How much inventory is necessary? The simplest answer is "enough." There should be enough inventory to maintain the operation every day. However, keeping stock is expensive. Inventory management must establish decision rules in order to balance the benefits against the rising cost of spare parts.
The transit industry can learn from the military. The primary objective of a military supply chain is to attain a specific state of readiness at the lowest possible overall cost. The military considers cost as part of the equation in its goal of achieving that specific state of readiness. There are different states of readiness based on each situation. Decision rules must be variable to include multiple situations.
For the military, the balance of cost and benefit vary during times of peace and times of war. For the rest of us, the decision rules will vary based on predictive or preventative maintenance and unexpected breakdowns. In times of crisis a customer may consider cost an unimportant detail in comparison to getting the part. However, a budget department will position cost with a higher rank, independent of the crisis. Customers can be unforgiving during a stock-out and budget departments can be unrelenting when asking for higher inventory turns and lower costs.
There must be a balance between inventory costs and service levels. Higher service levels results in fewer stock outs but requires significantly more stock. Looking at this from a statistical viewpoint, we can consider the costs in standard deviations. We need to have a service level sufficient to keep our service vehicles on the road. Two sigma, or a 95 percent service level, appears to be where the cost and benefits meet acceptable levels for both the customer and the budget. An inventory manager can establish a decision rule that indicates 100 percent fill rates for predictive or preventative maintenance requirements. A different decision rule, establishing a lower fill rate, can be created for the unexpected stochastic demand resulting from breakdowns. A third decision rule would cover a more urgent level of readiness, for example an upcoming conference which will require public transportation.
When supply and demand are stable, fill rate can be higher without exponentially rising costs. You could customize the service level based on the stability of the demand and the variability of the supply. Knowing the stochastic demands of a transit-based parts inventory, as well as the limitations of the finances for a public entity, is necessary to develop a workable approach to the demand. There are trade-offs between service levels and inventory levels. We know that the effect of demand variability is 10 times more volatile than lead time variability. A company must identify the cost they are willing to incur for the required service level, or conversely, what service level are they willing to live with to achieve the desired costs? The result of this conversation can then help guide inventory management in the establishment of the decision rules balancing the requirements of the varied types of demand with the different decision rules to achieve an overall fill rate of 95 percent.
The importance of inventory record accuracy in any inventory management setting cannot be overstated. The entire structure of inventory management relies on accurate and up-to-date data and inaccuracies can undermine the established decision rules. Inaccurate inventory records will cause unnecessary ordering, raising costs, or a delay in the replenishment of an item. Record accuracy needs to be handled through prevention and correction. Prevention in the form of eliminating root causes, adherence to procedures, and clear communication of the decision rules. Correction can be achieved through vigorous audit policies, which should include cycle counting.
Inventory management programs attempt to minimize variance, but these automatic adjustments do not work if the inaccuracies are being generated by human error. Thus, the human behavior factor should be considered when analyzing your record accuracy policies. Research suggests that any supply chain goes through normal periods of minor inaccuracy; don’t let the stress of those periods allow an employee to become overwhelmed and cause even more errors because of the stress. This phenomenon can be corrected with training, job design, job analysis and evaluation of employees. There is an importance of communication and attitude by the inventory team.
Service level is a simple metric, when an inventory item is needed, is it in stock? It measures the frequency of stock outs without regard to the magnitude of not having a particular part in stock. Statically speaking, 100 percent service level is not attainable. Once you rise above 95 percent service levels, the relationship from stock level to costs is non-linear. Costs will rise above the corresponding service levels. The law of diminishing returns is in full effect. You achieve smaller percentages of stock outs but at exponentially higher costs. Your stocking plan should not be intended to eliminate all stock outs, but to achieve that balance for each specific state of readiness.
Michelle Berry is a manager of inventory with the Greater Cleveland Regional Transit Authority.
