Inventory Optimization: Another Insight to unlock working capital - Part 2

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Welcome to the world of Supply Chain again...

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Last time I said that Robust control on "Naming Convention Following Process" can reduce inventory and improve supplier negotiations. Let us start with couple of practical scenarios from industry.

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On 1o-Jul-09, a customer service executive, while talking to a customer for an over the phone order fulfilment, when entered the item "MW Metal Rotor Blade 17 inches " in the ERP/ System, found that the quantity ordered for that item is 6, whereas they have only 5 items in the warehouse. She took the order, entered the order, back ordered it - the ATP engine runs and she gets a date of its availability in warehouse. She tells the customer that the 6th item will be available on the said date and do the customer wants them to ship the 5 items now and the 6th item on that future date. Customer disagrees and asked to send all 6 on the said date only. The conversation ends and she started taking the next call.

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The planning engine of the IT system, saw the demand, checked supply available and accordingly planned a new purchase order for the item equal to the safety stock of the item that was 10. Everything worked well as per the script and the item arrives in the warehouse and got shipped to the customer.

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Now, the 2nd scenario is the same company same day (1o-Jul-09) - another customer service representative got a call for the same item and did the same thing in system. He entered the item as "MW Rotor Blade 17 inches" and found that the stock is 17 whereas the customer wanted only 1. The order got fulfilled immediately and since the quantity was more than the safety stock, planning engine did not take any action.

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What did we see now? I think we got the pointers now, as how the inventory for the same item increased by 10 and since this item is a high valued item ($500 per item), the inventory went up by $5000, not a small number by any standards. Just because the same item was named differently in the system and even customer service executives know it differently, the stock went up. But, look at the customer service levels - even at a high inventory the service level got impacted by no availability of one name of the item so double impact.

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The 3rd impact of this issue is that when you buy quantities from supplier, naturally you buy small quantities and hence you have low negotiating influence but if we club the demand of both these names of same items (and who knows how many more names of same item exist in the system and for how many different items), we have a larger order and hence more influence, we can exercise while negotiating with suppliers.

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Same can happen with the supplier names also, if different departments define the same supplier in the system by different names (assuming low control on naming conventions), they can end buying from same suppliers with different names and hence lose the potentially more influence to negotiate harder. In large companies, the impact of this small anomaly is quite large and my experience says that this issue exists in almost all large companies and just the extent is different. Some companies have this issue limited to just <10> 50.

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Now, what do we do if we want to check if we have similar issue in our system or not. So, there are intelligent data cleansing tools available in market that will extract the data from your ERP/System as per the rules defined by you, transform the data into an excel for analysis and correction and help you making changes accordingly. In these testing times, overlooking this issue is a crime and we all must take care of this as soon as possible in our organizations.

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