By: Eric Jones
In order to maintain a successful planning process, organizations need to be able to quickly identify and remedy excess inventory. This task can be difficult, and is often overlooked, as it requires a great deal of accountability and discipline from all members of the organization.
As JFK said in 1961, “victory has 100 fathers, but defeat is an orphan.”
So how does an organization establish a disciplined process to quickly identify, analyze, and remediate excess inventory? The first step is accountability within the Integrated Business Planning (IBP) process.
The Integrated Business Planning (IBP) Process
A decision-making process to align strategy, portfolio, demand, supply, and resulting financial implications through a focused and exception-driven monthly re-planning process. The result is a single operating plan over a 12 – 18 month rolling horizon, which senior executives hold themselves accountable for achievement.
Done properly, it is the formal way to orient the business towards supply chain optimization. IBP and S&OP (Sales and Operations Planning) are very similar concepts, with a primary distinction that IBP involves non-supply chain stakeholders, i.e. Finance.
The Demand Planning (DP) Process
A process where demand for products and services is forecasted to support the marketplace. It involves all functional areas that plan and execute demand-creating activities, including the sale of unwanted inventory that is nearing expiration. The volume and financial projections from the demand plan are communicated to those who require awareness to perform their responsibilities.
Ownership of Inventory
Within this context of supply chain planning, we can develop a consensus on accountability by applying the simple rule: if excess inventory exists, thenthe function that caused the excessowns it.
For example, if a demand forecast error created inventory beyond actual consumption, the demand side of the business owns it. Conversely, if inventory was the result of producing beyond demand, perhaps to exploit a volume-based cost advantage, then the supply side owns the inventory.
Inventory Review Steps
While establishing accountability is a good first step, the critical task is to embed the inventory review steps into the IBP process. The responsible party has the task of identifying the root cause of the inventory, along with plans to avoid future errors.
Ultimately, the demand team will own the responsibility for marketing and selling the products to alleviate the financial and physical space constraints caused by the excess inventory. The key to a successful IBP process is not assigning blame. Success is found in planning process discipline, leadership humility, and a focus on execution.
The Role of Measurement
The old adage stands: what gets measured gets fixed. When inventory is added to the IBP/S&OP process, sales and marketing teams are allowed to develop creative strategies to incentivize the sales team to drive consumer preference towards available inventory.
In the end, excess inventory develops as a result of mistakes, misaligned decisions, and insufficient consideration or awareness of inventory costs in numerous decisions, including product design, sales forecasts, sales and operational planning.
The cost of these errors is only amplified by the constrained global supply in today's market. While there's no "silver bullet" to resolving the problem, companies that can quickly identify mistakes and find creative solutions to alleviate excess inventory will outperform their less disciplined competitors.
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