The Inventory Curve
     The Inventory Curve: How It Started

The tradition interpretation of the inventory level/customer service curve is flawed.  This page explores the logic for a much more robust and beneficial version of the trade-off curve.


I was managing a large distribution center for a major consumer products company. We were using state-of-the art planning tools: exponential smoothing forecasting, MRP and promotional order offerings designed to provide fairly long lead times.  Despite the use of these tools, we had substantial backorders on shipments going out the door and at times, the DC was so full, we had difficulty finding space to put incoming product away.  Being a curious person, I started learning about our systems and production and inventory control (P&IC).

As I learned about P&IC, I observed that our operations and performance were not behaving the way you would expect based on the P&IC body of knowledge.  One concept I found in the literature was the inventory level/customer service curve that indicated that there was always a trade-off between inventory investment and service levels. 

          

As I thought about this relationship in light of the operations I was managing, it became obvious that we were provided a marginal level of service, but had inventory investment far greater that was required for that level of service.  

The key insight was that we were operating inside the curve, not on it and that we had the opportunity to simultaneously reduce inventory investment AND increase customer service.  The real opportunity was not an "either/or" trade-off but an opportunity to improve in BOTH areas.   Nothing in the literature had addressed this view.


         

Commentary


  • Every firm is somewhere inside the curve.  The question is where. Some are closer to the curve than others.  
  • How close or how far away from the curve is a function of inventory balance: having what you need and not having what you don't need.  
  • Just knowing that improvements can be made in inventory investment and service does not guarantee that improvements will be achieved.  Achievement is the result of picking an appropriate strategy and then executing the strategy.  For example, I have seen organizations where a dictate came down from "on high" to cut inventory.  The easiest way to do this is to cut A items.  The result is that inventory drops and so does service.  
  • On occasion, I've been asked to quantify the improvement opportunity potential.  I've never found a good way to come up with the number, but there are some surrogate measures that can be used. Service level, based on line fill rates gives a good estimate for use on the horizontal dimension.  Excess and Obsolete (E&O) gives a reasonable estimate of unproductive inventory.  Missing is the amount of inventory required to overcome the lower service levels and the penalty costs associated with poor service.
  • As I have worked with the curve over the years, I've also come to the conclusion that it fits for areas other than inventory as well. Other resource investments such as capacity or manpower can fit on the vertical scale.  To the extent they are out of balance, there is an opportunity.   Or expenses/costs can also be on the vertical scale with simultaneous improvement in service and cost/expense reduction achieved through process and productivity improvements and the implementation of the whole range of lean or Factory Physics concepts.    
If you have questions or would like to discuss how these or other supply chain concepts and ideas can be applied within your organization, you may contact me at David.Armstrong@inventorycurve.com.

  ®  Inventory Curve, LLC, Westminster, Colorado USA

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