"Inventory is bad, inventory is evil," finance and operations professors intone across business schools worldwide. And every B-school graduate knows companies should balance enough inventory to meet customer needs while accommodating shifting preferences. That said, companies face a paradox; holding too much inventory ties up valuable cash, but too little inventory is risky since some suppliers could lose their financial footing. In a global financial crisis, is inventory still evil?
Forecasting sales and inventory levels is probably one of the most difficult jobs of a product and/or supply chain manager as companies need to marry demand signals with supply. Adding more complexity to the mix is global supply chains that span weeks, multiple countries and sometimes oceans. Lots of hand-offs, tons of data to track, and lots of points for things to go wrong.
For many product managers (and the marketing/brand managers that support them) inventory management is a critical task. By not carrying enough inventory, companies can not only lose out on sales but also suffer reputation damage by not meeting customer needs.
Nonetheless, with companies hoarding cash–it seems the last thing companies need is to be stuck with unsold finished goods or piecemeal parts.
Apple's Chief Operating Officer Tim Cook agrees. In a recent Fortune article, Cook says inventory is "fundamentally evil." And Cook should know, as he's in the very fickle consumer electronics business. "You kind of want to manage it like you are in the dairy business," he says. "If it gets past its fresh date you have a problem."
Here's the rub, however. Forces of globalization and tight coupling are magnifying the complexity, impact and frequency of events. Once steady suppliers are going bankrupt, some suppliers cannot get loans in the credit crunch, and disruptions in the supply chain are becoming more commonplace. Your product launch date doesn't matter much if your suppliers cannot deliver.
But can't analytical modeling save us? After all, most companies are using advanced planning applications to predict future trends and behaviors, right?
While statistical forecasting techniques can help extrapolate future trends, these methods rely on building models based on historical data. And some executives say in volatile times, historical data can no longer be trusted to accurately model and predict the future.
So what's the solution? Should we build more redundancy into our supply chains to better manage the risk of suppliers, or stay the course with the trend towards information management and just-in time supply chains that are well optimized and thin?
Better communication is a potential answer says Camille Schuster, President of Global Collaborations. What is needed, she says is, "Proactive contact with suppliers on a regular basis to determine how supplies are doing, what issues are coming up, whether any shortages are foreseen, whether there is any softness in any product area, what changes and/or rumors are floating about."
For many companies, effective inventory management is a critical component of financial health. With "cash" at a premium in this global financial pandemic, inventory decisions can literally make or break your company.
When it comes to inventory, what level of risk are you comfortable with?
Questions for DailyFix readers:
* Is a little inventory cushion warranted as risks (environmental, political, criminal, financial, reputation, terrorism etc) seem to be increasing in intensity, complexity and frequency?
* In volatile times, should forecasting and inventory management be more focused on "gut" decision making rather than mathematical models?
* Stockouts leave "money on the table" and ultimately reduce customer satisfaction. What is your marketing advice to supply chain, operations and/or engineering executives in these volatile times? Hedge their bets with a little more inventory, or continue to operate "thin"?
* Is inventory still evil? Should it be avoided at all costs?
Take the first step (it's free).
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