Learn more - Inventory management
Inventories are often an under-optimized part of the business that is regarded as 'necessary evil' or 'cost of doing business'. It can be tempting to fix acute issues quickly by building more inventory buffers.
Even complex and turbulent businesses can be operated with high service levels and lean, few days' inventories, but it requires both finding and fixing the root causes leading to inventories as well as strong operative practices to avoid shortages despite thinner buffers.
Approach
Accepting to carry inventories should never be done lightly. Inventories should be treated as investments, and they should be able to justify their value and role in fulfilling customer needs and earning profit to the company. Inventories should be used as a method of last resort after all other options to run the business without them have been used.
Root causes leading to inventories
For the biggest step improvements, it's necessary to track down and challenge the root causes that end up causing the inventories. These include e.g. business model, supply base, product architecture, service level promises and differentiation from competitors.
Once these root causes are clear, it is possible to assess if some of them could be adjusted slightly to radically reduce the need to carry inventories.
Clear root causes and their requirements for inventories enables also building a bottom-up 2nd opinion on how much inventories would be needed to operate company's business. This 'bottom-up 2nd opinion' can be used to assess and challenge currently existing inventories' total levels, instead of just working top-down to streamline them bit by bit.
Operative practices
Best inventory management set-up is worthless unless it can be executed in daily operations. Day-to-day management of inventories requires dealing with high amount of complexity and fast changes. This complexity can be handled via clear rules and practices, e.g. inventory steering models, and IT tools to maximally automate practicalities and help experts focus on solving special cases.
But most importantly, keeping the business running with thinner inventories depends on the skills, competences and ways-of-working of the experts using the tools and practices.
How to improve
Executing inventory improvements should be managed as an investment: pursuing to get it profitable as soon as possible. This can be done by first bringing home the quick wins, that justify the business case of working more patiently for the bigger step changes and their enablers, e.g. tools, competences and ways-of-working.
Improvements should be done gradually, and progressively towards lower inventory levels only after there is trust and experience in keeping the business running with previous level of buffer reductions.