Why Is Inventory Accuracy Foundational to Success?

Inventory accuracy is foundational to success. Most clients aren’t concerned about inventory, and they shouldn’t be if they can count on what their system says. However, in every case, inventory must be maintained to ensure your foundation is strong and will support customer service, revenue growth, operational efficiency, and cash flow goals. It is also foundational for maintaining financial records and a foundational requirement for Sarbanes Oxley.

For example, a security products manufacturing client called with concerns about decreasing profits. They were concerned that they couldn’t predict their costs and therefore their profit, and they thought it related to their use of the system. After performing an assessment of their people, processes and systems, it was clear that putting costs in their system didn’t make sense until they had a solid foundation to build upon. Inventory accuracy was one of those foundational elements that had to get in place before advanced layers of process and system capabilities were added. Fast-forward four months, and their inventory accuracy was intact, base product data was available, and they had gained control of their business and were better able to predict performance – and could advance from there.

Essential Inventory Accuracy Basics

Inventory accuracy boils down to a few simple concepts including:

• Process disciplines: The 80/20 of inventory accuracy success requires process disciplines to be implemented throughout your company. The tricky part of this equation is explaining the importance, establishing the connection points between processes, marrying the processes with the systems, and ensuring priorities are in place to complete processes and system transactions on a timely basis, in the correct sequence, and with the appropriate controls in place. Process disciplines cover from receiving and production to transfers (intercompany and intracompany) and shipments. In essence, any transaction that impacts inventory must be included.
• Use of the system: If process disciplines are intact, the only other root cause we’ve seen over a combined 100 years of manufacturing and distribution experience is the use of the system. Not all scenarios are created equal. For example, in several situations, intracompany transfers were an issue from an inventory standpoint. In a consumer products manufacturer, their system didn’t allow for tracking intransit properly, and so their inventory “disappeared” while intransit. In a building and construction products manufacturer, their system was highly capable, but the long-term processes didn’t account for transfers properly. Again, the result was “invisible” inventory.
• Root cause analysis: It is common to have inventory inaccuracies. No client has 100% inventory accuracy over the course of a year as perfection is cost prohibitive. On the other hand, many clients can maintain reasonable inventory accuracy with process disciplines and cycle counting. This suffices whereas only the best (around 20-30%) have substantial root cause analysis built into the culture and routines. If reasonable “works”, why strive for the best? They have fewer high skilled resources tied up in maintaining the foundation. Instead, these key resources are focused on profitable growth and advancing the business.

With these three essential inventory accuracy basics, a strong foundation is intact.

Maintaining Inventory Accuracy with Cycle Counting

The key to maintaining inventory accuracy is cycle counting. In essence, it is counting a subsection of your inventory on a daily basis to confirm your inventory accuracy foundation remains intact. Although there are many strategy options, common sense rules the day. ABC cycle counting means you count the material items (in terms of value, volume and/or customer impact) more frequently (that usually account for 20% of your items that equal 80% of your value) while counting the least material items (that usually account for 80% of your items that equal 20% of your value) less frequently. Instead of counting and adjusting, counting and adjusting in a vicious cycle, you focus attention on root cause analysis and resolution. Doing this for the “A” items will positively “B” and “C” items as well since the same process disciplines are required.

How Does a Physical Inventory Fit Into the Picture?

In most situations, once you implement a solid cycle counting process where you cycle through your full inventory at minimum on a yearly basis, you can provide evidence to Finance Auditors that your inventory will be “better” than performing a physical inventory. For example, if the people counting aren’t familiar with the units of measure and products, counting errors increase. Thus, many companies no longer require a full physical inventory. On the other hand, if inventory accuracy metrics start going off-track, it might be time to regroup with a physical inventory and a reimplementation of cycle counting.

The Bottom Line

You don’t want to be sitting happily and unwittingly in a house of cards. Thus, don’t have your house sit on a faulty foundation. Prioritize the appropriate resources to set up solid inventory accuracy processes and tracking mechanisms. If you aren’t in front of inventory variances and root causes, consider bringing on a supply chain consultant. You won’t need significant expertise long term for inventory accuracy alone, and so a short-term expert might fit that bill. Once intact, provide training and education, and make sure a regular review of metrics with Executives is a part of the process. It can be incorporated into the metrics slides of a SIOP (Sales Inventory Operations Planning), also known as S&OP, process to get a regular cadence with Executives.

Please contact us with your stories, issues, and ideas on inventory accuracy and cycle counting. And, please keep us in the loop of your situation and how we can help your organization upgrade your inventory accuracy processes to support profitable growth in addition to satisfying compliance objectives.

