ManufacturingJanuary 2, 2020

Why Is Inventory Still A Big Deal?

I have a colleague who loves to tell me “less inventory is…
Avatar Dave Turbide

I have a colleague who loves to tell me “less inventory is always better” because he knows I’ll take the bait. I simply can’t resist a good-natured argument about what the purpose of inventory and its value, as well as the costs and risks associated with having inventory in the plant and in the supply chain. (yes, I’m a nerd – and I make no apologies).

Inventory does serve a purpose… two purposes, in fact. One is to buy time: if a customer needs an item right away and it takes days or weeks to make it, carry some in inventory to be able to sell and ship the item in less than the lead time it would take to make it. The second use for inventory is to compensate for the unknown and uncontrollable. Exact customer demand is not predictable (it is predictable in general, statistically, but not in the specific as in how many orders will come in today compared to the total for the week or month). If production does not synchronize exactly with demand, inventory provides a buffer to maintain customer service. Other factors like late receipt from suppliers, equipment breakdowns, quality problems, etc. also bring uncertainty – inventory allows continued operations and shipping when supply or production are disrupted.

That said, there’s no benefit in having more inventory than needed. Less is always better when it comes to excess inventory. So the real answer for inventory is to have just enough to cover the time dimension and the uncertainty. When it comes right down to it, that simple sentence summarizes the main focus of MRP, ERP, as well as factory and supply chain operations. It’s no wonder inventory takes up so much of our time and attention.

With today’s supply network planning and management tools, we are now able to do a much better job of planning and managing inventory across the entire value stream. In the current parlance, we’re talking about Multi-Echelon Inventory Optimization or MEIO. The multi-echelon part is important. Instead of optimizing inventory at each warehouse or each tier (echelon) of the supply or distribution network, today’s planning systems can consider inventory at every location in its optimization.

It might be more beneficial to move inventory around the network or ship from further away rather than hold more inventory at lower tiers, for example. MEIO planning takes all factors into consideration including shipping costs and capacities (in multiple combinations), lead times, storage space, and more.

Counterintuitive as it might be, sometimes it is actually less costly to have more inventory is some locations and pay to trans-ship around the network or ship a greater distance to the customer… so less inventory is not necessarily better (take that, Richard).

While every company on the planet would like to have less inventory, the reality is that inventory is a necessity. The best outcome is to understand exactly how much inventory we need (and where, and when) and carry only enough to maintain service levels (availability) throughout the supply and distribution networks.

Oh, and by the way, as process improvement efforts decrease lead times, increase reliability and quality, and IIoT helps reduce uncertainty, you can lower those inventories without damaging availability (less safety stock). Win-Win.

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