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Antonio Zrilic
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Six Steps Inventory
Optimization

Six Steps Inventory Optimization Antonio Zrilic
1
Table of Contents
Instead of Introduction.................................................................4
First step – Analyze This ..............................................................8
Material classification...................................................................8
Pareto and His Pea......................................................................10
XYZ Analysis of inventories ..........................................................18
ABC/XYZ Cross Analysis...............................................................23
Defining a strategy based on the ABC/XYZ analysis......................25
Second Step – Inventory Management and Cash Flow Blues.37
What is the turnover ratio anyway? ............................................37
How to convert dead inventory into cash? ...................................49
Third Step - Diagnose Before You Prescribe ...........................62
The cause of death of dead inventory ..........................................62
Ask! ............................................................................................65
What does it have to do with inventory management? ................66
Fishbone diagram .......................................................................67
Fourth Step - Determining Inventory Policy ...........................79
The wolf is full and no sheep are missing.....................................79
Inventory types ...........................................................................82
Inventory and Strategy................................................................84
Cycle inventory............................................................................85
Safety Inventory..........................................................................88

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How to optimize the safety inventory...........................................91
Fifth Step – Who Can Tame the Inventory Beast ....................99
Conflicting goals .........................................................................99
Suboptimization........................................................................102
Materials management manager..............................................105
Sixth Step – Identifying and monitoring inventory key
performance indicators (KPI) ..................................................107
Defining goals...........................................................................111
What units of measure to apply?...............................................112
"It's not measurable!"...............................................................113
Inventory performance indicators (KPI)......................................116
Conclusion on Inventory Management.......................................119

3
Tables:
Table 1: ABC item distribution.........................................................16
Table 2: Inventory distribution according to competitiveness............45
Table 3: Analysis of Phisical inventory taking errors ........................71
Figures:
Figure 1: Pareto's rule.....................................................................12
Figure 2: XYZ Demand variation.....................................................19
Figure 3: Determining XYZ categories.............................................20
Figure 4: Characteristics of the item categories under the ABC/XYZ
matrix ....................................................................................24
Figure 5: Procurement initiated based on the ABC/XYZ classification
..............................................................................................28
Figure 6: ABC/XYZ classification-based principle of procurement....30
Figure 7: The ABC/XYZ classification-based automatization level of
procurement...........................................................................32
Figure 8: Pareto analysis of Phisical inventory taking errors ...........72
Figure 9: Fishbone diagram (Ishikawa diagram) .............................73
Figure 10: Fishbone diagram analysis of Poor communication as one
of causes of excess inventory...................................................75
Figure 11: Inventory availability by ABC groups..............................92
Figure 12: Determining inventory availability based on the ABC/XYZ
classification..........................................................................93
Equation:
Equation 1: Variation coefficient: 21
Equation 2: Calculation of turnover ratio and Inventory days 39
Equation 3: Safety inventory calculation formula (SI) 90

8
First step – Analyze This
So, how to manage inventories? It was already said
that the first thing you need to know is what
inventories are available to you. Inevitable tools at
our disposal for this purpose are ABC and XYZ
analysis and ABC / XYZ cross analysis wherein
inventories are classified according to their
importance (value) and variations in sale.
In this chapter we will make the first step, i.e.:
What inventories are available to you at all, what is
their volume and how much they cost you.
Material classification
In most companies materials or items are usually
classified in a linear manner (one-dimensional),
such as, for example, classification to raw
materials, semi-finished products, finished
products, spare parts and trading goods. However,
classification could be based on the intended use of
items being classified. For example, in
pharmaceutical industry additional breakdown to
solid oral forms, liquid and powder products is
made. Motor oils can be further divided, example,
to application in industry, transport and end-user,
etc.; further classifications can be done and
breakdowns per brands, markets etc. can be added.
We suggest that before making any analysis, all the
materials and products concerned are classified.

10
 Finished products.
Pareto and His Pea
We all know that the Italians are known for
spaghetti and nice cars. However, all of us who are
coping how to be more efficient and productive, i.e.
how to achieve more with less, should express due
gratitude to one Italian, who was neither a chef nor
a designer of sports cars. Vilfredo Pareto was an
economist and sociologist who lived at the turn of
the 19th
and 20th
century who, based on his research
of the world wealth distribution, concluded that 20%
of population owned 80% of the world wealth. This
equation is now known as the Pareto’s law or
Pareto’s rule applicable beyond the economy as
well, so this rule has spread to all areas of human
activities (80% of criminal offenses is committed by
20% of criminals, 20% of drivers cause 80% of traffic
offenses and accidents, 20% of your customers
account for 80% of your income, 20% of your time
makes 80% of money ... ). (ovdje nedostaje dio:
Kako je Pareto bio stravstveni vrtlar, čak i u
njegovom vrtu...) Even in the Pareto’s garden 80%
of peas is derived from 20% planted stems. In
general, we can say that 80 percent of
consequences arise from 20 percent of causes.
Accordingly, distribution can be made under which
20 % of products accounts for 80 % of revenues (A
items). Further 30 to 50 % of products account for
15 % of revenues (B items), and remaining 30 to 50

