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.

Did you like this article?  Continue reading on this topic:
Are You Managing Inventory or Is Inventory Managing You?

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Lisa Anderson, LMA Consulting President and Founder, feels there is still a great deal of confusion global supply chains. Anderson joined “Bloomberg Markets” with Caroline Hyde and Paul Sweeney on Friday morning.

(Source: Bloomberg)

Click here to watch the video.

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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.

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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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The world has all sorts of complications and challenges going on simultaneously. Thus, those with manufacturing capabilities are more resilient and able to take advantage of opportunities when they arise. 

The list of complications is long. For example:

• The Russia-Ukraine war is heating up, driving a severe energy shortage in Europe as Russia turned off the gas pipeline.
• The China-Taiwan tensions continue to gain steam with advanced computer chips at the crux of the conflict.
• The baby formula challenges carry on with flights from Europe and Australia supplementing US production.
• Hurricane Ida just destroyed sections of Florida and is eyeing South Carolina. Unbelievably, as insane as the fertilizer story was already, it is further threatened with one of the largest plants in the US in the line of the storm.
• Although the port and rail strikes have been postponed thus far, they haven’t been averted.
• The economy is starting to experience stagflation or simultaneous inflation and recession.

To learn more about these complications and to hear about the latest global challenges and opportunities, refer to our video series, Supply Chain Chats.

The pandemic showed that manufacturing of essential products was more important than the general population realized. After all, toilet paper, hand sanitizer and food items proved extremely hard to find during the early days of the pandemic. The wars and supply chain disruptions that continue to plague the world has proven that the successful will have greater control over their essential products such as healthcare products, pharmaceuticals, food, energy, aerospace and defense, and the like. Control over manufacturing creates resiliency.

How are the Best of the Best Responding?

The best of the best are quietly taking control. If an essential product can simply disappear because of a zero COVID policy, a strike, global tensions, or a hurricane, the situation will become dire very quickly. Thus, the best aren’t waiting for the government to do something; they are acting.

Unfortunately, the “fix” isn’t simple or quick. What can we do to gain control?

• Reshore/ nearshore: Move your manufacturing capabilities closer to your customers in friendly locations with the appropriate levels of talent, energy and infrastructure.
• Reevaluate your partners: Since you are dependent on your partners, you should ensure you are comfortable with that and adjust as needed. Beyond comfort, will your partners take you to the next decade?
• Backup to the backup: As a big believer in having backup plans, we feel strongly about the need for backups. Better yet is having a backup to your backup. In the last few months, I have been happy that I had a backup to my backup as they came in handy. Do you?
• Use of Advanced Technologies: Sitting in a Ford Pinto will not cut it in today’s environment. Get on top of the latest technologies that can support you. Automate, digitize, leverage analytics.
• Strategic inventory & capacity: The pandemic proved that taking just-in-time (JIT) literally wasn’t appropriate. Over-ordering is also not appropriate as you’ll inevitably have the wrong products in the wrong place at the wrong time. Instead, think about having just the “right” products or capacity in the “right” place at the “right” time. Implementing a SIOP (Sales, Inventory and Operations planning) process will be a great place to start.
• Cash is king: If you have the resources to invest when everyone else panics, you will leapfrog the rest. It is the time for smart investments.

Please keep us in the loop of your situation and how we can help your organization thrive during these times of volatility and disruption. There will be more winners created than at any other time than since emerging from the Great Depression. To gain additional ideas and insights on how to best navigate these volatile times and thrive, download a complimentary copy of our book, SIOP (Sales Inventory Operations Planning): Creating Predictable Revenue & EBITDA Growth.

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When Winter Storm Uri hit Texas in February of 2021, it crashed all the state’s systems. It did grave damage to the state’s unusual power grid, but it also stressed manufacturers, retailers, and customers. It did so in part because American business has for some time relied on what is called just-in-time (JIT) logistics. 

What have crises taught us about the utility and the limitations of JIT logistics? What needs to be changed to retain the virtues of the method? How can organizations insure themselves against JIT’s drawbacks? According to logistics experts, the key is to understand what JIT really means. 

Disasters, Damned Disasters, and Supply Chain Disasters 

The approach that grew into JIT was pioneered by the Japanese car company Toyota in 1938, so it’s not new. JIT prescribes, in essence, that you eliminate waste. Your warehouses should contain what you need now, not everything you could ever need. Understanding your company’s needs, what must arrive, when and from where is integral. Sounds great. So what could be the problem? 

The problem is what happens when decision-makers want the simplest possible guiding concept and ignore the fact that no aspect of life is easy, and no part of what we do is accomplished with the snap of a finger, Avengers notwithstanding. 

“The minority of clients that are proactive were using just-in-time principles, but in a way that works during the pandemic,” said Lisa Anderson, President of the LMA Consulting Group. “As a decision-maker, I need to have a certain amount of safety stock, but I will replenish that as we take orders, and we’ll replenish those reserves just in time. But 80% of the companies out there are definitely in a world of hurt.”

Click here for the full story.

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Forget ‘If It Ain’t Broke, Don’t Fix It’

All bets are off in these unprecedented times. What worked yesterday might not work tomorrow. Take a fresh look at your product supply strategies.

Should We Make or Buy?

Many executives outsourced when it was the popular and often a smart cost decision to do so. However, the times have changed substantially. Sometimes, we continue what is in place because of the cost and disruption to change. What is the current situation and how has it changed since the pandemic? Read our eBook, Future-Proofing Manufacturing & Supply Chain Post COVID-19 to gain details about make or buy strategies and what makes the most sense to meet your business and customer requirements.

According to my friend and colleague’s article, Is Just in Time Broken?, the incremental cost of inventory as a percent ranges from 31-58%. Now, that is substantial! Are you considering these costs in your calculations? Great minds think alike as our recent articles, JIT Might Not Be What It is Cracked Up to Be and Think Twice About Your Manufaturing Supply Chain encourage executives to THINK. Start with your customer, do a few quick calculations, use common sense and you’ll know what to do.

We are definitely interested in what you discover as you rethink your product supply strategy. Remember, no matter how “good” you feel you are positioned, if you aren’t innovating, you are moving backwards. Check out our eBook and contact us if you’d like to brainstorm these concepts further.

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Published in Industry Week on May 11, 2007

It seems very common that people get on the bandwagon of some of these philosophies like JIT, and they give up as opposed to understanding that it’s not something trendy to do,” says Lisa Anderson, president and founder of business processes advisory firm LMA Consulting Group Inc.

Click here to read more.

Click here for a PDF version of this article.

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