancelable, non-returnable (NCNR) parts. If you have the ability to do "what if" scenarios, run the numbers again with a more conservative forecast. This gives you important information about the scope of the potential problem should your forecasts head south. Also, make sure to check inventory drivers like lead-times, package sizes, order minimums, safety stock, buffer and administration times, etc.
If you cannot easily get to projected available inventory, use other measures to gauge near-term problems. Some companies use MRP suggested push-outs and line item dollars to determine the scale of the inventory adjustments that are required. For example, if you have one line item with 100 units at $10 each and the line suggested "push-out" is 30 days, then you have $30,000 dollar-days of adjustment to make. This becomes meaningful when you compare it to other suggested changes. You might have another line item with 1000 units at $5 each and a suggested "push-out" of 15 days. This change has a value of $75,000 dollar-days. The second change has more of an impact for your company. Also, when you sum the dollar-days for all components and products, you get an overall measure. You can monitor the reduction in this total number to see whether your efforts to eliminate potential inventory problems are effective.
Another area that you need to closely monitor is your excess and obsolete inventory at your contract manufacturers and/or key component and subassembly suppliers. In a recent survey that we conducted together with Arena Solutions, more than half of the respondents stated that they do not have regular visibility to excess and obsolete inventory in their supply chain. In an environment of fluctuating forecasts and on-going product changes, this can be a major area of financial exposure for your company. The sooner you know about potential excess conditions, the sooner you can act on mitigating the associated financial risks.
Longer Term
The best way to avoid the cyclical inventory crisis is to manage inventory exposure. Inventory exposure is a way to measure the time and dollar elements of your supply chain. At a high-level, you get to exposure by rolling together cumulative lead-time, volumes, and prices of finished-goods, work-in-process, and component inventory. You can find a more detailed explanation in a previous newsletter on the subject: click here. Once you have a baseline of your current risks, you can then begin the long productive march to reduce it.
The work to reduce inventory exposure takes two parallel paths. The first path deals with the way components and value-added steps are strung together to make a product. We typically map this is what we call the "product investment curve." To make improvements you would use techniques such as reduced lead-times, last-minute differentiation (e.g. postponement), low-cost buffers, reduced transformation time, reduced queue and transit times, etc. Many of you are already familiar with these approaches.
The second path deals with product availability strategy, which is based on the lead-time at which your company sells products. Too often, companies do not address this half of the equation and instead focus exclusively on the first path. For instance, we have seen companies offer the same off-the-shelf availability on all models within a product line, whereas some of the lower volume variations could be offered at a reasonable lead-time with little to no objection from customers, thereby reducing finished goods inventory exposure. Our experience shows that more that half of the long-term improvement in inventory exposure comes from a well thought-out product availability strategy as determined through collaboration between operations, marketing, and product management departments.
Reducing inventory exposure is one of the key practice areas of Symphony Consulting. If you think we can help you with ideas, tools, resources, or training, please let us know.