Do you have your Inventory Control “under control”?   by Theo Goutier

Inventory is the end-result of everything out of sync or gone wrong upstream sometimes long time earlier. Understanding the processes that contribute most will lead to control over inventory as well:

  • Forecasting (bias and accuracy) but also where in below processes do forecasts really add value?

  • Production (yield and stability) and it’s flexibility (quantity and mix)

  • Quality control (lead-time and reliability of tests)

  • Distribution (replenishment and stocking tactics)

  • Procurement (trading cost per unit for long lead times & high quantities)

  • Logistics (dispatching, lead times, delays, re-delivering)

  • Planning (scheduling, MRP, MPS, DRP, RCCP, 3 year plans i.e. S&OP)

  • Master Data (wrong settings can quickly ruin carefully built reputations)

Next to controlling these processes the inevitable Inventory Replenishment management depends largely on understanding the variances in demand and supply. Contrary to dealing with variance at each location alone the right aggregation level, time-buckets and uncoupling demand from supply will substantially increase reliability.

Typical overlooked are cost of inventory stemming from obsoletes and slow moving:  1 item shipped after 1 year has more cost than 20 items in 20 days. But also at the other spectrum cost of wrong or late delivery can be substantial (expedited shipments, re-delivery etc.).

  • Cost of capital: depends on financial leverage usually 6-12% of value

  • External warehousing:  Space essentially needed to store tail end

  • Production Capacity : Time used to make tail end = loss of flexibility

  • Inter-company Transport: moving stocks between locations to ‘help’

  • Write offs: eventually non-sold items need to be written off

Thus the key question is 'HOW TO BREAK THE COMMON PARADIGM:  Improving service requires more stocks and thus cost will go up?"


A) in LEAN terms:  Inventory in essence is Waste

B) in 6 sigma terms:   Put controls in place at critical processes

C) in financial terms:  Show the cost of capital and of non-service

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