When companies look to free up working capital from within their supply chain, they often focus on inventory. The thinking goes that if the cash stuck in inventory can be released, it could be utilized to do better things such as revenue generation or increasing production by getting faster machines. Wall Street also applauds companies that run lean when it comes to inventories.
As a result of this type of pressure from management, supply chain professionals want to invest in projects that help them with inventory planning. Typically, these take three forms:
These types of inventory projects deal with making the inventory visible and segmenting them. It may highlight any obvious mismatches with demand. For example, if there is inventory that does not move at all or moves very slowly or inventories that have simply expired or become outdated but are still carried on the books. There might also be an attempt to define the inventory policies based on the analysis. For example, should some products be treated as make-to-order versus make-to-stock? Should we simply stop selling some products?
These types of projects deal with calculating the appropriate amount of safety stock to carry given the variability in supply and demand. It is not enough to plan for the forecast; one needs to keep in mind that there is enough variability in the data such that one needs to keep a stash of inventory to deal with unexpected spikes. These projects could be calculated using either the single- or multi-echelon methodology.
Target Setting and Inventory Projection
This third type of project deals with the question of how much inventory to carry over time while accounting for the segments, policies and safety stocks as calculated in previous steps. This deals with forecasts, capacity limits and capacity mismatches because of the seasonality of demand. It also deals with the need to carry inventory for strategic purposes.
Supply chain practitioners intuitively understand the need to invest in these types of projects. However, they still need to sell it to management to get the appropriate funding. And management often demands proper ROI calculations so they can decide where to invest among the various competing projects. This means that supply chain practitioners need to have a way to quantify the benefits, dollarize them and present them in financial terms using terms like net present values (NPV), internal rate of return (IRR), and payback period.
Register now and join us on Wednesday, January 25 at 11 a.m. ET as I share how practitioners can go about presenting the ROI calculations to management.