P.S. To get ahead of the curve on where to focus for the best results to build on your foundation to get ahead of the competition, download our complimentary report, and The Road Ahead: Business, Supply Chain & the World Order.

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Why Balance Customer Orders, Inventory, & Profitability?

If you want to serve your key customers successfully (with high on-time-in-full (OTIF), short lead times, and proactive service) so that you can take advantage of the opportunities coming down the pike while addressing the hard realities of the current business environment (potential recessions, high interest rates, and less access to capital), you MUST balance sales, operations and inventory.

Otherwise, you will have one or more of the following issues arise:

• Inventory Overload: Too much inventory of the wrong products and WIP (work-in-process) in the wrong place at the wrong time.
• Slow Moving Inventory: Too much slow moving or obsolete inventory
• Production Schedule Disruptions: Not enough of the right inventory in the right place to keep production running smoothly.
• Weak Service: Not high enough service levels to ensure you can maintain and grow your business during turbulent times, let alone meet business plans
• Not Prepared for Growth: Not able to take on significant opportunities coming down the pike. For example, as companies expand manufacturing in North America, customer orders continue to increase down-the-line in the supply chain
• Skyrocketing costs: If you aren’t balanced, you have to spend more to meet customer objectives.
• Inflation cost increases: The only way to offset the massive cost increases related to inflation is to be able to get in front of what’s coming.

Instead of these dire consequences, the smart are proactively balancing customer orders, inventory and profitability.

How Do You Balance Sales, Inventory & Operations?

The good news and bad news is that balancing these factors does not require significant capital investments, the latest technologies like ChatGPT, and a mountain of resources. It simply requires rolling out the appropriate strategy and tactics that is uncommon common sense. Roll out the appropriate strategic processes largely encompassed with Sales Inventory & Operations Planning (SIOP), also known as S&OP, processes. Focus solely on achieving directional progress, and you’ll gain quick wins.

However, strategy alone will not “work”. It has to be accompanied with the appropriate tactics which is the execution of the fundamentals required to support Sales & Operations Execution (S&OE). If you aren’t familiar with S&OE, don’t fret. It is a common term in software circles, but in manufacturing and supply chain circles, it is known as supply chain planning and includes demand planning/ forecasting, supply planning (master scheduling, production planning, material planning, replenishment planning, inventory planning, production & labor scheduling, etc.), operational execution, shipping, receiving, etc.

Client Examples: Using SIOP / S&OP To Balance Sales, Inventory & Operations

The SIOP process is geared to aligning sales with operations, customers with suppliers, and demand with supply.

How SIOP Fueled Growth for a Biotech Manufacturer

For example, a biotech manufacturing client couldn’t meet aggressive sales goals with high enough service levels to ensure customer loyalty and future growth. Sales was frustrated and executives were concerned about how to support future growth goals. On the other hand, Operations didn’t have the information to prepare in advance to meet the service objectives with the aggressive goal goals. They were concerned about spending money until they knew the product wouldn’t go to waste, and management was concerned about hiring manufacturing employees until volumes were confirmed in enough detail to know the work centers and skills required. The bottom line: Sales was out of balance with Operations. Thus, the right inventory was not available in the right place at the right time.

After rolling out SIOP in combination with S&OE (as you cannot have one without the other), we developed a directionally correct sales forecast by geography, product and unit of measure that “added up” to the growth goals (in dollars) in a way that made sense when viewing by customer, product groupings and growth rates. Simultaneously, we focused attention on understanding capacity (production requirements vs. available capacity by key work area and equipment). It quickly became clear that we had to reallocate a few resources to the bottleneck operation, and we gained approval to hire a few people to support the growth plans. Once the bottleneck operation smoothed out, we gained efficiencies in down-the-line operations, and most importantly, customer service improved and customers gained confidence. Sales, Operations and Purchasing also had insights that enabled cost reductions, product rationalization plans, and key pricing decisions. Nice side benefits to the aggressive growth goals!

How SIOP Accelerated Cash Flow & Reduced Debt by Increasing Inventory Turns

In another example, an aerospace manufacturer had turned the company around following the 9/11 downturn and was interested in selling the business. Thus, they wanted to maintain their excellent service levels while maintaining/ improving profitability and reducing unnecessary debt. We had to balance sales with operations and inventory to reduce unnecessary inventory (not required to support service, spikes in sales and predictable disruptions in supply) while focusing on operational performance. Thus, we assigned executive leadership to the topic to emphasize the priority, clarified the sales plans, and focused attention on inventory planning processes (again, the combination of SIOP/ S&OP and S&OE).

In this case, we had to balance profitability/ margins by site with customer orders and inventory plans. We rolled out improved business processes, better utilized the ERP system, provided training and education to the inventory teams, and we aligned the goals of the Site Leaders with corporate objectives and the Inventory Leaders. Inventory levels came down by 30% in key product lines while maintaining/ improving service levels and growing the business. The company was also better positioned for sale and for continuing operations so that no matter which path was chosen, the company was in a healthy, robust position.

Path Forward

SIOP can be an important process in aligning people (within your organization and with your supply chain partners) and processes (demand and supply) to improve service, support growth, reduce debt, accelerate cash flow, and improve profitability. During times of volatility (inflation, recession, stagflation, technological advances, talent shortage), there will be more opportunities for those companies prepared for success. The winners will be separated from the losers and opportunities will abound. SIOP requires focus, but it doesn’t require capital intensive investments. There is no downside to becoming more profitable, having greater access to cash, and better serving customers and preparing for growth.

Refer to our SIOP webpage for more information, our blog (SIOP category) for hundreds of articles, and learn more about SIOP and what’s important for a successful implementation in our new release eBook, SIOP (Sales Inventory Operations Planning): Creating Predictable Revenue and EBITDA Growth. If you are interested in talking about how to improve profitability, free up cash, and/or improve service, contact us.

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SIOP/ S&OP Playbook: Creating Predictability & EBITDA Growth

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Silicon Valley Bank’s Failure kicked off panic in the financial markets and banking system. They had too much money tied up in long term bonds paying at low interest rates, and they didn’t have the liquidity to keep up with the depositors requests to take money out of the bank. This bank catered to venture capital backed companies in the tech space, and there were several depositors with more than $250,000 in the bank when it collapsed. Unfortunately, since the FDIC only insures to $250,000, these depositors would lose the rest. The government stepped in to assist. However, the liquidity crisis spread to Signature Bank and several others. What does all this mean and what can companies do about the liquidity crisis?

What Does All This Mean?

We are in a liquidity crisis. The increase in interest rates has increased the cost of capital. It was certainly not the only issue that caused the Silicon Valley Bank crisis as there were the normal gamut of issues when a company goes bankrupt, but it was a key factor and likely the straw that broke the camel’s back.

Interest rates are not going down anytime soon since inflation continues to rage as demand remains robust and supply is limited. Thus, products will cost more, and if you have to borrow money to purchase materials and pay employees until customers pay their invoices, you will pay more (assuming you can get a loan). Thus, proactively managing inventory and cash flow is essential.

Proactive Inventory Management

Every dollar you have in inventory is a dollar of cash flow tied up that cannot be used elsewhere. Inventory serves an important purpose to protect against variability (of both demand and supply). Since we are in volatile times, inventory can make or break success in your ability to service customers. On the other hand, if you have “too much” inventory, you are throwing money out the window, and with the high cost of capital, you might be paying a hefty interest rate for the privilege. Even if you aren’t borrowing the money, you cannot invest the funds in R&D or other ways to add value to the business.

A SIOP (Sales Inventory Operations Planning) process, also known as S&OP, can help you align demand with supply and proactively address inventory. For example, an aerospace client had a significant amount of money tied up in inventory. A certain amount of inventory was important to their success because a wide breadth of product availability was part of their unique differentiator in the marketplace which created a barrier to entry for potential competitors. However, they still had an opportunity to reduce inventory while maintaining/ improving service levels by implementing best practices in planning and inventory management.

In this situation, we aligned all sites on a common goal, highlighted the importance by putting an executive in charge of the initiative, and provided resources including process and ERP upgrade support, training and education programs, incentives, rewards, and recognition. We developed a collaborative demand plan and determined the best way to supply the volume. The sites worked together to determine how to share inventory and maximize profit. In less than a year, we were able to reduce inventory by 30-40% on the core product lines while increasing service levels to customers.

Please keep us in the loop of your situation and how we can help your organization roll out a SIOP process, reduce inventory and free up cash while improving service to customers. Learn more about how to use SIOP to succeed during volatile times in our new eBook SIOP (Sales Inventory Operations Planning): Creating Predictable Revenue and EBITDA Growth. Download your complimentary copy.

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Volatility is the New Norm

If there is one thing that is certain in today’s world, it is that volatility and change are the new normal. VUCA (volatility, uncertainty, complexity, ambiguity) is top of mind for every client. For example, clients ask the following questions:

• What will happen next?
• Are we prepared?
• Which are the likeliest risks with the most severe consequences?
• Should we take the appropriate steps to mitigate if we don’t know what the future holds and if our business can withstand the investment?

Unfortunately, there is no playbook. Only the proactive, brave, and resilient will thrive,

How Does Inventory Relate to Volatility?

