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The importance of inventory management and the relationship between inventory and customer service is essential for any company.

CFOs are aware today that getting inventory levels right is vital, since it not only controls costs, but also serves as a barometer of a company's overall health.

In general, inventories are competitive and strategic tools. If used the right way, they can be the basis of good customer service, which with time and effort becomes a competitive advantage for the market.

There are two classical assumptions that lead inventory managers to failure:

1. Improved accuracy of sales forecasts is the best way to reduce inventory.

2. Strengthened customer service requires making available a larger stock of inventory on hand.

The fact is that these assumptions may lead to oversupply or shortage in inventories.

A measure for optimizing inventory management is to involve cross-functional teams, rather than only the sourcing department to help determine the optimal frequency for producing or ordering products. That is because there are external factors, such as marketing campaigns that directly affect inventory levels. Production and ordering schedules should be set by teams that represent both marketing and sourcing.

There are usually 10 questions that assess the health of a company's inventory and are designed to evaluate the efficiency of inventory reduction processes.

1. Can your inventory be classified into three major categories when reporting levels: Safety, replenishment, and excess or obsolete stock?

2. Is your company using the most effective method to calculate your safety stock levels?

3. Do you recalculate safety stock levels on a regular basis to ensure they are up to date?

4. Who decides key inventory-related policy such as, the right balance between the customer service and inventory levels?

5. Is the optimal frequency for producing or ordering products determined by cross- functional teams or only by Managers of Production and Supply?

6. Are supply factors and frequency of negotiations as well as factors for future purchases and sales promotions or uncertainty (such as bad weather) considered when determining the frequency for ordering and inventory production?

7. Is the optimal amount to order / produce and its frequency calculated on a regular basis as part of a continuous improvement process?

8. Do you have regular visibility into excess and obsolete stock, and is it linked to targeted action plans to sell off or reduce this inventory?

9. Do you create working groups, with linked action plans focused on root- cause analyses on excess and obsolete stock?

10. Do you apply the above practices to all parts of the inventory (finished goods, raw materials, works in process and spare parts) and all organizational entities?

These questions will help you diagnose the state of your inventory, but mostly you can guide your company to identify significant opportunities to improve expense and asset effectiveness. Often ignored, inventory pulse checks can be a huge lever to improve the financial health of a company.

Pratap Mukharji, Sam Israelit, Francois Faelli, Thierry Catfolis and Raymond Tsang,
"Ten Ways To Improve Your Inventory",Jul 2011, Bain & Company.

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