Inventory Should Not Always Be the Enemy

Being married to a supply chain consultant and Six Sigma Black Belt, I've learned over the years that inventory is the enemy of many supply chains. Unnecessary waste, movement and products that do not help deliver an order any sooner or more efficiently all represent targets for supply chain cost reduction and working capital improvement. I'm still surprised at how few procurement people have more than a superficial understanding of the inventory issue from a working capital perspective, but I'm almost certain it's because most of us are not paid to factor sourcing decisions into account as a primary driver of total cost (the classic response is to toss this bit to operations to figure out). Yet now more than ever, it's critical for everyone in the sourcing and procurement world to better understand the impact of inventory and lead-times.

Paul Martyn (who in full disclosure is a personal friend) has been beating the inventory and lead-time drum non-stop these past few weeks, from national television to Forbes to Supply and Demand Chain Executive. In the above-linked article that he bylined, Paul suggests a dangerous cocktail at the moment. On the one hand, we're "wary of spending [our] company's most valued asset: cash. And since inventory is cash's evil stepchild, companies continue to aggressively reduce inventory levels." But we're doing this at a time when lead-times for many products are increasing, Paul notes (I'd also add that we're doing it at a time when we face greater concern over scarcity in certain commodities, such as rare earth metals, as well).

However, lead times are the major problem at the moment and the main reason we need to think about the tradeoff of tying up additional working capital in our supply chain. Paul notes, quoting ISM data, that lead-times in certain markets have "ballooned from 10 to 12 days to 53 days." But there are ways of fighting back, nearly all of which go back to better contracting (and negotiation) in the first place. One such technique is better integration of S&OP with procurement. To be more specific, Paul suggests "aligning the sales and operations stakeholders requires that purchasing managers negotiate effective combinations of service levels (i.e., lead times) and price with suppliers to meet the actual demand" and the sharing of "more 'optimistic' demand plans with strategic suppliers and negotiate price and service level terms in advance of an increase in demand."

Do check out Paul's piece if you're curious about the subject. But even more importantly, don't just read about the topic. If you face longer lead-times today (or are expecting longer lead-times down the road), go back to the basics and get smart about the criticality of considering both lead-times and inventory as part of sourcing decisions and ongoing supplier management initiatives.

Jason Busch

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