Your warehouse: a moneybox or a museum?
Frank Stieger
Published at
Are you sure you are managing your inventory properly? Are you sure your inventory levels are perfectly aligned to meet your desired service levels? Can you free up working capital that is tied up in inventory without negatively impacting supply chain performance?
At R&G, too often we see businesses trying to answer these questions by referring to a commonly applied metric such as Days Inventory Outstanding (DIO), also known as Days Sales of Inventory (DSI) at an aggregated level. Most of our customers know the turnover rate for the total inventory of their business.
Unleash working capital
At ten inventory turns for the total inventory value compared to revenue, this averaged number does not radically change quarterly. Hence the suggestion is created that the overall inventory is under control. And consequently there is no call for action. Few of our customers can accurately guess the age of the oldest item in inventory.
In fact, to understand your opportunities to unleash working capital tied up in inventory, you need to know the oldest item you hold in inventory as well as traditional metrics to track improvements over time.
Separating a Jeroen Bosch from yesterday’s Financial Times
When looking at your inventory at item level you might identify the Make To Order (MTO) item that has been sitting in your warehouse for over 400 days, the equivalent of your personal Jeroen Bosch painting.
What caused this item to age so much compared to your typical MTO items that ship from your warehouse as today’s Financial Times do from the newspaper stand? And how much inventory do you still own of the product that was phased out two years ago?
We work closely with clients to uncover the variability in the age of their inventories and learn what causes this variability. Creative system use, customer order changes, wrong settings on inventory management and replenishment systems are some examples of what we discover. Often there is a mismatch between existing assumptions on component categories MTO and MTI and the reality of the warehouse inventory.
From antiquities to modern art
The first steps in understanding the potentials that still exists in your inventory are:
- Install a measurement system that shows variability. Allow yourself to see that happens at item level instead of relying on what measurements at aggregated level may exist today.
- Set targets to distinguish what is valuable and what is not.
- Review outliers and learn about the mechanisms that created them.
By implementing these simple first steps and execute them with rigor, R&G has supported clients to succeed in reducing their working capital tied up in inventory to levels they never knew existed.
I would love to hear if you have you discovered your very own Jeroen Bosch yet!
Frank Stieger is Operations Manager at R&G Global Consultants in The Netherlands.
