What’s the Best Inventory Management Strategy?

[DHowardell]

I read an interesting article today on the difference between strategy and tactics. According to the author, former Pep Boys logistics executive David Schneider,
“Strategy is the art and science of overall planning and conduct of a large-scale operation. Strategy involves defining goals, or even better, defining results and the purpose of the results. A tactic is an expedient for achieving a strategic goal; nothing more than a maneuver.”

Let’s apply this definition to inventory management. The overall purpose of Inventory Management is to ensure you have just enough of the materials you need when you need them. If you have too much material or if you have it too soon, you impact cash flow and the bottom line. . If you have too little of the material you need, you impact customer service and the bottom line. To be successful in inventory management you need to implement a strategy gets you just enough of the materials you need when you need them.

One effective inventory management strategy used by a wide range of companies is to focus on increasing their Inventory Quality Ratio or IQR. IQR is a measure of inventory performance calculated as the percent of the total inventory value that is needed now. IQR measures inventory in two dimensions, value and timing. Value refers to how much inventory you currently have and is expressed in monetary units of measure. Timing is a measure of when you need the inventory you currently have and is usually measured in days or weeks worth of inventory. Increasing this ratio is a powerful strategy because it is easily understood, easily measured and because it will drive you to tactics that will not allow inventory to be created before it is needed. In other words, it links directly back to purpose of inventory management, ‘have just enough of the materials you need when you need them’. For more on how IQR measures inventory performance go to www.InventoryPerformance.com

A good inventory management strategy should define the results you want to achieve in terms of increased profits. There is a direct relationship between increasing your IQR and increasing profits. Every increase in IQR equals a decrease in the amount of money you have to borrow to fund inventory. Every dollar you don’t pay in interest is a dollar that goes directly to the bottom line. To help you set your increase profits goal, you can perform an analysis of how much your IQR needs to go up to achieve your desired increase in profits.

Tactics for executing your strategy include identifying individual parts with excess inventory and working the part with the greatest excess monetary value first to get the quickest bottom line results. That may sound simple but in the world of ERP systems the value of excess of individual parts is not easy data to get. ERP systems think in terms of inventory quantities and due dates of open orders. Working with inventory dollars instead of inventory quantities is a powerful tactic. Another effective tactic to increase your IQR is to identify the root causes of excess inventory and eliminate those causes. Companies that work to identify root cause of inventory performance issues usually discover that out of date planning factors are often to blame. Updating your planning factors is an excellent tactic.

So when applying Mr. Schneider’s definition of strategy and tactics to inventory management, increasing your IQR is a good way to state your strategy. That strategy sets the overall inventory performance goals and drives the tactics which are the individual steps taken to reach those goals.