Over the last several weeks, this blog series on Inventory Management has explored the objectives and roles of inventory managers and outlined several of the improvement levers available to them. This post will discuss some of the metrics and analysis tools that an inventory manager needs to identify risk and opportunities and to make intelligent decisions to optimize the performance of their inventory. When determining the metrics required for any business process, the first question you need to ask yourself is, “What are the business goals of the process?” Once you can answer that, you need to understand where the business process fits into the organization. What processes are upstream of your current process? Who relies on the outputs, and what are their priorities? These are all important questions to help you select metrics that facilitate a balanced decision making process and allow you to understand the trade-offs between proposed scenarios. The metrics you choose should answer the questions your organization is asking, without requiring additional analysis. If you find your organization spending too much time completing repetitive ad-hoc analyses, you may want to re-evaluate your metrics. Each metric requires context. This could be a target level, or simply historical data that allows the reader to understand how the current situation compares to the ideal. Your dashboard metrics should highlight issues requiring immediate action and should be supported by details that can tell the whole story. If your organization wants advice on data visualization techniques for dashboard design, communication, or analysis purposes, I highly recommend checking out the work of Stephen Few. So, what do you need to measure to manage your inventory?
- Inventory vs. targets: This one is a no-brainer, but how to report it often isn’t. Ideally, this metric would provide a historical look as well as a prediction of the future. It should be possible to break down the details into various segments, like ABC classification, make vs. buy parts, or by categories specific to your organization. This will help you understand the driving forces behind the data trends and identify key opportunities. It’s also important to understand what portion of your inventory is active, slow-moving, excess, and obsolete. I recommend the inventory quality ratio for this one. Depending on your industry, it can also be valuable to understand your inventory picture by customer or by supplier.
- Customer service level vs. targets: Your big investment in inventory has one purpose: to provide your customers with exceptional service. It’s important to understand the relationship between your inventory levels and customer service levels. Your targets should be high enough to satisfy your customers without being too high that it cuts into your margins by driving your inventory up. I’d consider graphing this as a % variance from target as the first thing most people would do is a comparison between the actual and target lines anyways. Another way to look at this would be to measure stock-out performance.
- Total Inventory Cost: Inventory management is all about finding the right balance. Inventory transfers, small lot sizes, and short supply periods all help you keep you inventory levels low, but can increase your total inventory cost. Similarly, high safety stock can give you great customer service levels, but can send your costs skyrocketing. Some of these costs can be hard to nail down, but the closer you can get, the easier it will be to optimize your inventory performance. Another major component of your total costs is the opportunity costs of lost business caused by not having enough inventory. If you’re turning customers away because you can’t meet their requirements you may need to rethink your inventory plan.
- Cash-to-cash cycle time: This can be thought of as a measurement of how long it takes for your inventory investment to pay itself back with a profit. The shorter the cycle time, the more often you collect. Another way of looking at this is to measure inventory turns, but turns doesn’t help you measure all aspects of the rate of return as it doesn’t account for things like payment terms. This may be the number one metric for companies looking to make the most of tight profit margins.
- Measure your input processes: It’s impossible for an inventory manager to succeed unless he understands the performance of all the upstream processes. Inventory records accuracy, supply action management, quality, supply variability, and engineering change management all play an important role in keeping the organization on track with the inventory plan. The inventory manager needs to know where he needs to collaborate with other managers to keep his plan on the rails.
This isn’t a complete list, but is a good start to help keep your inventory plan on target. What metrics does your organization use that aren’t mentioned here? Next week’s post will focus on technology enablers that facilitate the inventory management process and will offer some tips on how to make these and other metrics come alive to drive actions.
Interested in learning more about inventory management? Check out the rest of the blogs in this series.