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Supplying Thought: Inventory Management Part 2

20 Jun 2016 2:47 PM | Christon Valdivieso

Authored By: Christon Valdivieso

Edited By: Afton Knight

As a proponent of challenging what we “know” to be true, last year I wrote about continuing education. Inevitably, I recently found myself at a loss for words when a professor challenged me. I mentioned the importance of forecasting and how forecasting error often leads to poor inventory management. The professor interrupted and began to tear down the notion of forecasting. I could not believe it. How could a professor not support forecasting? Considering the role of the supply chain, isn’t the forecast instrumental? The point our professor was challenging us to consider is while most companies use forecasting to align cross functional strategies, when it comes to inventory management, forecasting is part of a bigger issue.

In Part 1 I talked about strategy and alignment; but, let’s not be naïve and pretend business is neat and simple. Tesla, for instance, had a strategic vision to generate cash flow in 2016; however, when orders for the Model 3 surged they pivoted to a time-to-market strategy. How can we as supply chain managers align inventory practices with business strategies that keep changing? We start by looking at the problems that distract us.

Looking online, most articles about inventory management problems talk about the Big Five Distractions (Big Five):

  • Bad forecasting
  • Bad data
  • Communication
  • Personnel
  • Software

The problem with the Big Five is that they place zero ownership on the inventory manager; and, that is the main problem with forecasting. Telling your boss, you cannot do your job because other people were wrong will not help you keep your job. The fact is, forecasting is almost always wrong. And If forecasting is always wrong, why do we blame others when inventory—aligned with the forecast—is off?

This is what my professor was implying. Issues with forecasting and bad systems or data will always exist. Leaders have to take these issues into account and create solutions. As competition increases and profits get squeezed supply chain strategy is the next frontier for growing profitability. Thus, when it comes to inventory management, leaders have to be agile and creative.

The inventory manager cannot hide behind systems, forecast, or people. In my experience there are two main causes of inventory issues: communication and poor decision making. I focus primarily on the latter—decision making.

Poor decision making is generally a product of a lack of focus leading to costly or short sighted initiatives. With numerous supply chains and shifting business strategies loosing focus is easy, but it is not permanent. Take Target, after years of being a “fast follower” and coming in a distant third, Target recently decided to focus their efforts on an improved supply chain. This entailed re-coding its e-commerce platform to improve visibility and capacity. They also cracked down on vendors to increase supply chain reliability. Similarly, Ralph Lauren recently took steps to improve its profitability through reduced store foot prints and shipments.

Each action is a practical step taken by the supply chain team to allow them to better react to demand, but first they had to accept ownership of the problem. Not only do the above instances illustrate the need to align the supply chain strategy with the business, they also show what can happen when we push beyond the Big Five Distractions. With all this in mind, I supply this thought: Are you or your forecast responsible for inventory decisions?


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