Lower Inventories as a Tool for Better Customer Service

There is an old adage that you can always buy better service by increasing your inventory level.  While generally true (having more safety stock will guard against supply chain “oops” or market variations), this generally equates to employing more working capital and as such goes in the wrong direction for today’s financially leveraged firms.

How then can lowering your inventory levels improve customer service?

Let’s look at how inventory levels are determined for stock items…

Inventory for a given item is dependent on several factors:

1. Lead time to replace stock
2. Shelf life/expiration date
3. Market variability ( seasonal, unpredictable, highly regular?)
4. Supply chain failure rate
5. Cost of the individual item to manufacture (inventory value)
6. Cost of stock-outs in lost market-share, income, reputation

Many companies depend on a calculated algorithm based on the above factors to send the “make” signal when new stock must be ordered.  How then can less stock be helpful?

Lowering stock levels is akin to watching the tide go out in the harbor.  As the water level drops, rocks start to appear.  What appeared to be a smooth surface on top of the water now reveals obstacles which had been hidden.  These are the issues which have been covered for by excess inventory.

With lower stock levels, the number of service level “misses” in the supply chain process will become more pronounced.  Yes, there will be a bit of (short-term!) pain.  These “misses” need to be categorized according to the service level model used.  By classifying the “misses” in a Pareto-type chart (looking at individual or grouping similar products or processes together), the areas which need improvement become more apparent. Now the work to improve begins.

Removing the rocks takes a bit of effort.  Improving the processes which led to the greatest amount of misses can form the bases of Lean initiatives, 6 Sigma projects, or purely scientific lab processes.  Once the cause is removed, the process is thereby made more predictable, shorter or cheaper.  The safety stock which was needed to guard against each of these eventualities can be reduced.  Usually reaction time is also decreased, so the market has less time to stray from the predicted trend line. Inventory level falls at the same time customer service level rises.  And so you go on to the next lower product or process in the Pareto analysis and improve both service and bottom line.