Thursday, 20 February 2014

Is Britain's inventory control lamentable?

Britain's overall logistics practices and performance may lead Europe but when it comes to the key element of stock control: "We are not good at inventory control," opined Mr Zen Yaworsky, director of the British-based Supply Chain Academy.* What that must mean in terms of multi-billion pound losses to the economy one can scarcely imagine but is it a true indictment?

There is, alas, plenty of evidence to suggest that it is. Inventory, for example, has seen off many of Britain's household name retailers and seriously embarrassed many others, leaving them with bare shop shelves, sometimes following installation of a new computerised system that proved disastrous. This is hardly surprising given that 20% of businesses have no Sales and Operational Planning recognizable processes in place, with only 10% having excellent S&OP. Moreover, it does not help when estimated demand for supply chain professionals exceeds supply by six to one. To address that serious imbalance, The Supply Chain Academy, in partnership with Plymouth University, has devised a BSc degree in International Supply Chain Management.

The prerequisite for addressing the inventory control issue is to have enough of the right logistics personnel timely in place and backed by suitable IT systems. Neglect of this, it seems, played a key role in Britain's Ministry of Defence (MOD) losing track of £150 million of battlefield radios, part of the £1.3 billion project Bowman tactical communication system, which provides secure radio, intercom and Internet service. Given the multi-billion pound inventory the MOD must control, such laxity beggars belief, especially as there are serious security issues involved.

Pundits claim that the supply chain is all about inventory. While this is overly simplistic there can be no doubt that it is the most critical part of any big production businesses. Within huge warehouses, for example, the cost of holding stocks can dwarf all other costs combined, especially if much of the stock has to be written off for a variety of reasons or sold at a deep discount. Logistics, with inventory always playing a key role, can even decide the outcome of key battles and wars that change the course of history. As Field Marshal Erwin Rommel remarked: "Before the fighting proper the battle is won or lost by quartermasters." It was a pity for the then German High Command that they lacked Rommel's understanding of logistics. It is no exaggeration to say that Nazi Germany's defeat owed more to logistical problems than anything else.

Inventory control, however, is not just about the present. For it to be truly effective it must also encompass future stock control, and that means forecasting demand, which is where the exercise becomes tricky. There are plenty of stock/demand forecasting programmes on the market, some better than others, but the most effective ones, especially for the food/drinks and clothing industries, are those that react in real time to changes in forecast weather conditions or other germane factors. This is crucially important because a pending heatwave, for example, can send demand for drinks soaring four-fold in a matter of days. Just as it is important to react to pending forces with known consequences quickly so, too, it is critical to forecast more often and forecast quicker, and there is no reason why aspiring to have stock-outs for seasonal goods should be seen as a cardinal sin.

The forecasting element of inventory control becomes more complex still when the entire supply chain is geared to just-in-time (JIT) production and supply. Even if a business has forecast demand accurately, and therefore stock needs, it is of little value if supplies have been disrupted and so fail to arrive in time, leading to lost sales and, perhaps, permanently lost customers. This is precisely what happened following the Japanese tsunami of 2011, which left car and electronics plants around the world idled for want of components, causing multi-billion pound losses in production and profits. The problem was that Japan was a choke point for about 95 products key to these industries and alternative supplies could not be found quickly. JIT-oriented businesses, therefore, must ensure that they have a robust disaster recovery plan in place as part of their inventory control strategy.

Despite these tricky problems, a good stock forecasting programme can typically cut total stocks by a third without harming customer service levels, and in the process achieve paybacks within two weeks. Yet not all businesses need rely much, if at all, on forecasting programmes, and that can apply to certain kinds of grocery retailers. The reason is that the consumer does the forecasting for the supplier shop, but this will only work very well if the sales information gathered on the day is relayed to the shops' regional or national distribution centres (NDCs) by close of business each day to activate the overnight picking for shop replenishment before opening for business the next day. This was the approach the Danish food retailer, Netto, used some 20 years ago with astounding success. All of its 120 shops were EPOS-connected with one NDC so that data on products sold each day was downloaded to the NDC's computer to generate overnight picking and replacement for the next day. None of that, of course, could have been possible without the speed of data transfer that EPOS enabled. Admittedly, Netto had one or two other business model ingredients in its favour, like deliberately restricting its product range to fast movers, and quickly dropping and replacing those fast movers that became slow. The result, as this writer saw at Netto's NDC, was that 90% of all goods stored passed through it every 24 hours. Such rapid replenishment also depended on a fast sortation conveyor capable of sorting thousands of items an hour. It was a business model that came to haunt Britain's giant grocery retailers, as this writer predicted, because Netto, along with other foreign discount rivals like Aldi and Liddle, came to Britain with similar business models and are now taking market share from the leaders.


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