As it relates to inventory, the entire point of carrying inventory is to cover lead time, mitigate risk, and address volatility. For example, if you purchase from China, you have to cover the manufacturing and transportation lead time (typically 12 weeks minimum). You would want to mitigate risk. Unfortunately, with China, there are many potential risks (Chinese spy balloons, Taiwan-China tensions, Zero-COVID policy shutdowns, lack of natural resource supply (energy, water), shutdowns, transportation challenges in the South China sea, potential weather, strike and other conflicts in its journey to its destination, etc.). And last but not least, inventory covers volatility. If Sales sells different products than predicted, if suppliers extend lead times, or if disruptions occur, inventory allows your customers to be served while you address the volatility.

Thus, executives are perplexed as to what to do about inventory. In fact, they are in a quandary.

• Volatility is high: Since VUCA is at an all-time high, both demand and supply are volatile, and therefore out of alignment. Inventory covers that gap, and so more inventory is required to successfully serve customers. Beyond required inventory to cover volatility, clients have also moved from just-in-time (JIT) to just-in-case. Inventory is piling up! Of course, unfortunately, it is typically the wrong items in the wrong place at the wrong time if demand isn’t aligned with supply via a process like SIOP (Sales Inventory Operations Planning), also known as S&OP.
• Cost is up: The cost of inventory is going up with inflationary pressures. Every client has experienced raw material, component, and ingredient price increases. Additionally, every unit of inventory has to be stored and transported. Logistics costs have increased significantly as well. Even though the cost of the increases are slowing down, if you compare costs to pre-pandemic, they are up substantially. Thus, every unit of inventory costs more.
• Carrying cost: Having “too much” inventory ties up cash unnecessarily. You purchase materials, pay for production, and have storage and material handling costs all prior to getting paid. In addition, if you have to finance inventory, the cost has been skyrocketing with the increase in interest rates. Even if you don’t finance inventory, you are tying up cash that you cannot invest elsewhere. This carrying cost is also adding up to simply cover built in lead time. For example, 12 weeks of inventory is not only tied up unnecessarily but the cost to carry that inventory has gone up substantially with increased interest rates, increased warehouse space cost, etc.
• Inventory accuracy woes: Although a bedrock fundamental, the more inventory you have, the more likely you’ll be to have inventory issues. For example, as warehouses overflow into the aisles, inventory gets lost. As more locations are added, complexity increases (a key element of VUCA) and inventory inaccuracies increase. For example, a client expanded rapidly to meet increasing customer orders. To meet this increased growth, they expanded operations. Resources are limited, thereby creating complications in keeping up with transactions. Also, they moved the stockroom to a different location to accommodate for the expansion, thereby creating further volatility. Additionally, they needed additional materials and components to support production, requiring additional space. They also purchased long-term supply of critical components coming from the Russia-Ukraine region to secure supply, therefore needing additional storage locations. And, to increase production, they had to produce work-in-process when capacity was available, thereby increasing WIP inventory while waiting for parts and capacity to be available to complete the job. Since they are located in a rural area, they had to expand quickly with multiple available buildings/ locations. What I love is the descriptive names for these locations – the barn, the swamp, the subway, and more. Nevertheless, quick expansion with multiple physical locations can be quite the inventory accuracy challenge.

Executives are deciding among conflicting factors – customer service, customer growth, margins, and cash flow. It is not for the faint of heart. The trick is to turn this “or” equation into “and” so that you can achieve a win-win-win.

Go Back to Fundamentals

The great news about inventory is that the fundamentals “work”. As challenging as it is to navigate volatility, the key is to focus on the fundamentals. Best practice processes paired with process disciplines will carry the day. However, that will not be enough. To thrive in today’s business environment, processes will have to be accompanied with the appropriate technologies. For example, barcoding is greatly more efficient than writing on papers and data entry. However, garbage in, garbage out. Focus on process disciplines before you jump to automate a “mess”. And none of this will matter if you do not have the resources to support these practices.

Best Practice Processes

There are several inventory processes required to have the “right” inventory in the “right” place at the “right” time without having “too much” creating financial woes or “not enough” to support customers. Several of relevant fundamental processes include:

