Manage Excess Inventory is the panacea for every Supply Chain professional.

According to McKinsey Global Survey of challenges ahead for supply chain; Reducing Operating costs and Inventory levels, are the main goals for Supply Chain Top Management.

For instance, Pharmaceutical industry is specially sensitive to suffer overstock. Despite using leading-edge technology -the increasing number of complexities and the exponential growth of demand– makes Inventory control one of the top priorities for Drug’s manufacturers.

What is Excess Inventory?

We all can figure out a definition for overstock. Nevertheles, I would like to take a helicopter view of any particular business and focus on the economic implications.

The damage caused by excessive stock impacts directly in Cash flow, which leads to loss of capital available for investing

In other words, let’s call Excess to all the surplus associated with loss of revenue owing to additional capital bound with the purchase or simply storage space taken.

As a result, Excessive stock could be a consequence of over delivery from a Supplier or from poor ordering and management of stock by a Buyer.

Levels of aggregation

Starting from your Suppliers, passing through the manufacturing process and finishing with your product arriving to Customers. Let’s take as an example a Drug Manufacturer

As stated previously, Excess could be allocated at any point of your Supply Chain. Imagine a metaphoric water tank:

Logically, the water in the Tank will represent the total Inventory, so we can expose the following statements:

• The level of the top water tank is directly conditioned by the Supplier
• The Top water tank has a direct effect on the below water tank
• The level of the below water tank has a direct impact on Customer

This is what I call “Levels of aggregation“:

(1) Raw Materials at the Top water tank are hardly calculated at the product unit. Raw materials acquisition depend on economy of scale, they’re bought with a long time in advanced and considering factors such as Demand forecast, Discounts and Rebates …

(2) Finished Goods in the lower water tank will have more value added coming from the Manufacturing process. Then, the cost will be higuer and the Price will be conditioned by the Market regulations and conditions.

Metrics

Taking into account the diagram above, it is evident that Excess could appear in any of the water tanks.

Excess in the top (Manufacturing Sites) does not immediately impact to the bottom . But having excess in the bottom (Local or Central Warehouses) it blocks the normal flow of materials from the the top.

Therefore, metrics should be accountable for preventing a potential Over Stock in lower water tanks first and then into the top. The tap between both water tanks controls the water flow and is a critical point.

Nowadays, Metrics are tipically in charge of detecting current over levels of Stock such as, Days On Hand (DOH), Days Of Coverage (DOC), (%) SKUs below Safety Stock, RAGY dashboards and so on.

Prevention

As presented above, metrics are mostly focus on showing the current situation of the business. However, none of the above metrics predict the conditional Inventory future positions.

In a Make-To-Stock industry your future Inventory conditions will be strongly linked to your Forecast. Demand Fluctuations in your Forecast will become the key parameter to analyze in order to predict potential disruptions in your Manufacturing plan.

Additonally, by using the Forecast and estiamted capacity you should be able to create Forward Looking Metrics and predict future Inventory scenarios focus on the estimated demand disruptions.

Self-Analysis

Following the next steps is like a vaccine to avoid getting sick from OverStocksis …

Mapping your Strenghts and Weaknesses in a SWOT template and make sure that all your team understand the meaning of Excess …

Keep track of your Metrics in a brutally honest mode. Removes all the exceptions that are just there to make look your metrics ‘good’ …

Monitor everything what makes your Inventory metrics down. Write down all the Root Causes which keep you away from being on target …

Evaluate those Root Causes (post-mortem) and start drawing common patterns …

Decide corrective strategies and support your decision-making using looking-forward metrics

Let me know your experiences, I’ll be glad to learn from your stories!

Felipe