Inventory Drivers

Supply Chain Organization: Is there an integrated approach to the supply chain and inventory decisions, or do you have functional silos? The less integrated, the more inventory and more inventory problems (shortages or overages) are likely to occur.
Supply Chain Network Design: The greater the number of stocking points, all things being equal, the higher the level of inventory. The longer the supply chain (e.g., goods produced offshore), the higher the level of inventory.
Customer Service Policies: A company’s strategies and goals related to customer service, both generally and at an A, B, C category level, will greatly impact inventories.
Safety Stock Policies: Also, how aggressive or not a company wants to be with safety levels, and how frequently a company revisits safety stock assumptions and SKU-level targets, are key variables.
Degrees of Freedom for Inventory Decisions: The more individuals that have the ability to add inventory into the supply chain, the higher the levels are likely to be.
Management of Trade-Offs: Company specific decisions about the traditional inventory, transportation, and unit cost trade-offs. The lowest total cost will usually have higher inventories than the lowest inventory cost option.
Forecast Accuracy: The greater the level of forecast inaccuracy, generally the lower levels of total inventory.
Demand Variability: Highly dynamic demand in general leads to greater inventory levels to maintain customer service targets.
Supply Variability: The more variable the supply, the more buffer inventory that needs to be held. Obviously, this is a potential issue with off-shoring. In general, variability of supply is worse than a long supply chain in terms of the impact on inventory.
SKU Counts: The higher the number of SKUs, the higher the level of inventory will generally be for the same dollars in sales.
Total Cycle Times: The faster the cycle times, the lower levels of inventory required. Procter & Gamble, for instance, is trying to make its factory more flexible, with much quicker set-up times, in part to reduce inventory levels.
Level of Supply Chain Collaboration: The more integrated a company is with suppliers and customers to jointly manage inventories, the lower inventories are likely to be.
Vendor Relationships: Companies that have supplier-owned inventory programs, or just-in-time supplier logistics centers, will have lower total inventories on the raw materials/components side.
Level of Supply Chain Visibility: The better visibility a company has to its network-wide inventory, the lower its total inventory should be. This is part of the promised potential of RFID.
Inventory Accuracy: The more accurate a company maintains its levels of raw materials and finished goods inventories, the lower the level of inventory, as planners have better trust in the numbers upon which they are planning.
Order Patterns (Seasonality): Less consistent demand patterns can lead to higher inventory levels. As an extreme example, some wrapping paper manufacturers build inventory all year to ship only in the couple of months before Christmas.
Metrics: What gets rewarded? Metrics drive behavior, and it is no different with inventory. Have a plant that is driven primarily by yield and cost per unit metrics? Expect more inventory, for example.

* from Supply Chain Digest Letter July 2008



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