Strategic Inventory Management

Speed vs. Inventory: How to find a perfect balance?

Jing (Cherry) Zhang
Master of Engineering
Graduated in 2017
Pricing, DHL Express (Finland) Oy
LinkedIn

The problem that I tackled in my Master’s thesis (1) related to finding the right balance between the need of reducing the inventory and increasing the service level for the customers of the case company. As an outcome, I proposed a practical, step-by-step approach for the company in terms of how to refine the inventory so as to keep stock levels as low as possible without sacrificing customer service.

Firefighting or good inventory management?

During my Master’s thesis, I worked as a purchaser in a fairly large manufacturing company. While working with several other colleagues in the same department, I noticed that each purchaser had their own way of managing make-to-stock items, and oftentimes the decisions were made based on a hunch. As a result, every time the inventory level became too high, we had to find a way to reduce it – like firefighters.

At that time, we had SAP in place, which should have helped us optimize purchases, avoid manual counting and ultimately keep the inventory level well under control. However, the system was not configured properly to do this, not to mention integrating inventory management best practices to SAP (such as 2, 3).

In my Master’s project, I explored the best inventory management practices from various sources (3, 4, 5, 6) and turned them into my own framework. Further, I studied the technical part of SAP and discovered the proper configuration that would allow my theory-based framework to work with SAP. My goal was to fully utilize SAP’s inventory management function in order to automate the purchasing process, and ultimately keep the inventory at the optimal level.

Thesis contribution to the organization

There are many approaches to inventory management, and it can be viewed from different perspectives. Therefore, I first needed to investigate the existing knowledge in inventory management and, based on these most recent best practices, I analyzed how things had been done in the case company.

This was a very exciting part! I learnt really a great deal at that time. The combination of literature that I discovered and the somewhat narrow understanding of the SAP functions in current company practices showed me the way how inventories can be tackled in the company. It was, therefore, a combination of both, studies and analysis of the practices in the company, which pointed to the need for a very visual and structured process that would help the purchasers.

The proposed approach contained a three-step process:

Step 1: to categorize inventory
Step 2: to select the type of inventory control system
Step 3: to define the replenishment process

This logic embodies the steps that the purchaser needs to take in a structured way. The proposal was detailed on the level of mathematical formulas for optimizing the re-order point, and the optimal safety stock correlated to the defined service level. The most valuable part - as I see it - was the proposal regarding how to incorporate this three-step process into the SAP system.

This project was done specifically to facilitate decision-making and refining the inventory management in the case company. However, as a general approach, it can also be applied by companies that are looking for a similar cost-effective total solution for managing inventory.

I think I was able to help the company by showing that although the inventory management concept is nothing new, there is a way to help the company with a practical approach by fully utilizing SAP and automating the purchasing process. Most importantly, when doing automation, the goal is to achieve the optimal inventory level in a sustainable way.

There is always room for improvement in any company. My Master’s thesis project taught me a systematic approach for problem solving and process improvement. I learnt that any improvement starts with determining why it is needed in the form of a clear objective.

Next step in career

My studies made a turning point in my life in the sense that after completing my Master’s thesis on inventory management, I have moved on to new roles. Soon after the completion of my Master’s thesis, I joined one of the world’s largest logistics company, as a part of the pricing team that serves all our customers in Finland. There has hardly been a boring day. I also love the fact that I am able to make use of my analytical and technical skills at my work, and knowing there are no limits to what one can do to add value to customers.

Earlier, I used to work in procurement and now my role is totally switched, as I am currently in the world of pricing and work for the largest logistics company in the world. In other words, I used to be a customer of my current company when I made purchasing decisions regarding logistics services.

My previous experience as my current company’s customer is definitely beneficial, as I understand the customer expectations. Since pricing as a job means working closely with sales, and the sales persons are working with customers (which is actually “previous me”), I am able to think from a customer perspective and structure an offer that meets the customer expectations and eventually helps our sales close the deal.

