8 ways to shake up Inventory Management as demand weakens in Singapore

An eternal struggle at the heart of effective supply chain management is how much inventory to hold. It’s an equation organisations continually get wrong. As demand flattens across Singapore it’s more important than ever before to get it right. This requires a complete shake up the way inventory is being managed.

The Singapore Institute of Purchasing and Materials Management’s monthly Purchasing Managers Index (PMI) has fallen from 50.8 in May to 50.5 points in the months of June and July. DBS Bank fears “if demand is weakening, inventory stock will build up and manufacturers have to calibrate their production downwards.”

Trying to handle this predicted inventory pile-up by simply stopping production until inventory is cut to an acceptable level won’t work, and may cause more inventory problems in the long run. It’s a typical situation; when demand picks up, customers can’t get the products they want. Production restarts, runs flat out for the next few months, and ultimately the organisation ends up with even more inventory than it started with.

To stop this from happening to your business, and effectively manage the anticipated decline in demand, follow these simple steps:

1) Understand your inventory

Trying to remove inventory without tackling the root cause is like tackling the symptoms of an illness before the diagnosis. First you must understand why it’s there in the first place.

The inventory an organisation holds today is typically a consequence of the decisions it made months, years, even decades ago – many of which are forgotten with the passage of time. When they make these decisions, all too often companies fail to recognise the long-term impact they have on inventory. So understanding what you have and why you have it is the first step.

2) Look to the future

To avoid making the same mistakes as your predecessors, you need to look beyond the immediate execution window and consider all supply variables before making decisions. An integrated management process, such as Integrated Business Planning (IBP) can help to achieve this. With a rolling 24-month horizon, this allows greater understanding of the impact overriding business goals have on inventory levels as well as enabling you to model how much inventory you need to run your business.

3) Remember the Great Unwatched

All too often organisations rush straight in to removing visible inventory (cycle stock, safety stock, pre-stocking, and hedging stock), when it’s on the rest - the great unwatched - which can be as much as 25 percent, where efforts need to be concentrated.

4) Consider your service offering

In an ideal world every organisation would have 100 percent service levels; the reality is many can ill afford this and have to settle for 95 percent at best. A small drop in service levels can have a significant positive effect on inventory levels, although of course for some this is not an option. Performance benchmarking can determine what an acceptable service level for the market is.

5) Change your cycle time

Long campaigns can aid operating efficiency, but result in cycle stock. Consider making half as much, twice as often; this can result in a company not only becoming more responsive to the market, but also significantly reduce cycle stock.

6) Invest in safety capacity

Most organisations see inventory as their only option to buffer poor supply performance and provide the flexibility to satisfy unforecast demand. But investing in safety capacity can be a cheaper option; reducing planned capacity slightly and having the ability to ramp it up when demand requires can provide a good alternative.

7) Vary your safety stock

Many businesses carry a generic weeks coverage model of safety stock for every product in their portfolio, but it’s important to consider the significance of each individual product. Some popular products may require a lower level of safety stock, whereas others with higher variability require more.

8) Effect cultural change

It’s vital that demand and supply take joint ownership of inventory. For this, you must eliminate blame culture. Plenty of people are involved in inventory management; from those who effect financial change, to those in planning frequency and safety stock. These people are the organisation’s most powerful weapon when it comes to inventory management, so clearly define their roles and equip them with the knowledge to apply best practice.