Three Reasons Inventory Optimization Fails

There are many ways to fail at inventory optimization but I list three primary causes and welcome your ideas and comments.

1) People don't understand basic inventory concepts.
This problem is rampant in industry. Even many of the purported "expert" organizations offer advice that is wrong or improperly applied. A common mistake is not understanding basic relationships like:

Reorder point = Replenishment time demand + safety stock
Reorder quantity = daily demand x days of supply

If you have a reorder quantity of 100 in your system for a part that has a demand of 10 per day, you should not also have days of supply set to 5 and then try to decide which approach (days or supply or fixed reorder quantity) is best--the two stated polices are not equivalent. This inevitably points to an incomplete understanding of the underlying mechanics of optimal inventory control. There are many other similar problems such as confusing Days of Supply ("DOS") with lead time—the two are almost always different.

2) Technology solutions are oversold
Software companies exist because they sell software. Analyst companies exist because they sell advice. No software company is going to tell you, "Actually basic MRP can work pretty well, you don't need new software." See chapter 7 in Factory Physics for Managers for detailed description of how you can use your existing MRP system to control immense detail, get predictive performance, and manage more easily in the face of product variation and demand variability. Hint: The approach does NOT use MRP as it was originally designed for detailed scheduling.

No analyst company is going to tell you, "We have run a similar survey about 10 times before but we are framing the same topic in terms of the latest hot concepts so we can sell more sponsorship."  The companies of the software-industrial complex (software companies, analysts and consultants) have mutually aligned goals. More new and different software presents more opportunities to sell software. More new software presents more opportunity for analysts to sell survey results to industry explaining the ins and outs of the new software. The underlying operations science relationships between inventory, capacity, response time and variability are is impermeable as the law of gravity. However, you won't find software companies or analysts often talking about how their products or concepts work with these fundamental relationships.

3) Management ignores training
This is a combination of items 1) and 2) but the responsibility falls directly in management's lap. Planners and buyers are some of the most critical resources for insuring that a company meets its performance goals. Yet it is amazing how many companies provide little to no training for these key resources. The typical attitude is that a person only requires street smarts to use a company’s bazillion dollar supply chain or operations technology. Street smarts are good, don't get me wrong, but I'm not going to hire a guy off the street to maintain my Lamborghini just because he has been around cars and talks a good game. OK, I don't actually have a Lamborghini but you get the point.

A common problem with training is it often consists of sitting next to someone who has been using the system and watching what they do—this may or may not be good. How does management know that the experienced hands understand basic operations science?

If you want to make improvements now, give us a call at 979.846.7828. We can train your people in practical operations science to ensure improvements last. We have worked with leading companies the world over to create and implement breakthrough operations strategies. We accelerate results using your existing efforts, such as Lean or Six Sigma, and your existing information technology. Call us if you want better results quickly or send me an email to espound@factoryphysics.com

Ed Pound is Chief Operations Officer of Factory Physics Inc. Ed has worked with major international companies such as Intel, 3M, Baxter Healthcare and Whirlpool providing education and consulting in the practical operations science of Factory Physics concepts. Ed’s work has helped companies realize millions of dollars in improvements and make operations, supply chain management and product development easier. Ed is lead author, along with Dr. Mark Spearman and Jeff Bell, of McGraw-Hill’s lead business title Factory Physics for Managers.

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