Problem solving approach from studies

In my studies, I learned the ability to approach problems. I have learnt that it is the problem solving approach that matters. Here, I am definitely thankful to my Master’s studies and especially the final project that taught me to select and adopt a clear, systematic approach to all kinds of problems.

Also, in the recruitment process, I felt that it helps to have a good Master’s thesis project completed. I felt that the recruiters are very particular in terms of selecting the right person, and their requirements are pretty high. They are not looking for just any kind of graduates, but they are looking for the ones that stand out, I would say. They noted that the thesis was graded excellent and awarded by the school, so they were positively impressed. The thesis project definitely helped in this sense.

Driven by the company’s deeply customer-centric culture, my colleagues and I work together to keep our customers happy. We share common objectives and constantly inspire each other. Not every day is a perfect day, and when a hard day hits, I remind myself why I am here and do what I do. Logistics is all about facilitating material flow, one of the three essential flows of our lives - the other two being finance and IT. Without logistics, the world will not run.

References:

1. Zhang, J. 2017. Proposing Inventory Management Framework for Make-to-Stock (MTS) Products. Master Thesis. Metropolia University of Applied Sciences. Master´s Degree Programme in Logistics Management. Helsinki.
2. Agrawal, P. 2016. SAP MM Consumption-based MRP: Technical Reference and Learning Guide. 1st ed. PHI Learning Pvt. Ltd.
3. Agrawal, P. & Pattanayak, B. 2014. SAP MM Inventory Management: Technical Reference and Learning Guide. 1st ed. PHI Learning Pvt. Ltd.
4. Ravinder, H. & Misra, R. B. 2014. ABC Analysis for Inventory Management: Bridging the Gap between Research and Classroom. American Journal of Business Education, Third Quarter 7 (3). 257–264.
5. Douissa, M. & Jabeur, K. 2016. A New Model for Multi-criteria ABC Inventory Classification: PROAFTN Method. Procedia Computer Science 96. 550–559.
6. King, P. 2009. Crack the Code: Understanding Safety Stock and Mastering Its Equations. APICS magazine – The Performance Advantage 21 (4). 33–36.

Effective Control of the Stocks – A Profitability Challenge

Juha Haimala
D.Sc. (Tech.)
Head of Industrial Management Department
Metropolia University of Applied Sciences
juha.haimala [at] metropolia.fi (juha[dot]haimala[at]metropolia[dot]fi)

Zinaida Grabovskaia
PhL
Senior lecture, Head of Master’s Degree Programme in Industrial Management
Metropolia University of Applied Sciences
zinaida.grabovskaia [at] metropolia.fi (zinaida[dot]grabovskaia[at]metropolia[dot]fi)

Inventory management and control of the stocks

Inventory management and good control of the stocks will always be a struggle, and business has always experienced this challenge. This is why companies need to find a compromise between the service level to their customers and the amount of capital tied in stocks. In this sense, the service level vs. the inventory level compromise makes a profitability question, and it will need a strategic decision (1, 2). Jing (Cherry) Zhang´s Master Thesis project (3) provides a good example of a study tackling this problem.

Different approaches to providing services to customers

One strategy is that the company does not provide all types of customers the same speed of delivery and short lead times. Only clearly defined big customers, for example, will enjoy these services. This is a strategic choice in order to stay profitable and attractive to these customers. Otherwise this business will not be profitable, nor sustainable.

Alternatively, some other business may decide to offer the same level of customer service (speed, price, etc.) to all types of customers. In this case, this is their strategic decision and a competitive advantage that this particular business offers to its customers. It is not by chance this is their policy. In this situation, businesses realize the penalty that comes with extra levels of stock, but this is their way to compete in the market.

For both types of businesses, it is a strategic choice, and this struggle has always been part of business. However, the compromise between profitability and the level of customer service is very much dependent on the business context - the industry, type of business, competition, and the type of products or services provided.

