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The Multiple Personalities of Inventory

Companies often find that they are arguing with themselves when it comes to inventory: one group wants to over-forecast, another wants to ignore that forecast and produce their own. The key, according to this article by Bill McBeath, is to create a holistic approach. All competing objectives (generated by groups like the Supplier, Buyer, Manufacturing, Finance, etc.) need to be brought together to create a business model which includes all interests and concerns. There are elements that are inherently easier to combine than others, and in this article one of the examples of an easier combination is risk management. Surely different groups within the organization are focused on unique threats, but one threat that is shared by all of them is mistakes made while making replenishment decisions: Replenishment decisions must also take into account risks””such as what are the consequences of an out-of-stock, and what is the level of inherent risk in the supply network. The consequences of an out-of-stock may vary dramatically. Consider two items with the same lead time and demand variability””standard formulas may tell you to keep similar levels of safety stock. But, suppose running out of one item means you simply have to juggle some production schedules until it arrives, whereas running out of another item shuts down your entire production line, costing millions per day. Obviously that must be considered when deciding how much of each item to carry. In addition, one item may have alternate sources available or a highly reliable source, whereas the other has only a single source, and that supplier has many vulnerabilities (these could be the financial, geo-political, natural disaster risks, etc.). This risk information also should be incorporated into inventory decisions. Often risk management is considered a separate discipline and organization from inventory management, but in fact the two should be working together closely. A way of helping more accurately make replenishment decisions (and many others) is to expand visibility into all areas of the supply chain. As of right now, many organizations only have “islands of visibility”, as McBeath puts it. This doesn't allow for a universal view of inventory and available stock. By increasing visibility, potential shipping concerns can be mitigated before they become show-stoppers.

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