At first glance Service Level seems pretty straight forward as an Inventory Driver. The higher the target service level the higher the inventory required. For finished goods that is true though there are a number of ways to hold inventory down while increasing service levels. Some examples would be improved forecast, increased flexibility, higher velocity, decreased lead time, etc. (Notice that these are all inventory drivers and they all interact with each other.) But I do not want to talk about service levels for EXTERNAL customers here since we all are used to that particular issue and have current, hopefully effective, tactics in place. What I would like to draw your attention to with this posting is service levels for INTERNAL customers. Yes, it is the same discussion as for external customers but somehow most organizations do not seem to consider it in the same light.
So who exactly are the internal customers that draw on inventory? The primary ones are production (raw materials & componentry), sales (samples), marketing (display samples), maintenance (MRO stock) and Quality (samples). What happens in your organization if you run out of stock and short ship an external customer? Responses to that can range from a shrug of the shoulders to mass panic and expediting of new material to the customer. Now, what happens if you run out of stock and short ship an internal customer? In most cases there is massive wailing and gnashing of teeth by various members of management until the material is acquired and delivered, usually by expediting the material. Again, you say, not much difference between internal and external. But this is where things start to diverge. Because the internal pain is much more obvious (and loud), all the people involved in ensuring stock availability become sensitized to internal stock outs. This invariably results in raw materials inventory drifting up to ensure no stock outs and since most organizations track the total inventory value (which goes up with the raw material drift) this put downward pressure on the overall inventory level. This downward pressure is often reflected in the finished goods levels, again because of the previously mentioned sensitivity to shorting an internal customer. The inclination is to decrease finished goods levels because it is “just” stock that is sitting there waiting for an order while raw material would not be in the warehouse unless there was a production order for it. Of course, sooner or later this means a customer gets short shipped and the screaming starts up again. Also, the production orders in the system would not exist if there was not anticipated demand for the finished goods so reducing finished goods levels may not be a very effective plan. As mentioned at the beginning of this post, the key to getting out of this particular cycle is to reduce the lead time for both finished goods and raw materials replenishment while at the same time improving demand management. (Easy to say, not so easy to do.) An effective Lean process is the best way to accomplish this. For more information on this refer back to the previous postings on Incoming and Internal lead time. The key to controlling external service level issues is to make sure and include internal service levels in your planning.
Before we close out this topic I just want to redirect your attention back to the MRO (Maintenance, Repair & Operations) stock. This is material used maintain equipment needed by the organization, whether machinery, trucks, tow motors or whatever. Often this material is not even included in the overall inventory value or the inventory control processes. This can be a major mistake as it still represents a (potentially major) expense to the company and there are repercussions both to too much stock or to running out of stock. So how best to control it? In all likelihood a Kanban or some variant of the 2 bin system is the best method. The main reason for preferring Kanban over 2 bin has to do with the notification system that additional stock is required in that it is built into the process (visual notification and pull processing). A 2 bin system on the other hand requires a person to physically contact procurement and tell them to order more. In the end you should always try to apply the KISS rules and set up the simplest process that is most likely to be followed.
Having issues with your inventory?
Do you understand what Drivers are biasing your inventory levels to move up or down? Do you need help understanding and getting control of your inventory? Contact Ed White at Jade Trillium Consulting to discuss whether we can help your organization and how best to proceed.
Next posting we will explore Constraint Management – What is it and why would it affect Inventory Management? In the meantime, enjoy thinking about Service Levels. Talk to your friends and co-workers about their experience and thoughts on this topic, especially what it means for your organization. And, as always, I would love to hear back on your (and their) thoughts. Just fill in the comment box below along with your contact information to let me know what you think.