Each company needs to decide the strategy specifically for their own business. In certain types of businesses, you cannot even make anything to stock, and these businesses compete with the speed for designing and producing the goods. In more traditional businesses, such as consumer markets and consumer-related supply chains, as well as in B2B components delivery business, there needs to be a clever balance, carefully designed, between the stocks and the speed. The balance is never easily found, and will always need clever adjustment.

The present of inventory management and the stock control

Since Cherry’s graduation in 2017 and completion of her Master’s thesis project in inventory management, there has been further development in business, especially in e-commerce. E-commerce has been increasing significantly, and it has also led to further changes in inventories (4).

Nowadays, inventories and supply chains can be designed in such a way that they can come from anywhere (5). Thus, inventories nowadays go very much beyond the classic type of a local or national inventory waiting for customers in a warehouse in a certain specific location. Instead, modern supply chains may be designed to order and deliver products from anywhere.

For example, car manufactures have established such supply chains for spare parts. Car manufacturers often treat the whole Europe as one market area, and do not keep any national inventories any more. In other words, all their spare parts come from one centralized location to anywhere within this market area.

But even for this one centralized location, we still come back to the same problem - optimizing the amount of stock vs. the ability to service the customer and deliver the spares quick enough and with a good price.

This trend for big centralized inventories is coming very visibly today. It is not possible for all types of businesses, but for some - big business, e.g. in consumer goods - it comes as a rule nowadays.

The future of inventory management and the stock control

The development of e-business will continue increasing and growing. It will definitely challenge the traditional, ‘old type’ of businesses. They will need to decide how they will compete in the new situation. What can be done in this situation? In some cases, businesses may decide to increase their capability to serve their customers faster from stock. They may find it a positive, good response to the challenges of competition from massive e-commerce. This choice also very much depends on the type of customers in a particular business, i.e. if they can or cannot wait for the goods. In this traditional way of servicing customers from stock, inventories may well pay off.

However, even if the business aims for ‘no stock’, and even if the stocks in some business will reduce, inventories will still have to be somewhere! Imagine, you are ordering something for yourself, some popular consumable product from the market. Such a product can hardly be produced in a series of one. Therefore, inventories are NOT going to disappear. But the location of the inventories may shift somewhere, to other areas from our traditional understanding - most likely, to the centralized, one point location. Finding this right location is the question of optimization for this particular type of business and inventory. For example, where to locate a distribution centre so that to find the optimum between the cost and service level becomes a profitability issue in the end.

We see no dramatic changes - so far - in the horizon for inventories, but the same trends that have started 10-20 years ago will continue. Traditional retailers (one could call them ‘brick and mortar’) will continue seeking to leverage their stocks to better compete against e-commerce retailers.

This topic in Master’s teaching and learning

Inventory management is one of very important substance areas for anyone who deals with SCM* or logistics. As such, it is one of the central topics in the Industrial Management Master’s program and it will definitely stay there, and most likely grow in importance. The focus may shift as new developments keep emerging. Automation and digital technologies continue to change the ways in which supply chains and logistics operate, and this development will naturally shape the education, as well.

*Supply Chain Management

References:

1. O’Brien, J. 2015. Category Management in Purchasing: A Strategic Approach to Maximize Business Profitability. London: Kogan Page.
2. Hines, T. 2014. Supply Chain Strategies: Demand Driven and Customer Focused. New York: Routledge.
3. Zhang, J. 2017. Proposing Inventory Management Framework for Make-to-Stock (MTS) Products. Master Thesis. Metropolia University of Applied Sciences. Master´s Degree Programme in Logistics Management. Helsinki. Available from: urn.fi/URN:NBN:fi:amk-201705199002
4. Shaw, M. J. (ed.) 2015. E-Commerce and the Digital Economy: New York: Routledge. Available from: www.taylorfrancis.com/books/e/9781317472704.
5. Mussomeli, A., Gish, D. & Laaper, S. 2016. The Rise of the Digital Supply Network: Industry 4.0 Enables the Digital Transformation of Supply Chains. Deloitte Press. Available from: www2.deloitte.com/insights/us/en/focus/industry-4-0/digital-transformation-in-supply-chain.html

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