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ASCM Insights

Inventory is bad …

title

… or so we’ve been told.

As supply chain professionals many of us have worked every lean and agility concept to reduce inventory. We’ve lowered our quantities and cut lead times. We’ve held our vendors and manufacturing facilities accountable for producing exactly what we needed, when and where we needed it. We’ve tuned and retuned our safety stock math. We’ve implemented multiple systems and endured countless hours of process training to help lower our stocks. We’ve worked diligently to achieve a batch size of one because inventory is the great evil.

To prove our dedication to the cause, we also developed countless metrics centered on inventory. Inventory was measured relative to sales, margin and forecast. All manner of stratification approaches were used to segment inventory. And inventory reporting was given a place of honor at our sales and operations planning meetings.

Industry professionals take great pride in our ability to reduce inventory. Look at any supply chain resume, and you’re almost certain to find a bullet point about inventory-reduction efforts. I’m as guilty as anyone. Heck, as a consultant I helped people reduce their inventory. I taught best practices and process models and the metrics that mattered. My resume is chockablock with inventory-reduction efforts.

Then COVID-19 hit us like a freight train. Suddenly, it seemed as if, well, perhaps we need more inventory than any of us ever could have imagined.

Cupboards were bare, and choices at the shelf became a rarity, as manufacturers limited variety to maximize capacity utilization. They produced what was most needed by their consumers and leaned into their A stock-keeping units. But even this effort to reduce complexity and optimize manufacturing did not yield enough inventory.

It wasn’t just our thinking on inventory that was broken. Those of us working in supply chain over the last few decades have prayed at the altar of every efficiency model, all leveraged to maximize capacity. Whether we became overall equipment effectiveness zealots or implemented single-minute exchange of die or finite scheduling applications, we sought to maximize every minute of production line capacity. Here, too, we boasted of our own successes in improving capacity utilization. This enabled us to stave off expansion projects, reduce overhead and preserve capital at all costs. But at what cost?

In many industries, hardly a minute of slack capacity was to be found. No doubt, these efficiency efforts served us well. Cash was freed up and capital expenditures were postponed to the last possible moment. We were heroes — until no one could find paper towels. Many industries became unable to meet the needs of surge volumes due to panic buying and pantry loading. By being so darn efficient, we made ourselves operationally inflexible.

Time within the confines of our supply chains was seen as waste. So, we pressured our vendors to reduce lead times, then built more efficient plans around these reductions. We worked on internal agility, making flow and cycle time improvements, all to squeeze more and more time out of our processes and supply chains. This also helped free up cash, mostly by reducing raw, pack and work-in-process inventories. It worked: Our cycle times receded.

When we made such changes, though, we did not expect that a pandemic would gum up the global transportation network — at times, slowing it to a crawl. Nor did we think labor shortages would slow production or distribution operations. Our lead times became meaningless as we scrambled and tracked every delivery and shipment. At a time when we had the greatest urgency, we waited on our supply lines.

Over the past few decades, cost became a key motivator for many supply chain decisions. Believing the world was flat, we sourced globally. We shaved a half penny per piece by moving production somewhere across a pond or onto another continent. But in so doing, we made ourselves less flexible, added risk and increased back time.

All of our “improvement” efforts were done with the best of intentions, certainly; but collectively we built longer and riskier supply chains that were largely unresponsive. And, in most cases, the risk we built in was multiplicative. One improvement effort alone did not lead to a dramatic increase in risk, but in concert, multiple efforts led to some obvious executional failures in the face of COVID-19. Our suppliers and their suppliers and their suppliers followed this path. And, in the end, as the title character famously said in the old Pogo comic strip “We have met the enemy, and he is us.”

I recently read some research that said the companies that fared well during COVID-19 were those that were “sensing and responsive” — and not just in March 2020. While this research did not indicate how these companies reacted, I suspect they pulled in excess raw and pack inventory from their suppliers, expedited shipments, checked and double-checked supply lines, increased future orders, and ramped up their own production to fill their warehouses and distribution points with inventory.

The company I work for took many of these same steps, while very wisely attending to the safety of our staff. We did not obsess over the pandemic, but we certainly looked at the limited number of raw and pack items we sourced through China. We also built finished goods inventory, unsure of the impact the pandemic would have on our plants or distribution network. In the blink of an eye, inventory became our friend. We survived COVID-19, even excelled, by making a few strategic pivots. This is not to say there weren’t tough weeks with lower-than-expected fill levels and a ton of hand-holding to manage inbound receipts and production. But we were far less impacted than many of our peers.

In all this, there are lessons to be learned. As we collectively evolve into the post-COVID reality (whenever that may be), we need to take the optimization models being sold as best practices and reconsider better ones. These tools must embed risk assessment of any process or structural model change. It’s time to stop evaluating best practices in isolated, pristine, laboratory scenarios. And we have got to stop paying so much attention to industry experts, many of who have not so much as planned a widget in decades. Most of their advice is disconnected from our reality. Practitioners must share more with each other.

In the end, COVID has been a lesson in humility for most supply chains. Our industry needs a rethink, one with a much greater focus on risk. Let’s up our game. Test our supply chains in war rooms that challenge our thinking and assumptions about how to react in extreme, event-driven situations. Accept that black swans are more common than we’d like to admit. Estimate and simulate how consumers might react in response to the next unforeseen, unimaginable major disruptive event. The first step is developing a better grasp of our supply partners and the risks that those relationships impart. Then, create smarter inventory buffers (whether finished or raw and pack) so our business models may continue functioning, even amid substantial supply disruptions.

Inventory isn’t bad; it’s essential.

About the Author

Patrick Bower

Patrick Bower is the author of SCM Now magazine’s “Sales and Operations Planning Department.” He may be contacted at plbowerone@yahoo.com.

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