7 Steps to Optimal Inventory. Q&A with Ed Frazelle

Having the right product in the right place at the right time and in the right quantity – or the optimal inventory level – is blocking and tackling. Yet, many organizations struggle with the basics of inventory management.

I recently had a chance to speak about the challenges of inventory optimization with Ed Frazelle, president and CEO of Logistics Resources International and author of: Inventory Strategy: Maximizing Financial, Service and Operations Performance with Inventory Strategy.

Modern: Ed, You and I met last spring (2014) in Atlanta at the Modex conference. You began your presentation by saying that the topic was a cure for insomnia, but I was fascinated. Tell us a little about how this book came about.

Frazelle: It started as a playbook to help Pratt & Whitney, which was a client of mine, to optimize their inventory levels. When I finished it, I realized that their struggles were hardly unique and that it might make a book. The other impetus was that I have done a lot of work over the years in Japan, where there is a fascination with lean strategies. Yet, in three engagements we did with leading North American companies, the answer was to increase inventory, not minimize it. What we try to get across is that there is no one right strategy; rather your inventory strategy has to support your business strategy. Sometimes the answer is to decrease inventory, but sometimes the right answer is to increase inventory, all depending on what you’re trying to accomplish with your business.

Modern: What was Pratt & Whitney’s challenge?

Frazelle: They were trying to extend their supply chain to source from less expensive regions. But, because the supply chain is so much longer, that strategy would require that they carry more inventory. They were wrestling with how to balance the length of the supply chain with the inventory in the supply chain and the mode of travel. As an example, in an engagement with another major corporation, we put all of their SKUs through our supply chain model, where we look at the ratio of the value of the item versus its cube and weight versus its cost and interest rates. When you do that, you find that some SKUs should be shipped by air and be available overnight, some should go by ocean, and some should go by rail. If you optimize your SKU portfolio, then the capital and human and system resources required to manage inventory you shouldn’t have can be invested in inventory you should have.

Modern: That sounds as if we just summarized Step 1. Rather than walk through all seven steps here, let’s talk a little about this concept of increasing inventory, which sounds counter intuitive to what most organizations are trying to achieve.

Frazelle: What we tell our clients, and what I teach in the classroom, is that we are not focused on minimization. That’s a lean concept. We are focused on optimization. Optimization says that sometimes a SKU should travel by air because of its value to the supply chain and sometimes it should be on the longest possible vessel trip because that is the cheapest, most economical way to manage that SKU. If you apply that to lot size optimization, we get into economic order quantities. For instance, we did an engagement with a beverage company that was manufacturing and carrying lot sizes that were half of what we thought they should be. We asked; why? One reason was that SKUs were proliferating and there wasn’t room on the production line. Another was that they’d downsized their warehousing in an effort to get lean and they didn’t have room to store it. We advised them to increase their lot sizes and add warehousing. As a result, their supply chain costs came down.

Modern: How do the Japanese view this idea, since lean originated in Japan?

Frazelle: It’s interesting. The tsunami changed some thinking there about supply chains. It opened peoples’ minds to the idea that there may be another way to approach this. We’re actually launching this balanced approach in the management program at a Japanese University. But, it is counter cultural.

Modern: Are there other catalysts causing us to rethink how much inventory we carry and where we carry it?

Frazelle: I think we are rethinking inventory because of customer expectations today, perhaps because of the Internet. If you can’t keep the item almost 100% in stock, well, maybe you shouldn’t have it at all. That’s driving companies to think about a different type of inventory that they can afford to stock. On the sale side, you have to get it right to keep your customers happy. On the financial side, you have to get it right because inventory impacts so many facets of your business. That’s why inventory is so critical and difficult to manage at the same time.

Click on the link to read an excerpt of Inventory Strategy: Maximizing Financial, Service and Operations Performance with Inventory Strategy.