Demand-Driven Performance FAQ
Providing customers what they need, when they need it, while lowering the overall cost of delivery and improving ROI
05. Addressing the Challenges of Inventory Management and Operational Performance in Supply Chain Management (DDPSC05)
05a. How can we better address the challenges associated with Inventory Management and Operational Performance?
There are several major aspects that can make Inventory Management very challenging:
- The variability associated with the time required to re-supply or replenish an inventory location,
- The uncertainty in customer demand (some of the possible underlying causes of the variability were discussed in DDPSC02); and
- The fact that it is virtually impossible to predict how the variability in supply will line up with the variability in demand, making the tradeoffs between investments in inventory and the corresponding risk of being out-of-stock equally as difficult to determine.
The problems associated with not effectively addressing the inventory management challenges vary and even change over time, but, usually include: out-of-stocks, shortages, over stocks, obsolescence, expediting, use of premium freight, over time, poor customer service, and lost sales. The final outcome is a higher cost, a lower top line and a lower bottom line.
The challenges of Operational Performance have more to do with delivering on time with shorter, more reliable lead times while lowering the overall cost to produce, process and deliver. Some of the possible causes, in terms of underlying policies and measures were discussed in Policies, Measures, and Organizational Alignment Issues (DDSPC04). The problems associated with not effectively addressing the operational performance challenges vary and even change over time, but, usually include: expediting, use of premium freight, over time, longer more unreliable lead times, lower inventory turns, late deliveries, poor customer service, and lost sales. As with Inventory Management, the final outcome is a higher cost, a lower top line and a lower bottom line.
When we look to acquire solutions to address the challenges of Inventory Management and Operational Performance we should keep in mind that there are two types of solutions. One type of solution helps us to be more efficient in dealing with these problems - more efficient in the sense of being able to compensate for the problem with a minimum of wasted effort or expense. The other type of solution helps us to be more effective in dealing with these problems in that the focus is on addressing the underlying causes of the problems, which significantly reduces and can even eliminate the problems all together.
It has been said that solutions are only as effective as the problems that they solve. Take, for example, these business challenges:
- We experience a lot of variability in our demand.
- We experience a lot of variability in our delivery performance.
- We don't always know what we really need to process and when, in order to satisfy Customer demand.
- Our lead times are often longer than our Customers' want to wait.
- We have too many "out-of-stock" situations for items we plan to stock.
- We are frequently expediting.
- Our premium freight charges are higher than we would like.
- Our workload and priorities are constantly shifting.
- Our overtime charges are higher than we would like.
- Our inventory turnover is too low.
- We have too much of some inventories and not enough of other inventories.
- Inventory designated for one order is often redirected to satisfy another order.
- Significant manpower is spent on maintaining, preserving, and inventorying our inventory.
- We have frequent disagreements over the types and quantities of items to stock.
- We have frequent disagreements with our Customers over price, lead time and delivery performance.
Are these a list of opportunities whose priorities are ranked according to the degree of risk relative to reward? Or, could there be a causal relationship that explains why these problems exist and that we experience their effects?
05b. How can we know, in advance, if a solution we are considering will provide us with greater efficiency or greater effectiveness in addressing our problems?
The best way to answer this question is to map the cause-effect relationships between the problems so that the underlying causes can be clearly identified. Once the underlying causes have been identified it becomes immediately clear whether or not the solution is addressing the underlying causes or enabling the effects to be more efficiently addressed. Another benefit to this process is that once the underlying causes have been identified, it is easy to see if the proposed solution is geared towards reducing or eliminating the underlying cause, or if it is geared more towards nullifying the effects of the underlying causes first and then eliminating its effects later.
If you remember back in Identifying and Addressing Organizational Measurements (DDPSC02) we concluded the following:
"The supply and/or demand variability is what causes all of the expediting, out of stocks, poor fill rates, over stocks, long lead times, late deliveries, lost sales, over time, premium freight, etc."
That leaves us with two courses of action: 1) focus our efforts on addressing the causes of variability, and 2) focus our efforts on nullifying its effects, which are not necessarily mutually exclusive.
Given the fact that we will likely never totally eliminate variability, we are usually better off focusing our efforts first on nullifying its effects and then using that information to identify and address its causes. (See DDPSC05 Figure 1).