manage inventory, or be managed by it

Inventory is one of those things upon which almost no one seems to agree. No matter how much or how little you carry, it's never enough for customer service, and it's always too much for management.

To most everyone in the supply chain world, inventory management essentially comes down to choosing between a couple of unattractive alternatives: keeping a lot of inventory on hand to hide problems or reducing the inventory in order to expose and fix them. Excess inventory can disguise a variety of sins, including poor forecasts, gaps in communication, inventory inaccuracy, inexplicably long lead times, sudden spikes or collapses in customer demand, unreliable vendors, or breakdowns in manufacturing.

Does any of this sound familiar? It should: these are the kinds of problems that regularly confront people who haven't figured out how to manage inventory effectively.

We don't want to make light of a serious condition. Research, notably by Dr. Walter Zinn and others at The Ohio State University, has shown that inventory levels have historically proved remarkably resistant to even the best-conceived efforts to reduce them. And it's only gotten harder in the past few years. The risks inherent in today's 10,000-mile global supply chains (monsoons, port congestion, labor strikes) have forced corporations to stockpile inventories as a hedge against uncertainty.

The Seven Habits of Highly Effective Inventory Managers
That's not to say you should give up. If you don't manage your inventory, it could well end up managing you. But how do you take back control? We've noticed that good inventory managers tend to follow a handful of practices that set them, and their inventories, apart from the rest. Stealing shamelessly from Dr. Stephen Covey, we've assembled the Seven Habits of Highly Effective Inventory Managers, as follows:

1. 1. Manage inventory at the SKU level. Inventory is not a singular entity that can be managed, even analyzed, in the aggregate. The battle is won by being smart about line items—quantities, dollars, demand.
2. 2. Try supplier-level planning/ordering. Engage your supplier partners in the battle. There are tremendous opportunities for savings when short-cycle orders for reduced quantities can be aggregated for effective transportation.
3. 3. Be ruthless in managing product life cycles. The market tells us when a product's time is up. We can't afford to be blind to the signals.
4. 4. Get in the analysis habit. Analysis and measurement aren't tools of last resort—or programs of the month. Make them a way of life.
5. 5. Avoid making decisions in the dark. Base your financial decisions on data, not guesses or opinions. If it was good enough for W. Edwards Deming, it's good enough for us.
6. 6. Get intimate with key suppliers. Forming close relationships with principal suppliers is a key to unlocking the potential for closer integration, reduced cycle times, improved quality, and greater reliability and dependability.
7. 7. Integrate with manufacturing. This is a little like an in-house version of forming intimate supplier relationships, but it's frequently a tougher sell. That's too bad, because collaborating with your counterparts in manufacturing can offer extraordinary opportunities for boosting inventory (and overall supply chain) performance.

Editor's note: Next month, we'll address ways to reduce dependence on inventory, including our exclusive 12-Step Recovery Program.