Steps to Determine How Much Inventory You Should Carry

The following transcript was created using a combination of automated and human transcription. Please check the audio version before quoting from the transcript.

Mary Vasile: Hi, everyone. Welcome to 3 Minutes in the Loop, the bite-sized video series where you can stock up on the latest supply chain insights, strategies, and news, in the time it takes to get your caffeine fix. I’m your host, Mary Vasile, and today we’re covering three critical steps for determining how much inventory you should carry. Our special guest is Gerrott Faulkingham, Director of Solution Engineering here at ToolsGroup. Gerrott, welcome to 3 Minutes in the Loop.

Gerrott Faulkingham: Thanks for having me. Glad to be here, Mary.

Mary Vasile: Glad to have you. To set the stage for our viewers, let’s begin with the customer. Customer buying behaviors have shifted dramatically over the past 18 months. Can you tell us why it’s so important to understand customer behavior, and how it translates into inventory requirements?

Gerrott Faulkingham: Great question. Even though we’re talking about inventory, it all begins with the demand-driven approach. Demand is obviously driven by what the customers of our customers want. The key is to assess inventory based on future customer demand, according to product availability. The last thing that you want is excess stock, or stockouts.

Gerrott Faulkingham: So, knowing how much inventory to carry is critical to maintaining the integrity of the supply chain, including high service levels.

Mary Vasile: Thanks for making that connection for us. What other key steps are necessary then, for measuring and maintaining inventory health?

Gerrott Faulkingham: I think that supply chain practitioners need to clearly define scenarios and sensitivity analyses, by determining the optimal stock holding targets for each location. This means evaluating inventory versus service level trade-offs, at various thresholds.

Gerrott Faulkingham: For example, one multi-national company wanted to maintain its current service levels but reduce stock. Its goal was to hit and maintain 99.2% product availability. This requires software that models the demand, and calculates the probability, or ranges of the demand that can occur.

Mary Vasile: Now that we’ve established the importance of having the right inventory levels, are there additional pieces of the puzzle that supply chain practitioners need, in order to know how much inventory to carry?

Gerrott Faulkingham: Yeah. Absolutely. I think it takes a quantified value proposition. Let’s say for example, that a modeling exercise determines that a company was overstocking its fastest moving items.

Gerrott Faulkingham: A modeling system can identify how $1.5 million worth of stock, for example, could be reduced by 35%, to under $1 million of working capital investment.

Gerrott Faulkingham: And all of this can be done, without impacting service levels. In  other words, the modeling that you use to optimize your inventory needs to be robust, and not brittle.

Mary Vasile: There you have it. Scenario and sensitivity analyses, a quantified value proposition, and understanding customer behaviors, are three measurable steps to achieving your ideal inventory levels. Thank you for those insights, Gerrott. And thank you for joining us today.

Gerrott Faulkingham: Thank you for having me.

Mary Vasile: And thank you for watching. Now, you’re in the loop. See you next time.