By Prof. Dr. Götz-Andreas Kemmner
While part two of our article has taught you the correct decoupling of inventory and MRP levels and explained the optimal coordination of lot size and replenishment lead time, we now move on to the final steps on the way to perfect inventory management: What are the consequences of different goals for the individual partners along the value chain and how do you coordinate with your business partners so that their behavior has as little impact on your supply chain as possible?
Unfortunately, the customer-supplier relationship in the supply chain is not only strained by exceptional situations such as persistent delivery bottlenecks, but also by the behavior of the (supposed?) partners in everyday operations, see…
Basic principle 10: When purchasing and sales meet, it is all too often about tactical maneuvering or leveraging power rather than constructive collaboration.
It is in the nature of things that the purchasing department tries to achieve the lowest possible prices for the products and qualities required by the company. It is also in the nature of things that the distributor wants to achieve the highest possible prices for the products and qualities it offers on the market. We all know what happens when the supplier’s sales department meets the customer’s purchasing department: everyone tries to gain negotiating advantages and use their own negotiating power. It is therefore particularly uncomfortable when one of the two parties has significantly more power. But in many business relationships, even business partners at eye level try to constantly catch each other out in misconduct or conceal their own misconduct in order to strengthen their own position in the next price negotiations. This behavior is all the more pronounced the more sales and purchasing are responsible for day-to-day business on both sides. Work is more cooperative where scheduling talks to scheduling and logistics talks to logistics. In this way, many coordination problems can be solved “at the working level”, so to speak, before they lead to conflicts at the “ministerial level” and thus usually to increased inventories.
Best practice module 10:
Sustainably effective inventory management requires objective and cooperative collaboration with the central suppliers, in which the costs of the supply chain are borne jointly by all parties.
If we look beyond the hall door at the variety of products in our raw, semi-finished and finished goods warehouses, we quickly realize…
Basic principle 11: Small cattle in the product portfolio usually make a lot of muck, but little turnover and even less profit.
In a typical product portfolio of a stock-keeping manufacturer or trading company, 20% – 30% of items generate 60% – 80% of sales (A-B/X-Y parts), while at the other end of the portfolio, 20% – 40% of items often only generate 2% – 3% of sales (C/Z-Z2 parts). While we find turnover figures of 12 – 24 and sometimes far beyond for the high-flyers, the stock of many of the exotics does not turn once a year. But even this long tail of exotics has to be managed and stored. If this “long tail” is procured on an order-related basis, it does not pose a significant problem for inventory management. However, order-related procurement is often not possible for various reasons. It is then necessary to find sensible strategies to reduce stocks and handling costs.
Contract manufacturers also have to deal with this kind of product portfolio distribution, not at the finished goods level, but at the purchasing or assembly level. One solution here is short production throughput and replenishment times for these exotic parts or, in some cases, C-parts management, which is primarily geared towards C/X-Y parts, but can be used for some C/Z-Z2 parts with short replenishment times. However, a considerable proportion of these C/Z-Z2 parts consist of drawing parts, for which C-parts management usually does not help.
The long tails in our companies’ product portfolios have a story, and like all stories, it starts at the beginning. In the case of a product or component, this means: when identifying or assuming a solution to a problem in which the market is interested. In order to be able to offer the solution, variants are split up or completely new parts or products are developed. With new product launches, it is in the nature of the business that we first build up stocks in order to be able to react quickly to the expected increase in demand and thus give the new product a chance on the market. If the product has had its chance and has not been able to make use of it, then it is logical to part with this product again.
From a logistics perspective, there is a lot to optimize in the context of product portfolio management, both for new and discontinued items.
Best practice module 11:
In order to keep inventory ranges sustainably reduced, there is no way around regular maintenance of the product portfolio.
Every product or component not only has a history, but also a prehistory that plays out in product development and design. This is where the challenges of inventory management arise, because it means…
Basic principle 12: A large part of the inventory costs of a part is already determined during product development.
Many years of experience have shown that 80% of a product’s life cycle costs are already determined during product development. In this way, product development also influences the inventory costs and future inventory requirements of each part in several ways.
The choice of raw materials and the manufacturing processes and processing steps resulting from the shaping have an impact on procurement times, purchase prices, procurement and manufacturing costs and thus on inventory costs and delivery readiness. The effects multiply with the number of parts that go into a product. Add to this the fact that the almost unavoidable spread of variants over the course of a product’s lifetime splits up the material flows very early on in the value chain, and the problems multiply once again.
Starting with product development not only means using a large lever, but unfortunately also a heavy one that only moves slowly.
Best practice module 12:
In order to reach the top of the performance leaders in inventory management, you need to design your products in a logistics-friendly way, with products consisting of as few parts as possible, using the highest possible percentage of standard parts and developing their variants as late as possible in the value chain, ideally only at the customer’s premises.
At the end of our joint journey towards sustainable and holistic portfolio management, we must not forget one key basic principle:
Basic principle 13: Trust is the beginning of everything, including the end of inventory management.
Crime statistics as well as private and company experience tell us that most of us, by and large, abide by laws and rules. And yet, as we know from our own experience, compliance with the law can quickly diminish if it is not constantly demanded and monitored. And in general, compliance with the law decreases where people are not convinced that the laws make sense or where they mean disadvantages for themselves. Accordingly, when it comes to inventory management, moderate control is better than excessive trust. Logistics controlling helps to identify the situation and find optimization approaches.
An effective control mechanism can be established by means of target inventory management. This tool can be used to continuously check how far the actual stock of each individual item deviates from the target stock at each individual stock level in the entire supply chain.
However, in order to determine realistic and not theoretical target stocks, a sophisticated set of tools is required, because reliable target stocks can only be calculated using a simulation process and not by taking a sharp look at the MRP list of an MRP system.
The core element of target inventory management is the key figure “inventory reduction potential”, which is determined for each individual material number. The inventory reduction potential can show operational users and inventory managers where there is too much and too little inventory and help them to stay on track in their day-to-day work.
Best practice module 13:
Consistent target inventory management is the lane departure warning system for inventory management. It gives users a guiding signal so that they can always find their way back to the predetermined path of readiness for delivery and inventory and shows managers where and how much action is required.
Inventory management is a holistic task. If you want to achieve sustainable results, you need stamina and the right tools and methods. Perhaps you have already implemented many of the best-practice modules described, or perhaps you still have a lot of work to do. It is work that is worthwhile from a corporate strategy perspective, as a 20% reduction in inventory improves net profit in an average company just as much as an increase in sales of around 10%.
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