Inventory levels are driven by two metrics: Volume and Volatility, which focuses on a team’s ability to maximize a customer’s fill rate and your revenue. Forsyth Advisor presents how historical data can help set, and manage, inventory levels.
Using historical data, a supply chain team should review a group of SKU’s while asking the following questions:
- What product (or raw material) has the highest volume over a year or season?
- Is the supplier of the product consistent in meeting lead times?
- What item has the most predictable demand?
- Which have more volatile demand?
The answers to those questions defines inventory levels and are designated into A, B, C, and D.
- “A” inventory designated materials with have High Volume and Low Volatility. For example, bread is a pantry staple. Everyone uses it and likely purchases it on a schedule (once per week). These are called “A” because you wish all inventory behaved in this manner.
- “B” inventory represents products with High Volume, but also High Volatility. These products sell often, but at unexpected volumes and at unexpected times. A good example would be roofing shingles in the Southwest US. Pretty steady demand unless a hurricane hits (or two, or three). In some cases, this volatility can also be caused by an inconsistent supplier.
- “C” inventory is for product with Low Volume and Low Volatility.
- “D” inventory is for products with Low Volume and High Volatility.
The added benefit to this segregation is that it illustrates opportunities.
- If you’re holding a high amount of inventory (“B inventory”) because your supplier isn’t performing well, resourcing to another vendor may be a good idea.
- If inventory needs to be held at a higher level because demand is inconsistent, is there a way to tie Supply Chain in better with the commercial team?
- If a product isn’t moving (D or C), should there be a discussion on substituting that item for a higher volume item or should the product be rationalized?
Once your inventory is segregated and volatility factored into inventory levels, the key action is consistent evaluation. Markets change as do suppliers and their reliability. It’s suggested that inventory be reviewed each month with a review of inventory segregation twice a year (or more often, depending upon your lead time and seasonality)
If inventory levels are seeing swings up and down with fill rates under expectations, contact Forsyth Advisors for advice on have to get them aligned to maximize revenue.