Reduction of excess stocks
One of the most frequent demands companies make of their employees in logistics and the supply chain is the urgent reduction of excess stock. The remarkable thing about this instruction is that in practice it is pretended that this requirement can be implemented in this form. Sometimes you also hear the statement: excess stock is too much stock. But we are going round in circles! Because the supposedly simple question arises:
What is excess stock really?
Based on this requirement, any knowledgeable MRP controller would immediately have to ask which logistical performance characteristic is to be used to identify excess stock as such. This is because excess stock cannot be identified, let alone calculated, independently of specific logistical performance characteristics (e.g. ability to deliver, delivery reliability, delivery time). What is excess stock and what is not can only be determined by (logistical) customer requirements. For example, a manager could conclusively and correctly claim that the stock of a particular item is too high or not too high in relation to the required delivery capability of 95%, for example. In practice, however, it is pretended that it is clear or clarified anyway that it is an overstock – usually based on the gut feeling of the manager – and that it is only a matter of finally – drastically – reducing it.
“Good stocks” and “bad stocks”
A further challenge in reducing inventories or excess inventories is that the specific inventories must be clearly differentiated in terms of their function in the respective company. For example, some stocks have the function of fulfilling certain customer requirements. I would like to refer to these stocks as “good stocks”. In a mail order company’s warehouse, for example, they serve to maintain delivery capability and represent a decisive competitive factor in the sales market. Or buffer stocks are held in an industrial company so as not to interrupt the clocked flow production. In another case, it may be a spare parts warehouse that is held to ensure the security of supply for repairs and maintenance. However, there are also stocks (excess stocks), which I refer to as “bad stocks” . These stocks are the result of poorly coordinated processes along the supply chain. They typically mask underlying problems that are “covered up” by a permanent increase in inventories and therefore do not make the – usually chronic – coordination problems of companies along the supply chain visible.
Logisticians and doctors
In inventory management and modern supply chain management, we have long known that the level of stock is always the result and not the goal of warehouse planning .
Therefore, the permanent demand to reduce inventories is only ever a means of combating the symptoms and not the causes, analogous to a doctor who wants to reduce a patient’s fever without identifying and combating the causes of the fever. In logistics and the supply chain, we are also dealing with a complex organic whole (system) whose understanding of the interdependencies simply requires more than mere common sense. The sustainable reduction of inventory is an – almost – exclusive problem of a well-founded process analysis and subsequent process design. In logistics and the supply chain, we now have numerous tools that can be used to identify and tackle the root causes of “bad stock”. Value stream mapping is just one of these tools.
Further information can be found under “The cost of unused opportunities in supply chain management”.
Image source: © wokwak, License: CC0 Public Domain