(This article first appeared at Supply Chain Digest and was co-written with Paul Brown.)
When rolling out a tactical inventory planning system, there are several organizational issues you need to keep in mind. These will matter as much as the technical capabilities of the solution in terms of overall implementation success.
1. You may have to do a lot of educating. Inventory concepts are usually not widely known outside of handful of supply chain analysts within an organization. You will need to do a lot of basic education on the drivers of safety stock vs cycle stock, the impact of desired fill rate on inventory levels, and the reasons you need some sophisticated math to get the calculations right. It’s also helps to explain “The Why’s.” Why working on inventory is important to overall business performance. For example; how inventory impacts key financial metrics like Cash Flow and how the amount and the location of inventory can impact distribution and transportation costs of both the company its customers. The Why’s are especially important to senior executives.
2. You may find a lot of Excel solutions in the organization. In large, (and especially decentralized) organizations, you are likely to find that many planning managers have built Excel spreadsheets to figure out their required safety stock. And some, or most, of these spreadsheets may be pretty sophisticated. This is good because these are people you don’t need to educate. It is also good because it represents a chance to make the organization more efficient—instead of having your managers develop and debug their own system, you can give them a system and let them focus on bigger problems. Of course, the downside is that they may resist the change and be fond of their system. Depending on the effectiveness of their spreadsheet models you also need to be ready for the fact that your new system may not dramatically improve their inventory.
3. You need to sell the project as inventory optimization, not reduction. There is a temptation to just assume that the project is just about reducing inventory. This may be true in organizations that have never thought about inventory planning before. But, for most organizations, you are likely to find that the results of the project are to decrease the safety stock for some items and to increase it for others. The benefits to increasing safety stock is usually better fill rates. But, this also leads to the following point.
4. Be ready for upset people. Once you’ve double checked your work, you will tell some managers that they’ve been holding too much inventory. They won’t all thank you for finding savings. Instead some may try to discredit you and the system instead of admitting they had too much inventory. You need to be ready for this – it might not be pleasant. Its helps to anticipate these situations and to think through change management strategies. Depending on your audience the strategy you use may be different. For example it helps to link improvements to the core metrics people are evaluated on. By linking inventory optimization with performance metrics and incentives (remember to old adage W.I.F.M.– “What’s in it for me”) you might improve the chances your suggestions will be adopted.
5. Be ready to face the fact that your fill rate may not be as good as you think. This one still surprises us. We often find it when we are validating the model. The model is coming up with much more inventory than exists in the system. Almost always, once we dig into to the data, we find that the actual fill rate is much worse than reported. We’ll be validating our model against a 98% fill rate when, in reality the company is not coming anywhere close to that number. When this has occurred we’ve found it helpful to explain the underlying drivers of fill rate so people can understand why their performance might not be as good as they thought.
6. You many need to change metrics and incentives. Organizationally, if you severely penalize managers for stock-outs, no inventory system is going to fix the fact that you have too much inventory. All smart managers will have extra inventory. Likewise, if you have a service metric that allows people to game the system, expect the system to be gamed. The line-fill rate is a good example of this. If you only count lines filled in-full, you might be encouraging people to use limited supply to fill a lot of lines on a lot of unimportant orders while your top customers aren’t getting any of the limited supply.
You can’t ignore the organizational issues when rolling out a new tactical inventory solution. Change Management is the key bringing people along and explaining the why’s behind the change often lead to better results.
About Paul Brown, the co-author
Paul Brown is a Global Director Supply Chain Strategy. With over 20 years business and leadership experience across a number of industries. Paul has held progressively more responsible roles with leading global consumer product and management consulting firms. Paul has led global initiatives within many large global Consumer Products companies. Programs include Working Capital Optimization, S&OP Process Improvement, best practice Demand Planning training, and most recently he led the global re-implementation of Llamasoft’s Inventory system to improve inventory and analytics across the supply chain. Paul has a strong background in supply chain strategy, supply chain optimization with core expertise in retail and consumer product industries. He has experience leading brand management, brand strategy, product and packaging development for retail and consumer products organizations. Paul has a record of developing leading supply chain organizations to drive significant financial, operational and customer service results. Paul’s past clients include the largest mass merchandise and grocery retailers, consumer products, paper, packaging, building products and aerospace and defense companies.