• Transaction disciplines: Every inventory movement (receiving, interfacility movements, work order issues, work order completion, operational steps, shipments, interbranch transfers, intercompany transfers, outsourcing operation steps, etc.) requires a best practice process accompanied with the appropriate use of ERP system functionality performed in the correct sequence and in a timely fashion. Most clients overlook the critical importance of these fundamentals. Although theoretically ‘easy’, it requires an orchestrated effort with trained resources who understand the impacts of their work.
• Cycle counting: Cycle counting is more than simply counting and adjusting. The key is to focus on root cause analysis and remain vigilant on process disciplines, cutoff times, and prioritizing what’s most important (ABC counting). The bottom line is that cycle counting will maintain your inventory accuracy so that when you go to produce, distribute, or ship, the inventory is where you expect it to be in the quantity expected. 
• Costing: Cost accountants are often underappreciated. Good ones can be your most valuable asset! When I was VP of Operations, understanding the true cost of inventory was a critical basic. Otherwise, how do you make “good” decisions? It was surprising how challenging it was to get a directionally correct cost for materials (including freight), labor, warehousing, freight, carrying cost, etc. It is important to properly utilize your ERP system to get a reasonable view of costs. Adding variances into the mix can confuse almost everyone in your organization. Stick with common sense. Strangely, cost reduction programs also cause havoc as 80% of clients double count at least some of the cost reduction programs accidentally. Bring on experts that can dig in and help you know where to focus. (Thank you to my mentor on this topic, Marty Ostrow!)
• Planning processes (demand, production, replenishment, materials, VMI, etc.): The best way to ensure the appropriate inventory is in the “right” place at the “right time” in the “right” quantities to support customer requirements while not having “too much” is to roll out best practice planning processes. These processes go hand-in-hand with ERP functionality including CRM, demand planning, MRP, advanced planning and scheduling, DRP, and more.
• SIOP (Sales Inventory Operations Planning), also known as S&OP: Aligning demand and supply is cornerstone to managing inventory. Refer to our eBook, SIOP Creating Predictable Revenue and EBITDA Growth to learn about how SIOP can help your organization and the secrets to implementing a process and cadence to ensure customer success and bottom-line results.
• Inventory metrics: Make sure to track the key metrics relevant to your business. A few of the key ones include inventory turns, days on hand (DOH), inventory variances, and inventory accuracy.

Final Thought

Inventory management is bedrock for any manufacturer, distributor, or retailer. Although solid inventory management is always vital in supporting growth, profitability and cash flow, it takes on even more importance during times of volatility, uncertainty, complexity and ambiguity. Both inventory accuracy and inventory levels will either propel success or become a bottleneck to success. Remember to dedicate key resources to this foundational building block.

Refer to our blog for many articles on inventory management and related concepts. Also, read more about these types of strategies in our eBooks including SIOP (Sales Inventory Operations Planning): Creating Predictable Revenue and EBITDA Growth. If you are interested in talking about implementing out best practices for inventory management to drive stability, customer service, growth and profitability, contact us.

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Are You Managing Inventory or Is Inventory Managing You?

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Originally posted as “Episode 2: Creating Resilience In Your Logistics Operations” on Cargo Shorts – Old Dominion Freight Line Podcast.

Click here to listen.

How to calculate your total cost of transportation and strengthening the shipper-carrier relationship.

The rising cost of transportation bottlenecks and service delays have left logistics managers with much to manage. Calculating the total cost of these issues is difficult when only addressing a predetermined price per transaction. Strategic partnerships between shippers and carriers can mitigate pain points and lead to a better customer experience. But, how can logistics partners improve the supply chain and reduce cost in today’s operating environment and create resilience in logistic operations?

Ed Garner is the Director of National Accounts at Old Dominion Freight Line and has been in the transportation industry for more than 35 years. Ed lead’s OD’s National Accounts team and is responsible for growing and fostering the relationships with OD’s top shippers. He is passionate about the shipper-carrier relationship and problem-solving the most complex LTL shipping challenges. 

Lisa Anderson is the Founder and President of LMA Consulting Group. LMA Consulting provides expertise and advice on end-to-end supply chain strategy and business transformation. She’s the author of three books, including Future Proofing Manufacturing & Supply Chain Post Covid-19, and I’ve Been Thinking. Turning Everyday Interactions into Profitable Opportunities.

The post Just-In-Time When Supply Chains Are Backlogged appeared first on LMA-Consulting Group, a supply chain consulting firm.

Lisa Anderson was quoted in Supply Chain Dive on whether just-in-time (JIT) is sill relevant or has the world moved to just-in-case.

“As retailers struggle with inventory glut and overstocked warehouses, the lean operating model may need to make a comeback. Just-in-time supply chains took a lot of heat during the pandemic after empty shelves laid bare the pitfalls of ordering as little inventory as possible in the name of efficiency. But, with retailers now struggling with inventory glut and overstocked warehouses, could the lean operating model be making a comeback?

Experts are mixed: While some believe that just-in-time has no place in the supply chains of the future, others say a modified version of the strategy will still be necessary to maintain resilience while keeping costs down.

Supply Chain Dive reached out to three experts in supply chain management to ask: Did the pandemic kill just-in-time? Here are their responses, which may be edited for length and clarity.

