Inventory ghosts and mythical stories…
Sometimes I come to an assignment at a company and I hear from all sides a panic stricken message: “inventories are too high!”. And even though I keep asking for a more insightful statement, I only hear “inventory is too high” How high is too high? 5 million? 50 million? Should you ask me, I would tell you that an inventory value of 50 million dollars with high turns and low dead stock is much, much better than an inventory value of 5 million dollars with low turns and high dead stock. So where is the rational here? “Inventories are too high because they are higher than they were last year”. That’s a statement that does not make much sense. Last year we had stockouts on many products and that is why we need more raw materials in the process and more of the right finished product in the warehouse. WE NEED MORE INVENTORY !
People are being confused by conflicting messages. What I usually teach, is that you don’t blindly reduce inventories but that you optimize inventories, so that you have the right product at the right time in the right quantity. This does not happen if you simply look at an inventory value at one point in time and compare it to an inventory value at another point in time. We need to take a more scientific approach and consider internal and external influencing factors. For example: if I keep dead stock from past inefficient planning processes and want to raise inventories for product that we were running out of, our inventory will undoubtedly rise. The answer can not be that I keep the dead stock around and/or do reduce the raw materials inventory for the product that I need so desparetly. I either accept the fact that inventory MUST rise or I get rid of the dead stock and it will stay the same. But I CANNOT keep the inventory low on a product much needed and keep on running out. Reducing Sales is not an option and usually a reason to fire someone (…instead of firing someone else when the inventories rise??)
Buyers and Planners are afraid of getting more raw materials but without raw materials they can’t make finished goods… and they were told to get the coverage up to 6 to 8 weeks…. and they did… and then someone says “The inventory is too high”
so here is the Planner at the crossroads: he gets told not to scrap the dead stock; then he gets told to increase the finished product to 8 weeks of cover so we can sell; he dutifully fulfills his tasks and brings in raw materials to make the right product at the right time in the requested quantity… and then someone just simply looks at the difference in inventory value from, before he was told, to after he was told and fulfilled his duty… and says: “the inventory is rising!” duh!