21 THE OUTSIDE-IN PLANNING HANDBOOK | 2023
21
Rethinking Inventory
The third step is to define the role of inventory in the value chain. Inventory is the most critical buffer to absorb demand and supply volatility. The design of inventory buffers is essential, and the traditional focus solely on finished goods safety stock management is insufficient. Implementing inventory management in outside-in planning requires a redefinition and clarity. The group must answer, “ What is the role of inventory? ” Along with the answer to the question, “ What makes a good inventory plan? ” This is important because of the changing nature of inventory in the supply chain. In the 1980s, when supply chain planning was first defined, safety stock was a higher percentage of total inventory, averaging 40-50% for each organization. Today, safety stock is 10-15% of total inventory. Inventory optimization increased in importance with the impact of the pandemic. (Based on demand and supply variation, the form and function of inventory assess where and how to store inventory and design buffers. For example, as variability increases, companies need to shift from holding finished goods to storing raw materials and semi-finished goods.) And, while inventories should be based on both demand and supply variability, in qualitative interviews today with supply chain leaders, we only find a focus on demand variability. Only 10% of companies include supply variability in the safety stock calculations. As shown in Table 6, on average, companies hold 28 more days
of inventory across industries in 2022 than at the beginning of the recession in 2007. The reason? There are five: 1. Longer Shipping Lanes. The impact of longer in-transit shipments and shipping variability increased inventory. 2. Product Proliferation. The addition of products to portfolios increased manufacturing cycle stock. 3. Bullwhip Effect on Raw Materials. Establishing inventory targets only through MRP introduces the bullwhip effect in raw material management. 4. Increase in Demand and Supply Variability. Over the last decade, as supply and demand variability increased, traditional approaches focusing only on safety stock management based on demand variability were insufficient. 5. Focus. The focus on functional metrics impedes the ability to manage inventory. Effective inventory management requires organizational alignment. Only 5% of companies interviewed can answer, “What makes a good inventory plan?” Ironically, inventory is also the most significant buffer and excellent source of waste, or MUDA, in the supply chain, creating organizational tension. (The Japanese “Muda” word ( 無駄 ) translates as uselessness or futility. In Lean management, Muda represents the changes or actions that do not cause a value-increasing effect on the product or drive improvement
Table 6. Increase in Inventory Across Industry Segments Over Periods from 2004-2022
Industries
Years
% Difference (2020-22 vs. 2004-06)
2004-2006 2007-2008 2009-2013 2014-2019 2020-2022
Medical Device
110
113
131
143
163
53
Beverage
115
119
138
191
164
49
Pharmaceuticals
155
144
170
195
197
42
Beauty
89
108
116
125
124
35
Automotive Parts
49
55
64
69
81
32
Household Products
50
51
57
74
82
32
Aerospace & Defense
94
89
97
103
123
29
Chemicals
62
58
64
80
88
26
Automotive
35
39
41
45
49
14
Food
50
51
56
58
59
9
Semiconductor
61
68
80
91
68
7
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