Breakdown of Inventory in a Retail Supply Chain

It is interesting to note how the inventory is spread across the retail supply chain. Here's how much inventory (by value) is carried by entities in supply chain.

• Retailers carry about 32% of inventory in the supply chain
• Wholesalers carry 27% of inventory
• Manufacturers maintain rest 41% of the inventory

Where auto markets are headed to in India and China

Here's an interesting article on how automobile markets in India and China are evolving along different paths: India and China: Divergent paths for smallest cars

Changing priorities for Supply Chain in 2010

Goals of Supply Chain operations change very rapidly in today's dynamic business scenario. In 2009, we saw the world economy (and especially US economy) dip to a low, which prompted most manufacturing and retailing companies to focus on trimming their costs to stay afloat. One of ways to cut down on costs was to reduce inventory and companies pursued that earnestly. Cutting down inventory was probably the most important goal of many supply chains as they struggled to compete against economic odds in 2009. A survey by US Census Bureau pointed out that manufacturing and trade inventory/sales ratio fell from close to 1.5 at the start of 2009 to just above 1.25 by the end of the year.

As a result, 2010 started with record low inventories in manufacturing and retail supply chain. As demand picks up in 2010, further reductions in inventory levels can only be counter-productive. Today, the topmost goal for most supply chain executives is to make supply chains more agile without drastically increasing inventories. The ability to quickly respond to increasing demand will be the key to success in 2010. And that is definitely not going to be an cakewalk for most companies. This has been borne out by this week's iPhone ordering fiasco for Apple. When Apple - which was voted as the best supply chain of 2010 by AMR - is seen faltering, other companies are definitely not invulnerable. Ultimately, the winners of 2010 would be companies that would have the agility to quickly respond to demand uptick and be able to expand their supply in rapid response to unexpected surge in demand.

Effective team meetings

We all learn best by observing. In corporate world too, the best way to learning something is by observing someone who is proficient at it. I have learnt a few things about project management by observing project managers who consistently produced good results, even under very challenging situations. Here are some of the characteristics I have observed of good project managers.

What I have observed about good project managers is that they are very effective at running productive team meetings. Good project manager don't just go round the room asking participants what they have been working on. They focus on certain things that make status gathering meetings very effective. Some of the things that they focus on are:

• Current status of work against the plan: Good project managers always talk about status of work with respect to the plan
• Plan forward: They focus a lot of energy in planning forward. They understand that a plan is not a static document, but needs to be revised (and refined) frequently as we progress.
• Risks: Good project managers focus on risks to the plan, and how to mitigate the risks 
• Action plan for resolving issues - Good managers don't focus just on issues, but spend time brainstorming resolutions

One characteristic of good project managers is that they are forward looking and focus on planning for future and mitigating future risks, instead of spending too much time on analyzing why issues came into being and who is to be blamed for the issues.

Best Practices in Physical Inventory and Cycle Counting Processes

One of the key aspects of inventory management and control is maintaining accurate records of inventory on shop floor and in warehouses. Accuracy of inventory data is one of the pre-requisites for an efficient supply chain. Without accurate inventory information, none of the activities within the supply chain can be efficient. Customer shipments would be missed because actual inventory would not be available to ship orders. Procurement would be sub-optimal because material would be ordered even when sufficient material is available. Assembly lines might shut down due to non-availability of key components, although systems would suggest adequate raw materials are available. Supply Chain planning would become ineffective due to “garbage in, garbage out” conditions. There can even be legal implications of showing incorrect inventory on financial statements. If such conditions continue for a long time, employees would lose their trust in systems, causing business processes to collapse. These are only some of the risks not having accurate inventory data.

Anyone who has worked in Supply Chain domain would have first hand experience of myriad of problems arising due to inventory inaccuracy. In my experience, I have seen several supply chain projects delayed for months or even failing altogether because of the inability of organizations to fix issues in their inventory data.

Importance of Physical Inventory and Cycle Counting processes

Maintaining accurate inventory data requires strong processes in all facilities to ensure that all the inventory transactions are correctly recorded in the systems. Despite the most disciplined efforts to ensure system accuracy, inventory records can frequently go out of sync with the actual inventory on the shop floor or warehouse. Inaccuracies routinely creep in due to several factors such as incorrect data entry in recording quantities, items or locations, system errors, transactions done that are forgotten to be entered in the system, pilferage, wrong quantities shipped on orders, unit of measures incorrectly entered, etc. These inaccuracies would keep growing with time, unless the inaccuracies are regularly identified and corrected. Physical Inventory and Cycle Counting processes achieve just that.

