Home' Australian Automotive Aftermarket Magazine : Australian Auto Aftermarket e-Zine - August 14 Contents INSIDE INVENTORY
AUTOMOTIVE AFTERMARKET MAGAZINE AUGUST 2014 97
Often, businesses simplistically hold, for
example, two months of stock across all
products, and then end up with poor service
levels or excess or both.
Smart inventory management starts with
asking some basic questions and periodically
revisiting them as business capabilities and
This is the first in a series of articles on
inventory from Horizon Inventory on this topic,
covering why we need inventory and why we
need inventory management. Later in this
series, how this can be done most effectively
will be examined.
Why hold inventory?
In very simple terms it is mainly about time,
although that can be influenced by other
factors such as product quality and cost. Let’s
examine the question by looking at the two
cases of supply to order (case one) and supply
from stock (case two).
Assume that a product is required in two
weeks (read weeks as days, or even hours if you
wish). That is, the firm requirement for the
product is known actually two weeks before it
has to be in the hands of the ultimate user.
If the part can be made and supplied at the
right quality, price and cost in just one week
then for that part we have a “supply to order”
situation, something where we require actually
no inventory at all. Timely information in this
case can be used to eliminate the need for
If in case two, however, the product,
perhaps because of a sourcing decision, can
only be built or supplied in four weeks, then
we need to have some inventory. Unless of
course we have absolutely perfect forecasting
which exactly anticipates future demand and
we have a perfect supplier, who is 100 percent
reliable – this is unlikely in any industry.
Before we explore the answers to ‘Why hold
inventory?’ it is wise to step back from the
immediate question and ask an even more
basic one: “Why is the product required at all?”
What does the final consumer/end user
want or need to do with the item that is
ultimately supplied? If it is a small cheap
product that is critical to the operation of a
major piece of capital equipment like a large
truck or a piece of mining equipment, then
often the consumer will be prepared to pay a
substantial premium. That means that a fast
but costly manufacturing and supply process
may be the optimum solution for the consumer
and the supplier.
However, if the purchase of the product is
more discretionary, the decision is a price
sensitive one and the manufacturing-supply
economics require high volumes, this may
force a long lead time supply situation, such
as in case two, and therefore you will need to
carry inventory, and hold it as cost effectively
To answer the original question,
“Why hold Inventory?” the answer is
It depends on many factors. To maximise
the apex business objective of return on assets,
just some of the factors you need to consider
are the following.
Is your product amenable to new
manufacturing technologies such as 3D
printing, so that you can significantly reduce
the supply/build time? This may be at a
premium today but certainly for some lower
volume applications the cost and capability
may be feasible.
What is the dominant cost driver? Product
costs, manufacturing and supply process costs
or holding costs? Holding one month of stock
might be the right decision for some products
but for a one cent o-ring, perhaps six or 12
months is better.
If you can use vehicle registration data and
full visibility of retail sales to improve
forecasting then you can afford to hold
inventory more easily and therefore change
sourcing to perhaps longer lead times and
lower costs. This is more likely to be feasible
with higher volume products.
What can you do to change the flow of
information? When do you as a supplier know
about the requirement for a product? When the
vehicle is on the hoist, or when it is booked in
for the service, or the upgrade? This sort of
information could alter dramatically the
inventory management options you have.
Reflect on the impact that online shopping
from smartphones has had, and the impact it
can have on how products are stocked and
You also should consider the product’s
popularity, the relative gross margin, supplier
reliability, cost breaks, MOQs, pack sizes,
common quantities in which products are
used, relationships between products,
seasonality, product life cycle, geographic
coverage, strategic and competitive position -
and risk - all of which will influence whether to
stock and how much.
A complex balance that
can be made simple
Some products will lean towards “supply to
order” and some towards “supply ex-stock”. In
fact when you look at it, there are over 20
variables that need to be considered for every
stocking strategy decision for every product.
Sounds complex and time-consuming? It
might sound like a big effort but it actually can
be done and done well. You need tools whereby
you can set the right policies as though you
had the time to make the “right” decision for
each and every product, every time. Then you
need to automate as many of these decisions
as possible, so that you can handle thousands
of SKUs according to best practices and to
meet multiple business objectives in a
balanced way across your product portfolio.
In future articles, we will explore some of
the approaches that can help with such best
practice inventory management.
Meanwhile, take the time to reflect on why
you hold inventory and think through some of
the above factors as they apply to your
business, to a greater or lesser extent.
For further information consult
The letter ‘y’ in inventory is at the tail end of the word and all too often when it comes to
spelling out inventory policies and strategies, the ‘why’ is not at the forefront.
FOCUSING ON THE ‘WHY’ IN INVENTORY
AM AUG 2014:AM MAGAZINE SHELL 5/8/14 10:07 AM Page 97
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