But how can managers who are embarking on a renovation or upgrading of their systems (inventory control or any other) be confident of getting maximum benefit from the change? First of all, they should ensure that the new system is not simply a rehash of the one that it replaces. Many projects of this kind are undertaken by teams consisting of managers and systems analysts, and the results are often computerised versions of existing methods and procedures. They may look more efficient but do not necessarily represent much of a step forward. Particularly where logistics projects are involved (production control and physical distribution as well as inventory), significant improvements are only likely to be achieved if the team includes operational researchers, statisticians and control engineers. It is the linking of these technologies with the computer which produces the results outlined above. Conventional management wisdom, even aided by information systems, is no longer enough.
Second, if the new system is to have a significant impact on performance and profits then a clear lead has to come from senior management. This means that senior management must know what can be achieved and how it can be done. Only rarely will a project team of departmental managers and management services staff move outside familiar territory. To be in a position to lead, senior managers must devote time in order to gain a proper understanding of the potential of modern systems, so that they can set the right objectives and ask the appropriate questions. Without informed guidance, project teams are apt to flounder in a mass of irrelevant detail. Senior managers who are not prepared to get down to detail are merely a hindrance, since they can unwittingly set conflicting objectives which serve to confuse and demotivate.
The interpretation of customer service objectives is a common source of confusion. "Customer service" is a current buzzword which can mean anything to do with being kind to the customer. In inventory control, however, it has a very precise meaning: namely, the proportion of customer demand which can, on average, be met immediately from stock. For each item of stock (or group of items) there exists a very definite relationship between the amount of stock carried and the service that can be provided.
For example, if the company aims to give a 99% service to customers, then the average stock holding must be 76 units. If cash flow, or a perceived need for a higher stock turn, dictates that only half that stock may be carried, then the best that can be done is to meet 94% of demand immediately from stock. This may create a conflict between the marketing and finance departments, but the resolution of such conflicts can hardly be left to the stock controller. It is a matter for general management.
A relationship of the type illustrated exists for every kind of stock item, whether it is for sale, a spare part or a component for manufacture. It is mathematically impossible to do better than the relationship allows. In this instance a 98% service level can be achieved only if an average of 62 units is carried in stock. There is no point in beating the stock controller, because he cannot perform better than the system. The ability to relate service levels to inventory is one of the two important contributions that science has made to inventory control. The other is to provide a means (ie. system) capable of delivering a selected level of service, and of continuing to do so no matter how circumstances might change.
The word "control" is often used loosely in the context of inventory and production. In fact it has a deeper meaning than has so far been recognised by most managers. The purpose of a modern inventory control system is to deliver a reliable level of service to the customer. The realisation of this purpose entails adjusting stocks to accommodate changes in the level and variability of demand, and in the time required to obtain replenishment supplies. Procedures are needed to track such changes, and to apply the compensating corrections to the inventory control system, and these call for the adoption of control engineering principles.
Whether an inventory consists of tens of thousands or only of hundreds of items, it is dangerous, in these days, to entrust its management to any human being. The human mind always overreacts to changes and discrepancies in behaviour, with the result that stock levels oscillate unnecessarily, while customer service levels are either over or under achieved. Only the computer can provide the fine adjustment that is necessary. It is for this reason that modern inventory control systems work best if human intervention is kept to a minimum.
(Anthony Lines is managing director of Slimstock Systems.)