What is Physical Inventory?

Physical Inventory is a process of counting the entire inventory in a facility, and correcting inaccuracies in inventory records. Physical Inventory is generally conducted annually or biannually. Physical Inventory calls for stopping all the regular operations of the facility, and counting all inventory that exists in the facility. A snapshot of inventory data is taken at the start of the process. Physical inventory tags are printed, for tagging inventory and entering information of inventory counts. Deviations of counted inventory from system quantities are recorded and investigated. Deviations that can be explained are approved and system quantities are adjusted to reflect the actual on hand quantities.

Best Practices in Physical Inventory

Best practices in Physical Inventory can improve the effectiveness of the process. Some of the best practices in Physical Inventory are –

·        A mock count should be conducted, during planning of Physical Inventory, to accurately estimate the time and resources required for the count.

·        Suppliers, customers and production should be informed about Physical Inventory schedule, so that adjustments to supply can be made in advance.

·        Physical Inventory of slow moving SKUs should be conducted few days before the actual Physical Inventory, to minimize the amount to time the facility has to be shut down for Physical Inventory. These SKUs should be tagged and transactions on these SKUs should be frozen until the Physical Inventory is complete.

·        All defective and obsolete inventory should be disposed off before the Physical Inventory, so that time spent on Physical Inventory is reduced

·        System values of SKU quantities should not be displayed during counting and entering count quantities

·        Staff should be trained properly in Physical Inventory activities to ensure smooth progress of Physical Inventory. Personnel who know the facility well should be deployed for Physical Inventory.

·        Systems staff should be available for support if system issues are encountered during Physical Inventory activities.

·        Adequate supplies of stationary, food and drinks should be arranged for the Physical Inventory.

Physical Inventory is a disruptive process that disturbs the normal business operations of the facility. To keep the inventory discrepancies identified during Physical Inventory to minimum and to reduce the amount of time required to conduct Physical Inventory to minimum, periodic Cycle Counting of inventory is recommended.

What is Cycle Counting?

Cycle Counting is the process of counting certain items in inventory every few days in such that all the items in inventory get counted at least once every few weeks. In Cycle Counting process all SKUs are not counted with the same frequency – high value and high turnover SKUs are counted more frequently than low value and slow moving SKUs. Cycle Counting relies on ABC classification of SKUs to determine the frequency of counting each SKU.

Unlike Physical Inventory, Cycle Counting does not require shutting down of the facility, and hence does not disrupt normal business operations. This makes Cycle Counting less costly to perform. Another important benefit of Cycle Counting is that it is more effective in maintaining accuracy of inventory, because inventory discrepancies are identified early, and hence are more likely to be traced back to the sources of error.  

Best Practices in Cycle Counting

Some of the best practices in Cycle Counting that can make the process more effective are –

• Cycle Counting should be a part of normal operations of the facility
• Cycle counting should be scheduled to be done as frequently as possible. Higher the frequency of cycle counting higher will be the accuracy of inventory, and lower will be the inventory write-offs.
• A proper classification of items into ABC groups should be done. Item classification should be reviewed periodically (monthly or quarterly). Generally accepted thumb rules are that Group A should comprise of about top 70% of inventory value, group B next 15% and Group C the bottom 15% of inventory value. The best way to base ABC classifications is on value of shipments and value of inventory at hand.
• It is recommended that on an average every product should be counted at least once every quarter.
• Before cycle counting is performed all open transactions, such as receiving, shipping, WIP, should be closed out for the items that are selected for cycle counting.
• Sources of error should be investigated and action should be taken to prevent those errors from occurring in future. It is crucial to identify and fix process or training issues that cause inventory errors.
• Inventory accuracy metrics should be tracked over time and targets set for inventory accuracy.
• Coordination of activities of items being counted is critical in Cycle Counting. Either all transactions of items being counted should be put on hold, or effective processes should be in place so that all activities are correctly recorded and reflected in system as soon as possible.
• Cycle Counting should be done at the start of the day before the operations of the facility have begun in full-swing.
• Cycle Counting process should be well-defined and documented, and personnel should be trained in the process.

