Why an Oversized Inventory Doesn’t Solve Service Level Issues

We are right now working with a great company, who supplies the retail and construction industry. They are totally devoted to quality and would go to any length to ensure that the product is delivered in perfect condition at the right time. With an annual growth of 30 – 40 % it is not surprising that all processes and support systems aren’t fully developed and rules of thumb are used instead. To make sure that an order always can be delivered on time the rule for inventory is 6 months sales in stock. Looking at statistics we saw that the service level was 95%, which is right on the average level in the US industry. Looking at the reasons behind the counter-intuitive “non-100%” service level provided some lessons:

 

  1. It is hard to say what 6 months inventory means. An average growth of 40% means that some products grow by 100 % and some less. So, with the sales history as a guide you will inevitably go wrong on some products.

  2. The demand isn’t continuous on all items. In this specific case the orders from big developers can be totally disruptive and distort the forecasting with unanticipated spikes in demand. This wouldn’t be different with an inventory management system though. You still need to handle this separately.

  3. The supplier lead time and reliability varies for different items. The agreed lead time can be handled fairly conveniently with a more specific rule of thumb, say by different categories or absolutely in an inventory management system. The lack of reliability is a much harder nut to crack, it takes very disciplined supplier management.

 

Short term it will take some hands-on inventory management to get closer to the 100 %, longer term it will take an inventory management system. In the mean-time it will take some work to figure out what to do with all the mostly obsolete goods in “the grave yard” the rented warehouse where all obsolete goods go.