Stages of Inventory Management Expertise

⇨ Inventory management is becoming a critical capability in the age of increasing supply chain complexities.

⇨ Organizations need to build robust inventory management capabilities but building those capabilities is a stepwise journey.

⇨ Organizations need to climb three stages to eventually build an inventory management expertise that is world-class.

SAPinsider will publish a benchmark report on Inventory Management and Optimization in November 2022. There could not have been a better time to conduct research focused only on inventory management and optimization. Why so? Well, first, the first aspect, which is not surprising to any of us, is the immense focus on supply chain and inventory management that we have seen in the last couple of years. As it applies to certain critical industries, inventory management is even being discussed in the White House. So that kind of provides a good opportunity to explore this topic, to get more insights on this topic for executives, so that they can leverage that to harness the energy that has built around transforming inventory management, put it to better use for getting funding, through getting business cases approved and, using that energy positive momentum to transform their inventory management process.

Inventory availability is the most critical aspect of customer service. In manufacturing and distribution domains, organizations need to define Inventory Management strategies that can help them control and minimize Inventory costs while providing the desired service levels to their customers. Inventory Management strategy can be used as a strategy of competitive advantage and as a key differentiator if the organization achieves a certain level of Inventory Management expertise. This leads to the question- what different levels of Inventory Management expertise can an organization achieve? The Inventory Management Pyramid illustrated below can answer this question.

The Inventory Management Pyramid

The three levels of the Inventory Management pyramid essentially are three different stages/levels of Inventory Management expertise that an organization must achieve in its journey towards achieving Inventory Management excellence.

First Stage: Inventory Control

This stage is the foundation of the path towards achieving Inventory Management excellence. In the Inventory control stage, the focus is on activities like recording all Inventory transactions, establishing processes for inventory valuation, and maintaining inventory accuracy like cycle counting. Since this stage lays the foundation of the organization’s inventory management journey, the organization needs to invest significantly in people, processes, and technology to ensure the foundation is strong. With advances in Information Technology, this stage is relatively easier to achieve these days, and most companies that are willing and capable of investing in systems and processes will be able to achieve this stage of Inventory Management.

Second Stage-Inventory Planning

Now that you have visibility into your inventory and have established processes to maintain accuracy and valuation in the first stage, it is time to get tactical with Inventory Management. In this second state, Inventory Planning, organizations deploy quantitative models to determine inventory policy, which are essentially used to make two fundamental decisions:

• How much to order?
• When to order?

These quantitative models help calculate parameters like reorder point, order up to levels, optimal order quantities, safety stock, etc., which essentially help answer the two questions above. At this stage, you also need to make some tactical decisions, for example, whether you would implement a continuous review policy or a periodic review policy for your items/Product groups (multi-period policies).

A key aspect of this stage is defining what policy will suit your different product groups since each product group will have unique characteristics and may require different inventory policies.

Third Stage-Strategic Inventory Optimization

Organizations that are innovators reach this level of Inventory management. After achieving expertise at this stage, an organization can expect to leverage its inventory management process as a competitive differentiator. Examples of best practices that organizations achieve at this level are:

• Adopting Inventory management best practices like Vendor Managed Inventory (VMI), Collaborative Planning, Forecasting and Replenishment (CPFR), Just in Time, Cross Docking etc.
• Improving the accuracy of forecasts by developing better forecasting models and by promoting better communications between supply chain managers and marketing and sales personnel.
• Leveraging optimization and simulation tools to decide optimal points in the network to hold Inventory and how much to hold at each location. Instead of optimizing locally (Inventory Planning stage), you optimize Inventory across your network.
• Collaborating with suppliers to reduce lead times and hence reduce Inventory.
• Implementing best-in-class processes that reduce Demand and Supply uncertainty so that safety stock needs can be reduced.
• Postponing product customization to downstream stages of the supply chain.