‘Just-in-time is not dead; however, the days of taking the concept literally and ordering inventory to arrive ‘just in time’ is dead. The just-in-time concept has always accounted for common sense decisions. For example, if ordering strategic inventory from China, you should account for likely demand and supply volatility and stockpile inventory appropriately. With that said, most businesses were completely focused on efficiencies prior to the pandemic and took just-in-time literally, assuming the supply chain would continue to support their needs. They went through the motions of assessing risk, but did not adjust their inventory profiles and were left empty handed during the pandemic,’ said Lisa Anderson, CEO of LMA Consulting.”

To read the full article, click here.

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Lisa Anderson’s press release about the reshaping of supply chains was picked up by CSCMP. Rightsizing and balancing inventories is becoming essential to success especially with increasing interest rates.

“As supply chains grapple with demand fluctuation, supplier challenges, stagflation, and volatility in the economy, Lisa Anderson—manufacturing and supply chain expert—sees inventory tightening.

Also the president of LMA Consulting Group, Anderson says, ‘The supply chain has been front and center since the beginning of the pandemic, when toilet paper highlighted the importance of a reliable supply chain. Volatility in supply chains has caused chaos in every industry.

‘Now, the emphasis is on inventory. Building inventory was important when supply chains were trying to regain a semblance of order. Yet, in haste to build inventory, sometimes the wrong inventory was increased, the right inventory was in the wrong place, profitability was sacrificed, or all of the above. Whatever the situation, inventory is now a key focus.’

Organizations are taking a hard look at existing inventory, customer demand, and profitability to remedy and balance inventory.

‘Companies need to reshape their operations and supply chains by right-sizing inventory levels,’ Anderson says. ‘The trick is to cut inventory without impacting customer service or cutting performance or profitability. Volatility in the economy will be the reality for the foreseeable future. Those who have processes in place to evaluate customer demand, create accurate forecasts, position capacity, and plan production to capitalize on opportunities that exist will have a huge advantage’.”

Read the full press release on CSCMP or Quality Digest.

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Manufacturing and Supply Chain Expert Lisa Anderson, MBA, CSCP, CLTD, known as the Strongest Link in Your Supply Chain® and President of LMA Consulting Group Inc., sees inventory tightening as supply chains grapple with demand fluctuation, supplier challenges, stagflation and volatility in the economy. LMA Consulting Group works with manufacturers and distributors on strategy and end-to-end supply chain transformation to maximize the customer experience and enable profitable, scalable, dramatic business growth.

“The supply chain has been front and center since the beginning of the pandemic when toilet paper highlighted the importance of a reliable supply chain. Volatility in supply chains has caused chaos in every industry. Now, the emphasis is on inventory. Building inventory was important when supply chains were trying to regain a semblance of order. Yet, in haste to build inventory, sometimes the wrong inventory was increased, the right inventory was in the wrong place, profitability was sacrificed, or all of the above. Whatever the situation, inventory is now a key focus,” Ms. Anderson said.

Organizations are taking a hard look at existing inventory, customer demand and profitability to remedy and balance inventory. “Companies need to reshape their operations and supply chains by right-sizing inventory levels. The trick is to cut inventory without impacting customer service or cutting performance or profitability. Volatility in the economy will be the reality for the foreseeable future. Those who have processes in place to evaluate customer demand, create accurate forecasts, position capacity and plan production to capitalize on opportunities that exist will have a huge advantage,” she said.

Ms. Anderson and her firm use the SIOP process to capitalize on opportunities while maintaining organizational alignment. “Pencils and erasers, excel spreadsheets, and gut instincts no longer work. Manufacturing today is complex. Customers are sophisticated. Their needs and wants change depending on the end user. It is up to manufacturers to anticipate change, plan for it, and be able to change at a moment’s notice. Processes can provide data, consistency and order to the many moving parts in the supply chain,” she concluded. Supply chains are sophisticated and ever-evolving. Ms. Anderson provides supply chain updates through Supply Chain Chats, a series of short videos that address current topics, issues and challenges related to supply chains. 

