Is Inventory a Means or an End?

A few years ago I conducted a workshop for the operating committee of one of the world's largest industrial conglomerates. The heads of operations for each business unit plus the company's COO participated. We had a question and answer session at the end of the workshop. The COO asked the first question. "Dr. Frazelle, we have quite a bit of conflict in these meetings. Especially lately. Why is that?" I asked him what the charter of the group was. He said, "We have two main objectives. The first is to reduce inventory. The second is to lower our unit costs." I said politely, "You just answered your own question. Your main methods of reducing unit cost, far flung global sourcing from cheap labor sources and buying in large quantities to receive discounts, increase your inventory levels. The objectives are at odds with one another so you are at odds with one another."

They asked me what they should do about it. I encouraged them, like I encourage all our consulting and professional education clients, to take a step back and reconsider their objectives and their approach. I suggested that their objectives would preferably be to maximize return on invested capital (ROIC), improve perfect order percentage, spend whatever was required in total supply chain cost to support those objectives, and invest in whatever inventory level was required to accomplish those objectives. Sometimes that inventory level will be higher than we currently have and sometimes it will be lower. Inventory is not an end in itself; it is a means to an end.


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