The white paper “
Inventory Rationalization and Right Sizing Strategies” brings up the old debate about whether inventory is a liability or an asset. Perhaps you could take the approach that the point at which it moves from an asset to a liability is when the revenue you will receive for it is less than its disposition costs. A particular printed circuit board is an asset if it is in fact built into final product because you will realize its full asset value which is much higher than its disposition costs (the costs of assembly, test, packaging and distribution shared across all materials). Of course, the same board, being so special-purpose, has a high ‘asset-to-liability velocity’; in order words, it can quickly change its stripes based on how unique it is across all product bills of material. This is another factor that could be included in the right-sizing equation that may not be borne out by looking at traditional approaches that include demand variation and service levels.
I often wonder, with the plethora of inventory management books, tools and services out there, why there are so many warehouses full of slow moving or obsolete components and products. Is it all tied to legacy products that are ‘loss-leaders’ (‘a key customer needs one or two a year of product X but they buy a boatload of product Y and I don’t want to lose them’), associated with demand for a product line that marketing or senior management is sure is going to be revived some day or perhaps the result of too many ‘strategic inventory partnerships’ with customers that may have actually moved on? Whatever the case, it often appears that it’s difficult to actually execute to what appears to be the type of common-sense approaches found in the white paper (not to say you shouldn’t try).
And of course, no matter how good the right-sizing, you’ll still have to deal with those one-off disasters that occur in the supply chain. One that comes to mind is that acute shortage of one brand of winter tire in Eastern Canada in the fall of 2008. Apparently the only way to remedy a particular mis-labeling of 100,000 units was to ship them back to China which of course would result in them returning too late to sell for the winter season. In these situations, you need to have the capability to understand the impact of the disaster and examine the various options to mitigate it.
Bob May is a Product Manager for Kinaxis, provider of the on-demand RapidResponse service that empowers multi-enterprise manufacturers with the collaborative and integrated demand-supply planning, monitoring, and response capabilities.
Inventory right sizing strategies
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