How to Determine the Root Cause of Inventory Management Problems

By: Leon Dixon

When a company has an inventory problem—whether it is too much, too little, or the wrong mix—the president may ask, “What do we need to do differently?” All too often, the answer is not what leadership expects.

It is essential to view inventory differently

Inventory issues are easy to see, though they are not generally the problem. Undesired inventory levels are a symptom of larger problems, most often the impact of prior business decisions, misaligned execution, or both. Conducting an inventory analysis and determining the right target requires thorough collaboration between the supply chain, sales and marketing, new products, and financial teams.

The executive leadership team is responsible for making better business decisions, being accountable for improving execution, and ensuring that functions, capabilities, and strategies are aligned. Instead of allowing inventory to victimize the company, it is imperative to use inventory opportunistically. It is a business investment and a tool to increase sales revenue, create customer loyalty, improve efficiency, and fend off the competition.

Addressing the symptom of unneeded and insufficient inventory creates two “wins.” First, focusing on current inventory levels bears quick results. When the root causes of undesirable inventory are addressed, it leads to a second win, resolving longer-term issues and reducing chronic inventory problems. Short-term financial performance is improved, and the company is better positioned to attain longer-term business goals and strategies. In the end, executive teams leverage the power of inventory to improve business performance.

A mindset change is required. Inventory is a cross-functional asset that requires governance without creating a bureaucracy. The executive team must be willing to open-mindedly analyze the problem and commit resources to identify the root causes of the inventory situation, then take corrective action to prevent recurrence. Implementing and sustaining the behaviors required to maintain achieved gains through inventory governance is also vital.

Three steps to successfully attacking inventory issues

There are three quick, simple steps to attack inventory issues successfully: Understand, Correct, and Sustainably Improve.

1 – Understand. The executive team takes steps to understand how inventory supports the business strategy, capabilities, and goals. Once the executive team agrees on how to leverage inventory to support the business strategy, it is easier to set inventory targets. When discussing inventory alternatives, it is important to consider the financial impact and consequences to market share. Setting inventory targets based on benchmarking is a flawed exercise; no two companies will be alike in their strategies or capabilities, and inventory turnover is also different. Once decisions are made on the ideal inventory target, it is critical to routinely revisit the company’s balance point and whether the tradeoffs remain acceptable.

2 – Correct. Depleting inventory that is not immediately needed—preferably by selling it—relieves the inventory symptoms of the root problem. The executive team then analyzes and determines root causes when actual inventory misses the target range, whether high or low, and maintains course by regularly revisiting targets. Not surprisingly, discomfort arises when addressing these issues, especially when faced with the stark realization that current inventory may be overvalued.

3 – Sustainably Improve. Sustainability is created through leadership’s well-communicated expectations that address behaviors, practices, and policy; creating this new normal involves change management driven by better practices and supported by a more honest culture. An inventory governance policy helps reinforce the needed behaviors and paves the way to better practices overall. One objective of the inventory governance policy is to ensure that the inventory symptom is used to illuminate the root cause issues for resolution.

The previously mentioned president was hopeful that financial performance would improve as a result of inventory governance—and it did. The most significant financial results were improved operating margins and increased cash. Unexpected, pleasant surprises included increased sales revenue and increased market share.

When inventory management has lapsed, it will be obvious. Well-managed inventory is a powerful tool for executing the business strategy and goals year after year. Service levels are likewise tied to overall company performance, making inventory governance a critical part of any business plan.

Oliver Wight has a 50-year track record of delivering business improvement to some of the world’s best-known organizations. They are thought leaders in the fields of supply chain management, integrated business planning, demand management, and product management.

Read the Inventory Governance: Inventory Is Not a Problem; It Is a Symptom White Paper

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Quick Guide to Inventory Governance

White papers on Inventory: authored by Oliver Wight thought leaders explaining the “whys and the hows” of making business process improvements

Webcasts and Videos on Inventory: by Oliver Wight educators on Inventory Governance