Last quarter one of my clients built a natural process of inventory control and recently described it in the form of a set of guidelines. Subsequently, I found several requests including a discussion in a LinkedIN group for a rule of thumb for stocking levels. Well we know that things change with time and static rule of thumb may not serve the purpose. You need a process to allow you to have an acceptable level of inventory. Most often the decision is not how much inventory, it is about how do I have a process that addresses the dilemma of sometime having too less stock (stock out) and other time having too high stocks (expiries, non-moving stocks, returns, money locked).
Here is a sample of the description and question that I am often asked.
I have 30 days of committed orders and above it we forecast for 60 days. Hence, we have orders for 90 days ( a quarter of the year) in our operational horizon. With time orders add into ‘committed orders’, which may be from the ‘forecasted ones’ or ‘new orders of different products or specifications’. The committed orders in fact, could change almost in the range of -5% to 25% over 30 days load on day to day basis. Of course, once in a quarter we may have spiked orders of more than 10 days work.
We do use some sort of forecasting, but you know it is never accurate for operations and it never works, rather creates a lot of mismatches and tension. Forecast, does seem useful though, for advanced planning and preparation with suppliers and sometime for capacity management. We do have intuition that for effective operations, we need something at the level of scheduling and stock management, than long term based planning.
Under above situation, we often run out of stock for several products and we get brickbats from our customers as well as from our sales team for not honouring the promise of due date or ready availability of certain products. On the other hand, at any time, a substantial number of our products are overstocked and lie in our FG stores for too long a time, which locks my money and invites ire of my CEO and CFO.
In every meeting I am hammered to ensure availability on one hand, while I am warned of bad consequences on my next promotions if I do not keep my inventory down to 30 days. My inventory levels fluctuates in the range of 75 days to 90 days.
Well this is only half of the story, I have to take care of raw materials as well, whose variety is no less than that of our saleable products (SKUs).
I feel than 30 days inventory is not realistic, while my bosses feel than anything above 30 days is a professional crime. What do I do?
wish you happy reading.