These are some of the practices that can improve the effectiveness of Cycle Counting. If deployed properly a good Cycle Counting program can eliminate the need for an annual Physical Inventory process.

Conclusion

A well-executed Cycle Counting and Physical Inventory program can lead to significant reductions in operational and inventory carrying costs. With increase in inventory accuracy, safety stock levels can be reduced thereby reducing inventory carrying costs.  Pilferage can be reduced when critical high value items are counted regularly (some can even be counted daily). Higher inventory accuracy leads to improvements in customer service levels and thereby enables increase in sales. It reduces or eliminates all the problems caused on account of lack of inventory accuracy that we talked about earlier in the document.

Cycle Counting and Physical Inventory processes play an important role in improving inventory accuracy and improving the performance of supply chain operations. Well-executed Cycle Counting and Physical Inventory processes are akin to oiling the wheels of supply chain, that keep the supply chain functioning smoothly, efficiently and at low cost.

Supply Chain Visibility 101

Supply Chain Visibility is the capability to have (near) real-time information on the status of supply, demand, inventory, and capacity information across the entire supply chain. Supply Chain Visibility would involve –
• Having real-time visibility into status and location of goods in transit
• Having an accurate and close to real-time data about the demand from all the channels and customers
• Having an accurate information about future deliveries from suppliers
• Knowing accurately how much inventory is in the supply chain, and where exactly it is located
• Having a measure of current and future capacity utilization at manufacturing plants
• Having a visibility into the production status at outsourcers

Although end-to-end visibility of supply chain remains a utopian ideal, it is not always possible to achieve it in practicality. Hence a company needs to prioritize the areas where improving visibility lead to maximum return for the buck. For instance, a Consumer Packaged Goods (CPG) manufacturer might find maximum benefit in getting accurate information about real-time demand from retailers based on Point-of-Sale (POS) data. A component manufacturer might want to get real-time data about status of jobs that it has outsourced to sub-contract manufacturers. A retailer might benefit most by having accurate real-time information of incoming supplies into its Distribution Centers and stores from logistics providers.

Supply Chain Visibility comprises of two distinct features –
• Collaboration of data between supply chain partners providing real-time and accurate information across the supply chain
• Providing real-time event based alerts to supply chain partners that would enable prompt reactions to events & exceptions

A recent study by IBM found that Supply Chain Visibility was rated as the biggest challenge by largest number (70%) of Supply Chain executives across the globe. The study also found different programs being implemented by organizations for improving supply chain visibility. Some of the most common supply chain programs were –
- VMI implementations
- Collaborative planning with suppliers
- Collaborative Planning, Forecasting and Replenishment
- Continuous replenishment of material for customers
- Real-time sharing of inventory and demand data between supply chain partners

Supply Chain versus Value Chain

Value Chain and Supply Chain are similar concepts and hence confused by many. Though similar, Supply Chain and Value Chain are not identical. Let’s see what’s the difference is between the two.

Supply Chain, as you know, refers to the flow of material from suppliers to the customers (or as some might say, from suppliers’ suppliers to customers’ customers), and the flow of information in both the directions. It is about ensuring that goods and services are produced and delivered in the most efficient and cost effective manner. Supply Chain deals with efficiency. It asks the questions like what should be done to reduce distribution costs by x percent or to reduce lead-time by x amount. It deals with issues in integration with supply chain partners to improve the flow of information and improve efficiency. The keyword here is “efficiency”.

Value Chain, on the other hand, deals with more strategic decisions pertaining to the supply chain. It deals with long-term decisions about structuring the supply chain in a way to get competitive advantage in the market. Value chain asks how does one get maximum value for the company and its supply chain partners. A typical Value Chain decision would be whether to source components from low-cost Asian supplier or to manufacture components locally close to the market in the West. These decisions have long-term implications to the supply chain. Value Chain deals with gaining competitive advantage in the market using your supply chain. Decisions pertaining to forward and backward integration fall in domain of Value Chain.

Mandating your suppliers to send Advanced Shipment Notice of raw material shipped and deploying systems to improve efficiencies using ASNs is a Supply Chain activity. Deciding on whether to manufacture or buy locally or buy globally is a Value Chain activity. In short Supply Chain is tactical, Value Chain is strategic.