About LMA Consulting Group – Lisa Anderson, MBA, CSCP, CLTD

Lisa Anderson is the founder and president of LMA Consulting Group, Inc., specializing in manufacturing strategy and end-to-end supply chain transformation. She focuses on maximizing the customer experience and enabling profitable, scalable, dramatic business growth. Ms. Anderson is a recognized Supply Chain thought leader by SelectHub, named a Top 40 B2B Tech Influencer by arketi group, a Top 50 ERP Influencer by Washington-Frank, one of the most influential in Supply Chain by SAP and a woman leader in Supply Chain by RateLinx. She was recently interviewed on Fox News, in early 2021published a Special Report, Emerging Above & Beyond: 21 Insights from Manufacturing, Supply Chain & Technology Executives, the ebook, Future-Proofing Manufacturing & the Supply Chain Post COVID-19, and her primer, I’ve Been Thinking, strategies for creating bold customer promises and profits. A contributor on topics including a superior customer experience with SIOP, advancing innovation, and making the supply chain resilient, Ms. Anderson is regularly interviewed and quoted by publications such as Industry Week, Bloomberg, and the Wall Street Journal. For information, to sign up for her Profit Through People^TM Newsletter or for a copy of her book, visit LMA-ConsultingGroup.com.

Originally published on ExpertClick: November 11, 2022

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Inflation, Recession, Both?

We are in unique times with inflationary pressures continuing while recessionary trends are emerging as well. In either instance, it is vital to right-size inventory. It will not change anytime soon. With interest rates rising rapidly, it will curb demand while increasing the cost of capital. On the other hand, with supply chain disruptions continuing and world events becoming more concerning, shortages will persist, driving up costs.

What Does It Mean for Inventory?

Whether inflation, recession or both, you’ll want to right-size your inventory. In essence, you will want to have the ‘right’ amount of inventory in the ‘right’ place at the ‘right’ time. This sounds far easier to do than it is in reality. As demand changes and supply shortages persist, what is the ‘right’ amount in the ‘right’ place at the ‘right’ time?

During inflationary periods, you don’t want excess inventory tying up cash unnecessarily, and it is especially problematic since it costs more to produce this inventory. Finance isn’t excited to pay suppliers for the inflated cost of materials and components and pay employees higher salaries to produce upfront, and then have to wait for customer payment. Clearly, in the food and beverage industry, expiration dates make this situation even more concerning.

On the other hand, during recessionary times, you cannot afford to have inventory (and therefore cash) sitting idle. As customers slow down in purchases, what used to be 3 months of inventory could easily turn into 6, 9 or even 12 months of inventory. Of course, that will put you into a cash crunch. Unfortunately, after the 2008-2009 recession, we were called into several clients to right-size inventory in order to resurrect customer service levels because they cut inventory in the ‘wrong’ products (materials, work-in-process or finished goods) in the ‘wrong’ place at the ‘wrong’ time. Clearly, although possibly required to survive, it did NOT set them up to be successful in growing the business because they cut in the ‘wrong’ areas.

What is Right-Size Inventory?

It is a tricky answer. In essence, you want the optimal amount of inventory (not too much but not too little since you don’t want to run out) in the right place (most likely, positioned close to your customer, at your customer’s location or with the appropriate transportation capabilities to arrive quickly at your customer) at the ‘right’ time (when the customer needs it accounting for changing conditions in the marketplace). In order to achieve this objective, you will need the ‘right’ amount of materials, components, and ingredients in the ‘right’ place (manufacturing facility that has capacity to produce near the customers that need the products and is the lowest cost producer) at the ‘right’ time. It is no wonder successful inventory management becomes dicey.

Process to Right-Size Inventory

The best clients with right-sized inventory prioritize the following:

• SIOP: They utilize a SIOP (Sales, Inventory & Operations Planning) process, also known as S&OP, to steer the ship in terms of the appropriate manufacturing facilities, capacities, supplier partnerships, pricing, make vs buy decisions and the like.
• Demand Planning: Keeping in alignment with your customers and sales patterns can prove tricky especially in such volatile environments. Since we are entering a world stage of VUCA (volatility, uncertainty, complexity, and ambiguity), having a resilient and evolving demand planning process will prove essential.
• Supply Planning (Production, replenishment, scheduling, materials, inventory, etc.): Keeping your supply planning processes in sync with changing capabilities while navigating supply chain disruptions is quite the task during VUCA. Your process must be flexible, proactive, analytic, predictive and innovative.
• Tools & Technology: There are limited resources and skills in every client. It will be vital to right-sizing inventory to utilize your ERP system to its fullest potential, evaluate whether advanced demand and supply planning software would add value, analyze trends and create dashboards with a business intelligence (BI) software, evaluate the need for predictive analytics, potentially utilize CRM software, automation and robotics, and more.
• Talent: All of the above will prove meaningless if you do not have the talent (or are able to source the talent), supplement and support your talent, and, most importantly keep your talent.

Pertinent Examples

We recently worked with a client that suffered in service levels to their customers (both on-time-in-full OTIF and lead times). Thus, growth potential was limited until resolved. In one facility, OTIF levels were in the 40%s and customers were unhappy. In another facility, OTIF levels suffered, but even worse, the lead times were too long and customers were looking to the competition. Not a good position for the market leader!

