This article is an excerpt from the reportThe Right Stuff — Managing Inventory to Enable Agility for Manufacturing and Distribution Companies. A copy of the full report can bedownloaded here.
In Part One of this series, we discussed what causes under- and over-supply scenarios and the importance of product-specific demand forecasting expertise. Here in Part Two, we look at what it takes to create accurate inventory visibility.
Accurate Inventory Visibility is Foundational
The foundation for inventory management — and a prerequisite to being able to balance supply and demand — is having accurate, up-to-date inventory visibility. When a company has manual processes, lacking error detection/correction, then errors creep into the perpetual inventory1 numbers. If the inventory data about each item at each location is incorrect, then decisions are made based on false assumptions. The business will be unable to optimize replenishment or production plans to ensure it has the right amount of inventory at each location.
Accuracy Requires Methodical Processes and Systems
Inventory accuracy depends on having consistent, disciplined processes at each inventory control point2 in the cycle, preferably driven by a single company-wide system. An inventory control point is the step within a process where the disposition of an inventory item changes. Often the change in disposition is when an inventory item is moved to a different stocking location, such as when the item has been received into a warehouse, or putaway to a specific bin number. It can also be a non-location change in disposition such as a quality hold for a part or product. For example, if there are 1,000 of a specific part in stock within a manufacturing plant, it would be critical to know if 600 of them are on quality hold. In that case, the available inventory is only 400 parts, not 1,000 parts.
Consider a manufacturing plant, as shown in Figure 3. With paper-based or spreadsheet-based manual data entry processes, mistakes can be made at each inventory control point — i.e. at receiving, putaway, raw material retrieval, WIP movements, finished goods putaway, and pick, pack, ship. These errors accumulate and the inventory numbers become increasingly inaccurate. Much higher accuracy is maintained by using barcode or RFID scanning at each step, preferably with some sort of double-checking mechanism, such as weigh scales that ensure the weight of the items matches the number and type of item being recorded into the system.
Figure 1 – Inventory Control Points in the Flow of Inventory Through a Manufacturing Plant
For critical steps — such as pick, pack, ship to a retailer that charges hefty fines for incorrect shipments — some companies go as far as having a second employee rescan or physically recount each order, to ensure high shipping accuracy. That becomes another time and cost sink. A high-accuracy inventory control system reduces the need for that kind of labor-intensive inventory counting and double-checking.
Regardless of the system in place, employee training and monitoring is needed to ensure compliance with process and proper use of the system. The amount and intensity of training and monitoring can be reduced by the use of human-error-preventing systems that automatically double-check workers’ actions to catch and correct errors or raise an alert for potential data errors in real-time.
The same concept of inventory control points applies to inventory flowing through a warehouse or distribution center (DC) which also has inventory control points where receiving, putaway, move, pick, pack, and ship are done. High-accuracy mechanisms (e.g. barcode scan, system double-checks vs. expected quantity, etc.) and process discipline at each control point ensure more accurate perpetual inventory counts. Inbound inventory can be matched against the ASN3 and/or PO (purchase order) to ensure the proper inventory was received. In the handoff to transportation, high accuracy counts (barcode or RFID scans) of what is loaded and unloaded from trucks and containers is also quite valuable.
Beyond the Four Walls of the Business
When an enterprise has many suppliers, channel partners, and customers spread out across the globe, it becomes more important that it gains better visibility into inventory outside of its direct ownership and control, on both the supply and demand side (see Figure 4 – End-to-end Inventory Visibility). On the supply side, the company has outstanding POs and needs reliable estimates of when those will ship, as well as early indications whenever there will be delays in shipment. Once shipped, updates on estimated time of arrival (ETA) are important, particularly when there are delays.
Figure 2 – End-to-end Inventory Visibility
This external visibility is even more important during times of disruption. Early visibility into disruptions in supply or rapid changes in demand is key to providing the intelligence to drive agility. By responding earlier, faster, and with more accurate intelligence, a company has more options, makes smarter decisions, and avoids catastrophes.
Demand-side information can be harder to obtain but is extremely useful in creating a more accurate forecast. This becomes even more essential when launching a new product through a multi-tier distribution channel. Knowing how much inventory is in the channel and sell-through rates at each tier is key to ‘clearing out the channel’ — i.e. getting most of the old model inventory sold before launching a new product, without running out of the old models before the new product launches.
It is also very useful to understand customers’ inventory levels and get visibility into actual consumption as it occurs, whether selling direct or through a multi-tiered channel. End customer consumption is the only consumption that really matters in the supply chain — everything else is there to serve the end customer. Customer onsite inventory visibility is imperative when there is a VMI (Vendor Managed Inventory) relationship with the customer.5
In Part Three of this series, we will examine inventory management strategies to achieve higher service levels and lower inventory levels simultaneously.
1 Perpetual inventory management (aka continuous inventory management) keeps an ongoing running tally of inventory across the organization. In contrast, periodic inventory management counts and updates inventory numbers at regular intervals and does not keep a running tally in-between the inventory counts. Modern fast-paced businesses require accurate perpetual inventory numbers to compete and succeed. — Return to article text above
2 This is not to be confused with the US military use of the term ICP (Inventory Control Point), which refers to an organization unit within the DoD supply system responsible for materiel management of a group of items. In this paper, we use ‘inventory control point’ to refer to the point within a process where the disposition of an inventory item changes. — Return to article text above
3 ASN = Advanced Ship Notice, an EDI message that provides details on a shipment before it arrives, enabling the recipient to better plan ahead. — Return to article text above
4 One-up/one-down traceability in the food supply chain is mandated in the United States by Section 306 of the 2002 Bioterrorism Act. — Return to article text above
5 A 3PL (Third Party Logistics) provider may provide storage and fulfillment services at a VMI hub or site near the customer. In that case, the 3PL may give updates on inventory on hand and consumption by the customer. — Return to article text above
To view other articles from this issue of the brief, click here.