To wrap up the series, one final root cause of why organizations carry excessive inventory is Capacity Constraints and/or Seasonality.
Managing inventory so service is maintained through tight capacity windows is incredibly important. A capacity constraint should not be an acceptable reason for service issues in your business, at least not one that's plannable with effective forecasting like seasonality. There are times where customer order patterns do irrational things which cannot be planned, in which case short-term capacity constraint is perfectly reasonable.
In my experience, I've noticed that most organizations that have implemented sophisticated planning and forecasting processes often manage unconstrained demand signals very well. Forecast accuracy at varying levels in their pyramid, different time windows for measuring accuracy, SKU versus customer, etc. These businesses have the systems, processes, order placement, etc. to have confidence in. This is why planning and forecasting is progressed much farther in retail, distributors, eCommerce, and other unconstrained spaces.
It's very difficult to constrain a demand plan and manage the commercial strategy to capacity constraints, optimizing cost per unit of production, etc. There are a few lookouts however that I believe will help.
- Map out maximum supply capacity via all internal and external avenues and compare to unconstrained demand
- Utilize a Replenishment/Planned Order output with safety stock targets assumed to maintain conventional inventory policy
- Quantify the exact constraint based gap
- Come up with an inventory strategy to prebuild precisely that amount
Unfortunately, this is very simple but a lot of companies are not as precise as required. To have a minimal inventory strategy, you have to truly understand the future production output, have a view of demand that the business trusts, and the precision planning/ordering/scheduling to build only that amount.
Most companies know intuitively where the capacity constraints are and when the lines are busy. They tie up working capital in a strategy of "get ahead for _______ months because you know we'll be tight." While this may be accurate, it's not precise and unfortunately it's how most companies live.
Be different, be better. We can help build the processes around the unconstrained demand view BUT TAKE IT A STEP FURTHER and help constrain the supply side to give true signals to optimize production, inventory, and working capital.
Velocity to the rescue! Shoot us a note and let's see what we can do.