We worked with a cross-functional team to upgrade their SIOP process and to focus the discussion on meaningful data for decision-making. The meeting went from 3 hours of debate and conversation to an hour of focused review and decision-making. We also worked with the production planner to automate and upgrade the planning and scheduling process at the long lead-time facility. Production stabilized, output records were broken, and customer service improved dramatically. Lastly, we also worked with the replenishment and supply chain teams to calculate safety stocks and service levels, upgrade the process, better utilize the ERP system, and right-size the inventory across the supply chain network. Service rose to the low 90%’s.

Refer to our blog for many articles on planning, inventory and related concepts. Also, read more about these types of strategies in our eBooks, Thriving in 2022: Learning from Supply Chain Chaos and Future-Proofing Manufacturing & Supply Chain Post COVID-19. If you are interested in talking about what it would take to right-size your inventory, contact us.

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Are You Managing Inventory or Is Inventory Managing You?

The post Right-size Inventory to Thrive During Inflationary & Recessionary Times appeared first on LMA-Consulting Group, a supply chain consulting firm.

Originally published on Adhesives & Sealants Industry on September 23, 2022

Logistics costs have been staggering. According to the 33rd Annual State of Logistics report produced by the Council of Supply Chain Management Professionals by the global consulting firm Kearney and presented by Penske Logistics, U.S. business logistics costs rose by 22.4% last year. The bottom line is that the global supply chain is out of alignment, and it remains out of alignment. Unfortunately, it isn’t a simple or quick fix to re-balance and right-size the supply chain and curtail inflationary pressures.

Current Challenges

Look no further than recent occurrences in the global logistics landscape. Shanghai was under lockdown for two months, and wait times reached a peak of 69 hours before reopening. During that lockdown, factories had to wait on raw materials, creating potential future disruptions in the supply chain. As Shanghai started shipping again, there are concerns of a new wave of container ships arriving at the U.S. ports, creating new congestion and delays. On the other hand, labor negotiations are creating concerns at the West Coast ports, and so some shippers are diverting containers to other U.S. ports, causing congestion, delays, and increased costs throughout the system.

From a shipping point-of-view, costs will remain high with rising interest rates, historically high fuel prices, increasing wages, and inventory carrying cost pressures. Fuel prices are likely to remain high with the Russia-Ukraine war, energy policies, and the inability to change the situation quickly. Inventories are up by double-digit percentages in the second quarter and warehouse vacancies are at historic lows, and so inventory management is taking on greater importance. Unfortunately, the right inventory is not in the right place at the right time. 

Successful Inventory Management

Those that manage inventory well will have the opportunity to grow and thrive, and the rest will lose customers, and/or be saddled with debt and have limited cashflow. Strategic decisions will have a direct impact on inventory levels. For example, a lawn and garden tools manufacturer had to keep a minimum of 16-20 months of inventory on hand to satisfy customer requirements and to offset the 13-week supplier lead time from Asia. Although most of the inventory was built into lead time, the manufacturer was able to minimize inventory levels vs. its competition with effective inventory management disciplines.   

Successful inventory management processes require exemplary planning disciplines. Thus, the tools manufacturer implemented best-practice demand planning processes to forecast future sales and product mix. The resulting demand plan was provided to manufacturing and purchasing so that the production schedule and purchase plan would make sure that the right items are available at the right time to best support customer requirements at the lowest cost. The distribution (replenishment) and logistics plans took it from there and made sure that the right product was distributed to the right location (its internal warehouses or its customers’ distribution centers) at the right time by the optimal modes of transportation to support its customers’ frequently changing needs in the most efficient and effective manner possible.  

Advanced Planning and Adapting

Although the tools manufacturer could reduce inventory to three months with effective inventory management, it decided the built-in lead time was no longer acceptable. Thus, for this reason among others, it also decided to move the bulk of its manufacturing from Asia to North America, thereby decreasing the inventory required to support the built-in lead time. These inventory strategies created a competitive advantage so that it could be more resilient with changing conditions.  

By implementing advanced planning principles across your organization, you will most effectively manage your assets and best support your customers. Since there are widespread supply chain disruptions, those companies that have the “right” inventory available for key customers and potential ideal customers will have the opportunity to grow and thrive while their competition struggles to navigate the supply chain chaos and inflationary pressures. The strong will continue to get stronger, creating more opportunities in the next few years than at any time in history except for during the Great Depression, while the weak get weaker. Reevaluate your strategic decisions as inventory gains in importance and focus on proactive inventory planning processes to take control and thrive during these turbulent yet opportunistic times.

The post Gaining a Logistics Edge with Inventory Management appeared first on LMA-Consulting Group, a supply chain consulting firm.