Global Logistics and Supply Chain Strategies - August 2008 - (Page 38) Taking Another Look At Inventory Planning And Optimization BY ROBERT J. BOWMAN Soaring fuel prices and the side effects of outsourcing to China are causing supply chain managers to seek new solutions for managing buffer stock while keeping down costs. lan Milliken isn’t very impressed when a consultant shows up and offers to assess a company’s inventory and risk management strategy for half a million dollars or so. “It just doesn’t look like much of a bargain,” says the business process education manager of BASF Corp., in Florham Park, N.J. At least until the price of oil tops $140 a barrel. Then it’s a whole new ballgame. Actually, Milliken has been obsessed with the subject of inventory for some time. He has written extensively about “dysfunctional” inventory—situations where stock is too plentiful, too old, obsolete or unsuitable due to quality problems. “Every business needs a formal process to identify and control those inventories that do not function to support customer service or help to optimize costs,” he wrote in a recent newsletter of the American Production and Inventory Control Society (APICS). A In recent months, however, the situation has become even more acute. The reason is greater supply chain instability, driven mostly by the soaring price of oil, but exacerbated by the rush to outsource manufacturing, a growing scarcity of raw materials and rising consumer demand in developing nations. As a result, says Milliken, “we’re going to see more true risk assessment and risk management. Not just something you read about in a book.” BASF is leading the way. The practice of inventory swaps, whereby nominal competitors help each other out in regions where their own supplies are lacking, is already well established in the chemical industry, Milliken says. Obviously, that approach is less practical where finished goods are involved. But there are other strategies that apply across the board. One is the development of contingency plans to cope with supply disruptions. Every decision on where to place inventory represents a calculated risk, Milliken says. No business can afford to keep safety stock at all possible locations. But risk must be accompanied by planning. Many organizations, says Milliken, “wait until the shortage crisis is upon them. Then they start the firefighting.” In the future, “you’re going to see companies get smarter and start to move toward advance planning on allocating product that’s in short supply.” By some indications, those companies will be starting from an alarmingly low level of expertise. Following a presentation that he gave during a recent webinar, Milliken was shocked at the elementary nature of the questions. Individuals with titles like director of inventory management seemed to lack the most basic knowledge about how to set order points, safety stock and lead times. 38 AUGUST 2008
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