A few years ago, a supply chain executive at a large consumer supply chain told me that his CEO had recently commented that if they had obtained all the inventory reductions promised from process and technology over the past decades, they’d have negative inventory by now, “but we have more inventory than ever.”

At the Retail Industry Leaders Association (RILA) Logistics conference in 2005, Wal-Mart’s Johnnie Dobbs noted even Wal-Mart was challenged with managing inventory levels, due in part to the fact that “there were so many paths that could lead to inventory in the DC.” As we’ve reported here, Wal-Mart’s inventory growth versus sales growth has soared in recent years, leading to the “Inventory DeLoad” program that hopes to get inventory growth back down to 50% of sales growth (see Wal-Mart Inventory Policy Changes Impact Its Suppliers’ Financial Projections, Stock Prices)

A year or so ago, a consumer goods company and I had some dialog about this topic, driven by their analysis that they had more inventory relative to sales than the competition. The question was: Why? They had a project to find out.

I offered some of my thoughts.  This was a loose framework, but a reasonable starting point. Seems to me inventory levels are impacted by the following, many of which obviously overlap:

• Supply Chain Organization: Is there an integrated approach to the supply chain and inventory decisions, or functional silos?
• Concentration on Inventory Decisions: The more individuals that have the ability to add inventory into the supply chain, the higher the levels are likely to be.
• Metrics: What metrics drive decisions, (e.g. cost per unit and manufacturing yield, total cost, inventory levels, etc.)?
• Management of Trade-Offs: Company specific decisions about the traditional inventory, transportation, and unit cost trade-offs. Lowest total cost will usually have higher inventories than the lowest inventory cost option.
• The Supply Chain Network: The greater the number of stocking points, all things being equal, the higher the level of inventory. The longer the supply chain (e.g. goods produced offshore), the higher the level of inventory.
• Customer Service Policies: the goals related to customer service, both generally and at an A, B, C category level, will greatly impact inventories
• Safety Stock Policies: Ditto with safety stock rules
• Total Cycle Times: The faster the cycle times, the lower levels of inventory required. Procter & Gamble, for instance, is trying to make its factory more flexible, with much quicker set up times, in part to reduce inventory levels.
• Demand Variability: Highly dynamic demand in general  leads to greater inventory levels to maintain customer service
• Forecast Accuracy: The greater the level of forecast inaccuracy, generally the greater levels of total inventory
• Collaboration: The more integrated a company is with suppliers and customers, to jointly manage inventories, the lower inventories are likely to be
• Vendor Relationships: Companies which have supplier owned inventory programs, or just-in-time supplier logistics centers, will have lower total inventories on the raw materials/components side.
• Visibility: The better visibility a company has to its network wide inventory, the lower its total inventory should be. This is part of the promised potential of RFID.
• Order Patterns (Seasonality):  Less consistent demand patterns can lead to higher inventory levels. As an extreme example, I know a wrapping paper manufacturer that basically builds inventory all year to ship it all in the couple of months before Christmas.
• SKU Counts: The higher the number of SKUs, the higher the level of inventory for the same dollars in sales.

Those are my thoughts. That’s also a lot of variables. I’d welcome your perspective on this topic. Please send me an email at the link below.

On a related note, our News and Views piece last week summarizing a Journal of Business Logistics article comparing lean, agile and hybrid “leagile” supply chains strategies provides some additional insight I think you will enjoy – take a look.

Finally, SCDigest and The Logistics Institute at Georgia Tech/The Supply Chain Executive Forum are conducting some research on “the integrated supply chain organization.” It involves a simple web survey that asks companies to describe how integrated their supply chain organizations are, and the challenges with getting there and maintaining this structure. I know we’re all surveyed to death, but this will take just a few minutes, and help me and Dr. John Langley of Georgia Tech out. Summary details and a link to the short survey can he found here. Thanks for your help.

Let us know your thoughts.