Lean is the flavour of the decade. With the global economic recession fairly widespread and margins under pressure, manufacturers are increasingly looking towards cost cutting as a tool for improving profits. And where else to cut costs than that biggest of all culprits – that elephantine mammoth INVENTORY!
It goes without saying Inventory is a necessary evil. In fact a bundle of evils, including:
And so, in this season when “Lean is In”, how LEAN is actually LEAN? Am I already lean?
Going lean is not an end in itself – striking the right balance is the key to losing flab without your business failing to deliver. Going Lean cannot be an excuse for failed deliveries. Without an effective strategy in place, you will be playing blind in this gamble of going lean.
Defining a Coherent Stocking Policy
Lean Inventory comes with its own set of risks towards realization of Order Fulfilment Ratio. A successful model balances both these concerns and helps in reducing inventory without affecting the Effective Service Rate or Order Fulfilment Ratio adversely. Critical to success of any lean inventory endeavour is effective Demand Forecasting. So if you have not invested in necessary forecasting tools, do the same before you embark on this route.
Even with an effective forecasting in place, there are a number of outliers to the rules and these must be normalized. It must be remembered that all Demand Projections come with an inherent risk of being wrong. Recognizing the common factors for such a failure and fine-tuning the forecasts can mitigate the risks significantly.
Some of the common type of exceptions you must be on the lookout for are:
An intelligent Forecasting model can help take into account this and various other factors for inventory forecasts and safeguard your path to Lean Inventory.
Measuring the Forecasting Accuracy:
If you are already on the Forecasting bandwagon, then do not forget to take your efforts one step beyond. Make sure you are monitoring the effectiveness of Forecasting, especially Demand Forecasting which is the Achilles’ heel of the entire process. Compare the Actual Demand with the Forecast predicted and monitor for Top 5% variances (both Up & Down variances).
Some of the metrics that can help you judge the efficiency of the forecasting model are indicated below:
Journey towards Lean Inventory management is fraught with risks and wrong steps can result in significant loss in business. Applying scientific models, using tools etc., can help to a certain extent. However over and above the same, it is necessary to establish internal standards for acceptable fluctuation and frequency of orders. A well-defined stocking policy is critical to the success of such initiatives. Make sure the forecast is constantly monitored and relevant metrics are regularly presented and discussed. Look out for the top 5% wrong forecasts and carry out a root cause analysis for the same. This will give you surprising insights into what needs to be corrected in your business in this noble path of lean inventory.