I have a fundamental problem with some of the traditional measures and key performance indicators in place in companies, because they do not always reflect the real costs in the businesses' supply chain. With margins in the food industry being under constant pressure, wouldn't you want an accurate picture of how much it costs you to do business? Take the cost of holding stock as an example.
It is, quite rightly, a key factor when discussing service levels and stock policies with suppliers and clients. Most businesses still consider the additional cost of holding stock to be between 4% and 10%. Apparently this includes the cost of warehousing and capital. Is it realistic? Is that all there is?
Do you ever lose orders? With most supply chains carrying more stock than necessary, I know businesses regularly lose stock. They know they have produced it and it is somewhere in the busy warehouse ... but where? So they make it again, using extra material and capacity. How about that for a real cost!
I was recently talking to a forklift driver and I asked him how he felt about the amount of stock in his warehouse. He described how, more often than not, the pallet required is not within direct reach. This meant that he had to make about six times as many manoeuvres as were expected from him. To me, this translates into a higher demand on this capacity and therefore slower response, not to mention a higher rate of damage. Now add that to the bill!
Obsolescence is another interesting one. I see businesses find packaging stock that they had forgotten about, or hide stock to avoid having to write it off. That tells me that there is more obsolescence than the figures might reveal. Whether you keep storing it or you eventually throw it away, either way it will cost you more than you thought.
I could go on ... but in reality the cost of holding stock is nowadays closer to 40% for most businesses, which puts a totally different slant on inventory planning.
Hugh Williams is founder of supply chain planning specialist Hughenden. hugh.williams@hughenden.net