Go for the bacon!

Just between you and me: have you made any New Year’s resolutions? As a survey showed, the majority of company managers have made a resolution to lose weight in the coming year. However, what is initially aimed at physical well-being can easily be applied to the supply chain of many companies: many simply have too much stock around their hips. However, there can be no question of prosperity bacon here. On the contrary: (excessively) high inventories cost money and tie up important liquidity! And in view of the ongoing banking and euro crisis and the flagging economy, this is leading to a strategically dangerous situation. Because when the earnings situation weakens, banks often reduce their credit commitments – in the worst case, there is a risk of financial collapse.

So get to work, because there is usually still untapped potential for improvement and liquidity reserves in your own company that you can exploit. A reduction in inventory not only frees up liquidity, but also significantly reduces running costs: for 80% of companies, it is possible to reduce the amount of inventory by around 20% to 30% per year. But which companies does this apply to? Let’s take a look around: In my experience, three groups of companies can be identified:
A third of companies are still manual controllers. For the most part, there are no portfolio targets. While inventory is still tracked as a key figure, there are no objectively reliable figures on delivery readiness. The planning and scheduling functions of the ERP system are only used to document the manually compiled findings. Safety stocks are included in the order quantities from the stomach of the dispatchers and production controllers. Safety stocks are usually only stored in the ERP system by the sales department for important finished goods, but are often ignored by MRP. Stocks are reduced unstructured by manual measures and only remain until the first delivery bottlenecks occur.

50% of the companies are among the basic and basic optimizers. Inventory targets often consist of little differentiated inventory ranges, and few are interested in measuring delivery readiness. Companies are either unaware of or ignore the complicated web of connections between planning strategies, scheduling procedures and logistical data, combined with the architecture of the value chain. Instead of having the problems solved quickly and sustainably by specialists, the company tinkers with its own resources. In most cases, simple basic measures such as the intermittent updating of basic logistical data are sufficient. Focusing on the success of a stock level often ignores the fact that stocks have not really been reduced, but only shifted.

The majority of inventory reduction successes in these types of companies are not sustainable and the existing potential is not being exploited. The resulting yield losses alone would justify even the most expensive optimization projects.

The last and smallest group are the professional inventory optimizers, who work continuously and systematically on the profitability of their value chain. Actual delivery readiness is usually tracked in a differentiated manner as a key control variable. Across all inventory levels, there are realistic, item-specific targets for delivery readiness and inventories, which are simulated and balanced in such a way that the entire supply chain operates as economically as possible.

To achieve this, planning uncertainties are systematically identified and reduced or buffered by safety stocks. The day-to-day business should largely be planned and scheduled by the ERP system, leaving people to concentrate on handling the exceptions. This involves continuously adjusting the parameters, strategies and data of the end-to-end planning and scheduling process using suitable strategic ERP tuning systems.

However, most of the companies in this group did not achieve this goal on their own, but sought extensive specialist and technical support – which paid for itself within a short period of time.

Needless to say, the latter group of companies has no problems with its banks and still makes decent profits even in economically weak phases. If your company does not belong to the latter group, your New Year’s resolution for 2012 should be: Lose weight! Only for the stocks, of course.

Picture of Prof. Dr. Andreas Kemmner

Prof. Dr. Andreas Kemmner

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