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The "right" inventory? This is how supply chain works!

Recently at VW – The supplier Prevent stopped delivering seat covers, causing a standstill in Passat production until a legal resolution could be found.

For days, 14,000 employees couldn't work. The disruption of the fragile supply chain led to major production stoppages at the already troubled automaker. Once again, the risks of the tightly synchronized just-in-time production concept were exposed.

Supplier insolvencies, misfortunes, warehouse fires, natural disasters, floods, earthquakes and tsunamis like the one in Japan in 2011 halt production lines and cause real problems for manufacturers, for instance because required parts are suddenly not available. On the other hand, however, having parts in storage to cover every eventuality causes massive cost problems.

It is not easy for manufacturers to protect themselves against earthquakes or awkward suppliers. But in the face of global competition, it is essential to find the right volumes that cover fluctuating demand with available inventories while also keeping costs under control, because even normal operations are highly complex!

Much depends on finding the "right" volumes in logistics and supply chain management, ensuring that they are available where needed or arrive there on time. The "right" inventory is a key variable at the start of a chain of activities, but which factors and parameters influence what is "right" for the actual demand?

Inventory health:

This is without doubt an important indicator of whether the inventories are dimensioned properly. Are the right amounts of the right parts in storage or at least available? Which parts do you need most often, and which are never required? The answers to these questions can generally be found in ABC and XYZ analyses, consumption, stock levels and costs, and they can be processed into further meaningful figures in various ratios. One of these, for example, is the "turn" (3/5/20 p.a. depending on the industry) of the total inventory. Comparative values, benchmarks and industry-specific figures inform as to whether an inventory is "healthy" or not. It is not if parts are only used rarely or not at all, or if there are wrong parts or too many of the right parts on the list.

Long tail:

This term refers to the long, flat backlog of C parts in an ABC analysis that you no longer simply do away with. "Cut the long tail" is a thing of the past! Today, suppliers don't store seldom-required C parts on their own premises, they offer them in a network directly from the manufacturer of the part, for whom it quite possibly is not a C part but an A part because that is exactly their speciality! Collaboration and data networking are trump here!

E&O excess/Obsolescence:

Time and time again, products can be found in warehouses, the materials management system and/or the process chain that are in excess or obsolete, and that therefore neither move nor can be used. In industries with strict regulations, such as the aviation business, parts cannot be used after a given expiry date, just like a yoghurt in the supermarket. Parts can also become obsolete when technical improvements or modifications occur. To say nothing of parts that were quite simply bought in excessive numbers, and that now languish in limbo on the warehouse shelves. E&O is an important indicator of a healthy inventory, well organized logistics and a perfect supply chain!

Vendor-managed inventory (= vendor-managed replenishment):

Manufacturers are increasingly turning to this concept to prevent E&O. With it, the supplier plans, maintains and organizes the manufacturer's inventories and assumes the entire responsibility for costs, parts availability, etc., somewhat like external service providers doing the shelf maintenance for supermarket chains. The supplier becomes a partner integrated into the value chain, who can do the job better and more cheaply because it is a specialist, unlike the OEM! In turn, the OEM can concentrate on its core business, which is, as is so often the case in life and business, the goal and a key success factor:

"Concentrate on your core business and leave the rest to others who can do it better and cheaper!"