Common Inventory System Problems & Solution
Mistake No. 1: Using a narrow measurement of performance
Symptoms:
Preoccupation with the forecast within the execution time frame. Typically, companies begin altering their forecast management processes when addressing supply chain performance. But this is unwise without understanding the nature of your demand and the root causes of forecast errors. When forecast accuracy is overemphasized, fill rates and inventory turns don’t improve, even when forecast accuracy does.
No measure of customer service or inventory turns. Customers must be satisfied on an ongoing basis for a company to achieve long-term sustainability. Yet, inventory managers often have no idea how well customers’ needs are being met. Similarly, without knowing how quickly inventory moves through the value-creation-and-delivery system, a company won’t be able to manage inventory levels.
Daily planning is based on a back order report. This is an entirely reactive model. Today’s fast-paced marketplace requires proactive inventory planning to meet current demand. Customers will switch to a competitor if their needs are consistently unmet in the time frame they dictate.
Solutions:
Mandatory tracking of fill rate and inventory turns for all product lines. Product managers should know these measures at all times. Fill rate should be measured daily, while inventory-turn measures will vary based on sales and production cycles. The important thing is that managers are both tracking and working to improve these rates.
Develop realistic forecast-error measures. Developing realistic measures for how much forecast error you can tolerate without a SKU stock-out is essential. Typically, companies estimate plus or minus 10 for this measure, which equals about two days worth of inventory-a miniscule amount considering that companies often have weeks or months worth of inventory. Effective forecast management and inventory planning require accurate data, so accurate forecast error measures are a must.
Mistake No. 2:
Symptoms:
Preoccupation with the forecast within the execution time frame. Typically, companies begin altering their forecast management processes when addressing supply chain performance. But this is unwise without understanding the nature of your demand and the root causes of forecast errors. When forecast accuracy is overemphasized, fill rates and inventory turns don’t improve, even when forecast accuracy does.
No measure of customer service or inventory turns. Customers must be satisfied on an ongoing basis for a company to achieve long-term sustainability. Yet, inventory managers often have no idea how well customers’ needs are being met. Similarly, without knowing how quickly inventory moves through the value-creation-and-delivery system, a company won’t be able to manage inventory levels.
Daily planning is based on a back order report. This is an entirely reactive model. Today’s fast-paced marketplace requires proactive inventory planning to meet current demand. Customers will switch to a competitor if their needs are consistently unmet in the time frame they dictate.
Solutions:
Mandatory tracking of fill rate and inventory turns for all product lines. Product managers should know these measures at all times. Fill rate should be measured daily, while inventory-turn measures will vary based on sales and production cycles. The important thing is that managers are both tracking and working to improve these rates.
Develop realistic forecast-error measures. Developing realistic measures for how much forecast error you can tolerate without a SKU stock-out is essential. Typically, companies estimate plus or minus 10 for this measure, which equals about two days worth of inventory-a miniscule amount considering that companies often have weeks or months worth of inventory. Effective forecast management and inventory planning require accurate data, so accurate forecast error measures are a must.
Mistake No. 2: