Supply Chain Directors should look at inventory like an Eskimo!
The legend goes that Eskimo have up to 100 different words for snow.
I am not able to check how true this statement is but according to Wikipedia, they call snow on the ground “aput”, falling snow “qana”, drifting snow “piqsirpoq” and a snowstorm “qimuqsuq”. The English language has plenty of words for rain. That is of course because going out in the rain without an umbrella has different consequences in the case of a drizzle, a shower or a cloudburst…
Both examples are illustrations of linguistic relativity: language affects thought. Some experts go as far as saying that language determines thought: you can only think what you can say. We might not go that far but the idea behind linguistic relativity is easy to understand: the more people need to think about a phenomenon, the more words they need to describe the subtle differences between variants of the phenomenon. The different words help them to be precise in what they mean, to better understand what they are talking about, and to make better judgments.
Apply the principle of linguistic relativity to the word ‘Inventory’. How important is inventory in your company? How many words do you have to describe it? How can we expect to understand inventory and be able to take good decisions about it if we cannot even describe it with some degree of precision?
We do not need 100 different words for inventory.
Just a few are enough. Let’s concentrate on 5 words that are very important to take correct decisions about inventories.
- Safety stocks are stocks that you keep as a buffer for the normal uncertainties of day-to-day operations. It’s the stock that allows you not to get in trouble if demand is higher than expected or if supply does not arrive on the day you asked for it.
- Anticipation stocks look a bit like safety stocks but they follow a completely different logic. A company can decide to build an anticipation stock to cover a peak demand that it will not be able to produce at the moment of the demand. Safety stock is driven by uncertainty, anticipation stock is driven by a known temporary unbalance between supply and demand.
- Strategic stocks find themselves at the other side of the uncertainty spectrum. Companies do not keep them as a protection against something planned. They do not even keep them as a buffer for regular variability. No, strategic stocks are there to respond to risks.
- Cycle stocks are the result of minimum order quantities or minimum production quantities. Companies accept cycle stocks because it is cheaper to buy or produce goods in larger quantities then to buy or produce them one at a time.
- Work in progress or stock in transit is the result of lead-time. If goods spend 2 months in transit between two continents or 4 weeks in process at a subcontractor, you will see at least so much inventory in your books.
If someone says: ‘Our inventories are too high.’, ask, ‘What inventory do you mean?’
As long as you do not have an answer to that question, do not hope to reach sustainable improvements in inventory efficiency.
Why is that? Because different types of inventories work in different ways.
- Safety stocks are driven by uncertainty and responsiveness. To reduce safety stocks, work on reducing uncertainty of supply and demand and reduce lead-times.
- Anticipation stocks are driven by capacity limitations with regards to peak demand. To reduce the need for anticipation stocks, increase peak capacity.
- Strategic stocks are difficult to reduce. But making sure that we have well thought about them can help a lot already.
- If cycle stocks are too high, discuss with purchasing and manufacturing. Can they reduce setup costs, should we negotiate again with suppliers?
- Reducing work in process is all about reducing lead times. Get rid of the waiting times in the process and the work in progress will go down automatically.
Improving inventory efficiency becomes much easier once you know what inventory you are talking about. Learn to distinguish inventory like Eskimo distinguish snow and get a much better grip on the millions your company has invested in inventories.