Inventory Gluts: Avoiding butter mountains and wine lakes

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In the 1980’s, Europe had what was colloquially known as butter mountains and wine lakes. Farmers in the EU under capitation grants were being paid to produce product for which there was no market. The overhang was enormous, and this inventory glut of unsold butter and wine went on to impact the price industry could command for these products.

Europe is still paying the price with what is now known as decapitation, effectively paying farmers to leave land fallow in order to try and manage the supply demand imbalance. China, and more widely the Asian region, is not immune to the global economic downturn despite growth figures their western counterparts envy. Europe & the US are still struggling. China’s input and output figures released for August are lower than expected. They have also reduced expected growth rates for 2001/2012 by 1/5 to 1 %. The upshot of this to a regular consumer is quite staggering, and to business worldwide.

China is a country of production. If we, and in we, I mean all of us, don’t buy, or more accurately can’t buy, where does all of the production stuff go? Into warehouses. And that’s when the problems really begin. Building inventory mountains is a major problem. Masking the problems and creating falsified growth make it much more difficult to manage. So, what can you do to avoid it, and if not avoid it completely, best manage it?

The moral to the story is this: Know your inventory. Here is the key:

Make inventory management a direct part of S&OP, not a by-product of the process. There is a difference. With the trend of outsourcing still strong, inventory planners cannot go down to an inventory floor and visually see what they are managing. Your CM’s contractual obligations can also be negatively impacting you. Harsh sale or return clauses on VMI (Vendor Managed Inventory) can negatively impact your bottom line. And depending on your forecasting model, you could be contributing to the problem.

Having, and managing key inventory metrics are key to knowing your position, and enabling you to react. Often, S&OP can be implemented with inventory falling out as a by-product of S&OP policy, not as an integral part of it. Linking dynamic inventory management to S&OP is the key. Maintaining strong E&O (Excess & Obsolete) reporting, measuring DoS (Days of Stock) and ToR (Turns of Ratio), reviewing contractual VMI clauses, and closely monitoring forecast accuracy is the best way to keep your inventory glut to a minimum.

Forecasting accuracy is the bugbear of the supply chain. With business building to forecast as opposed to real demand, this is shortening lead-times and enabling responsiveness. All good. But, and it’s a big but, it only works if you closely monitor forecast consumption and adjust your horizon accordingly. Use market trends to help determine the right statistical model to use.

Regardless, historical trends should be an indicator, but not the only consideration. Given economic instability, what was in the past, may not be the future and determining the weight you apply to historical is key. This nicely segues into VMI. Depending on your contractual obligations to your CM— normally a 60 day sale or return policy— you could end up with a large inventory bill on your P&L statement that few companies have the luxury to absorb easily.

Ensure your figures look like they should. Trending DoS and ToR of your inventory will allow for intelligent analysis. If the numbers are rising for DoS and lowering for ToR, this should be reflected by your CM’s figures and is an indicator of forecast consumption. Growing inventory mountains bring bad news. It reduces product value, negatively effects employment therefore reducing consumer spending power, and floods the market with cheap goods. It is crucial that inventory management is treated within the S&OP process as an integral part of planning strategy, and not a by-product.

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