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  • How much inventory is reasonable?  

    As an inventory planner, no matter how fast your inventory runs, someone wants to challenge you and say your inventory is not reasonable.
    In fact, "unreasonable" is a synonym for "too high". But think about it, every penny of the inventory is not out of the blue, all for specific business needs and set up, which can not be reasonable?
    You know, inventory is the result, is the embodiment of the company's comprehensive ability. At any time, the results are reasonable - you get what you deserve. If it is unreasonable, that is because as a business, its ability to short board, the process is not done.
    For example: the planner is graduated from high school, Excel will not use, of course, do not good inventory plan; sales only assess sales and gross profit, and not check the cost of idle inventory, the result is naturally too high inventory. This is the ability problem, ability is not reasonable, the result is naturally not reasonable. To change the outcome, the premise is to change capabilities, such as recruiting college graduates to plan, and to balance sales performance.
     Of course, you take these remarks to the boss to listen to, 80% will be knocked to the head is a bag. The boss will challenge you to draw a line in the sand: how much inventory is reasonable?
    You can follow the inventory and safety inventory to roughly estimate the theory of "reasonable inventory", such as: raw materials have safety stock of about 3 weeks, 2 weeks to processing production line, products generally placed 4 weeks of inventory, then there are at least 9 weeks of inventory. Of course, this is the ideal situation, many factors (such as poor inventory) will lead to high inventory. If you add another two weeks, that is, 11 weeks, the stock will look reasonable.
    However, this is not about the excess inventory is an enterprise will have excess inventory piles, all sorts of decisions, they come from the previous objective existence, but who also can't do what it takes to rework rework: early, can be returned to the supplier early, can also handle the discount discount deal, there is some typical "chicken ribs" tasteless but wasteful to discard, but you can say these unreasonable inventory?
    Therefore, it is a false proposition to discuss how much inventory is reasonable. In other words, it doesn't make sense to discuss the stock in terms of absolute quantity. However, from the relative quantity, it is of great value to discuss the increment of inventory, that is, to intercept the stock at a certain time point as the base number, and then to judge whether the change in inventory is reasonable according to the change in the volume of business.
    As we all know, in order to do business, we must have stock. Business growth, inventory will increase, but the growth rate should be lower than the growth rate of business. For example, business growth of 20%, inventory increments below 20%, otherwise, where scale benefits go? The marginal turnover of inventory is the new increment of the business unit, the new stock to achieve the turnover rate, which is a more effective indicator of inventory control.
    Then, how is the marginal turnover rate of inventory calculated? It is assumed that it is a two stage inventory system: total library and sub warehouse. The warehouse usually stores 4 weeks of stock, and the warehouse is kept for 3 weeks, plus 7 weeks of stock. The stock turnover is 7.4 times (52 weeks divided by 7 weeks). Because of the scale efficiency, for new business, assuming that the total library will increase 3 weeks of inventory, the sub warehouse increased 2 weeks of inventory, plus 5 weeks, but also means that the marginal inventory turnover rate is 10.4 times (52 weeks divided by 5 weeks). This means that if the business of the past year has increased, the incremental cost of the product will be 3 hundred million, and the inventory increment shall not exceed 28 million 850 thousand (300 million divided by 10.4).

    One might ask why the marginal appreciation of inventory declines as a result of new business This has to go back to inventory components: turnover inventory and safety stock.
    The turnover inventory is directly proportional to the volume of business, i.e., the turnaround period is multiplied by the average demand. It can be seen that the turnover inventory is not diminishing or increasing, and the safety stocks are more. When the business is more, the relative changes will be smaller, and the required safety stocks will be less.
    This is scale effectiveness, which must be reflected in the results of the supply chain planning and operation.
    Of course, the two basic premise here is that the new business is a net increase in sales of existing products, and the supply network remains unchanged. In reality, these two assumptions are often difficult to implement. For example, some companies increase the complexity of the product by importing more new products or new models. These new products or models are often aimed at some differentiated needs and have lower scale efficiency. In addition, in order to increase sales, enterprises often enter some "leftover" areas, nationally or globally. What follows is the complexity of the supply network, such as adding more warehousing and distribution centers, and increasing more inventory points. Similar to new products and new models, these inventory points often result in diminishing returns to scale, and the resulting marginal returns on inventories are lower.
    In the past few decades, mass customization becomes more intense, the globalization of business will grow with each passing day. The cost is that inventory efficiency has been on the decline, and inventory turnover has gone from bad to worse. But don't be pessimistic. At least when the boss questions the stock, you have an explanation.


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