A snow goose could very well be a polar bear’s prey, since both share a common habitat in the arctic and, unlike penguins, which live on the South Pole, snow geese are not protected from this predator by distance. Even though polar bears are among the most powerful land predators on the planet, they usually ignore snow geese. The explanation is quite simple: If a polar bear needed more than 12 seconds to catch a snow goose, it would burn more calories than it would gain from eating its prey. Therefore, the polar bear weighs benefits against costs. On the other hand, it would certainly not miss out on hunting a large seal.
As with many phenomena in the animal kingdom, the polar bear’s cost-benefit principle is transferable: for example to the ABC analysis, one of the methods that supports inventory management.
Role distribution in a warehouse
Take the following warehouse situation: up to several thousand different items in different quantities lie on the shelves and have to be managed as efficiently as possible. These days, companies cannot afford to tie up capital for unused material when it is actually needed for developing technological innovations. Consequently, warehouse stock levels are kept as low as possible. Yet, far worse than high stock levels is a low service level. In every sector, the competition is unrelenting, pressuring one’s own company to keep both low stock levels and a high availability of required items.
In many operational situations, finding the right balance poses a major challenge due to various hurdles that planning and purchasing departments have to overcome on a daily basis. Events, such as unexpected large orders, a sudden loss of a key supplier or a defective machine are common in daily business, and take away precious time from inventory managers.
This is why it is important for each planner, purchasing agent or inventory manager to use their daily working time as effectively as possible. So what has the analogy shown us so far? Wasting time trying to catch snow geese is the wrong approach. But what do these snow geese represent in a warehouse? It’s quite simple: C-items. Items of low value, or C-items, are likely to constitute a large portion of the overall warehouse stock, but their value is comparatively low. On the other hand, the A-items, and potentially B-items, represent seals. So inventory managers, being metaphorical polar bears, should direct their attention toward the few items making up the highest total value of the warehouse stock (the “fat seals”). While a delayed delivery of a C-item is certainly bothersome, a delayed A-item might cost the company a valuable customer.
Prioritization for optimization
ABC classification of items can be done using different criteria: for example with the corresponding contribution margins, dispatch values, dispatch quantities, stock quantities or stock values. Even within a particular item group, it often makes sense to base a decision on value and quantity. Here, the transition between A-items and B-items as well as between B-items and C-items must be determined individually.
Only the intelligent use of priorities makes them meaningful when planning stocks. However, manual maintenance of these key figures and their consideration in the planning process is hardly possible, given the broad range and high quantity of items. Intelligent planning systems automatically classify items via detailed selections and integrate an ABC analysis into already existing processes. By automatically incorporating transparent information into a cost-optimized order quantity calculation, polar bears (warehouse managers) are able to concentrate on critical customer orders and purchase orders for highly profitable items. They don’t waste any more time with snow geese (C-items) and thereby make inventory management more effective.
All things considered, my advice for a cost-optimized inventory management is: classify items and weigh planning and management costs against benefits depending on the item class.
What tips (or analogies) do you have that can lead to successful inventory management?