The Tip of the (Inventory) Iceberg

This is an excerpt of the original article. It was written for the November 2014 edition of Supply Chain Management Review. The full article is available to current subscribers.

November 2014

Supply chain managers are on the lookout for metrics that will allow them to put a number to their progress - or lack thereof. Welcome to KPI's that allow them to demonstrate the quantifiable value that they deliver. At the same time, Murphy's Law may intervene or they may be called upon to put out fires or come to the rescue and make good on the promises sales and marketing have made to customers - regardless of the cost. So, how do you measure success? I hope this month's issue and online bonus feature help you consider how you measure your progress.

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As every sailor or fan of the movie “Titanic” knows, it’s not the tip of the iceberg that gets you; the real danger is the ice hidden below the water’s surface. Even though you navigate around the visible ice, the hidden ice can still sink your ship.

High levels of inventory can have the same effect in the retail supply chain. As a Kurt Salmon analysis noted, most retailers carry anywhere between 20 to 40 percent surplus inventory. The reason for this build up, in our experience, is that retail professionals are convinced that if they have inadequate inventory for customers, their businesses are bound to fail. In order to avoid such possibility, the mantra of “keep it filled” conveniently becomes the platform for a second objective of “buy it cheap.”

The failure to manage inventory and contain this surplus becomes the source of what we call hidden costs. These are not the typical costs like inventory carrying costs. Instead, they are costs that do not get associated directly with inventory, but are caused by moving, storing, and handling excess inventory in the enterprise. They affect an organization’s profitability and productivity. What’s more, they could have been avoided by better inventory management.

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