11
% of products account for only 5 % of revenues (C
articles).
To make the data and interpretation of ABC analysis
consistent and meaningful, ABC analysis is done
separately for each product category we have tried
to define previously.
ABC analysis is a method of classification of
materials into groups, each with a different
relevance and significance for the business. Their
treatment is determined according to this
significance. The purpose of this method is to
establish an effective system of control and
management of items within the procurement, sale
and warehousing operations by implementation of
various methods to achieve higher efficiency and
productivity of business operations.
In inventory management this rule helps us to
distribute, i.e. classify items according to the
importance these items have in our company. Thus
we get the inventory categories A, B or C, and
attention is paid to them based on their
importance. It is natural that A items are more
important to us and we will pay more consideration
to them, i.e. more time will be spent on their
analysis.

18
XYZ Analysis of inventories
In explaining the ABC analysis we have already
mentioned that only after the XYZ analysis is made,
we will be able to give a thorough interpretation of
the ABC analysis results because then the second
dimension will be also included. The XYZ analysis
measures variation of demand for particular items
and grouping them into categories that contain
items with the similar variability characteristics.
After both analyzes are performed (ABC and XYZ)
with the cross analysis of ABC / XYZ, we will obtain
matrix of nine groups of items that are then
individually approached and the strategy of
procurement, sale and warehousing for each of
them is determined.
Whereas the ABC analysis is the basic technique for
the supply chain management and is the primary
technique for the analysis and control of
inventories, the XYZ analysis, on the other hand,
enables us to perform the next step of the inventory
analysis. It is a secondary analysis that tells us about
the stability in demand for items and is carried out
by classifying items into three groups - X, Y and Z,
but by applying the criteria of variation in demand
compared to the average demand. Measuring the
variation of sale is done by so-called variation
coefficient which is calculated by the ratio of
deviation of monthly or weekly sale from the
average sale.

19
The XYZ analysis is, therefore, the method
comprising the second dimension i.e. the variation
in demand for certain items. As in the ABC analysis,
which we performed in the previous stage (and
described in the previous chapter), the purpose of
this classification is establishment of an effective
(optimal) system of supply, sale and warehouse
operations to reduce costs of inventories,
procurement and warehousing, which is one of the
fundamental objectives of logistics, especially in
times of recession.
Figure 2: XYZ Demand variation
How to determine what category an item belongs
to?
The category under which an item will be classified
depends much on the branch of industry in which a

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company is doing its business. According to some
sources (see Figure 2) X products are those that
deviate up to 10% of the average, Y products
deviate 10-25%, and all above 25% is sporadic
demand and belongs to the Z items. What I can say
from my personal experience is that this distribution
in most companies with whom I worked, is rather
optimistic, bent and that it "does not hold water." In
my experience (and also according to experiences of
some global companies), distribution can be done so
that the X products are those who deviate up to 50%
from the average, Y products deviate 50-100%, and
Z are all items which deviate by more than 100%.
Variation
coefficient
Deviation from
the average
X 0-50% Do 50%
Y 30% Do 100%
Z 100% and more Over 100%
Figure 3: Determining XYZ categories
How to calculate the variation coefficient?
The next task is how to determine what 50% or 100%
of the variation in demand means. As shown in
Figure 3 such determination depends in the

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trigger detailed measures, particularly for critical
materials. The characteristic of these products is
that forecasting is highly demanding and very
difficult and it is recommended to spend more time
in forecasting and that the procurement is made
manually, without any automatization.
ABC/XYZ Cross Analysis
In order to provide a fuller interpretation of the
results obtained with the ABC and XYZ analyses it is
necessary to make the ABC/XYZ cross analysis
matrix. From this analysis we get nine groups of
products with the characteristics of ABC and XYZ
analysis, to which one can approach individually and
determine the strategy of procurement and
warehousing for each and every of them separately.
When these two analyzes (ABC and XYZ) are
combined, additional insights can be obtained as
well as the opportunities to act on specific groups of
items through specific strategies for each of the
categories.
Interpretation of such analysis is shown in the table
with the ABC / XYZ cross analysis below – Figure 4:

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A B C
X
 Very high share in
total value
 constant usage
 High reliability of
forecast of demand
 Medium share in
total value
 constant usage
forecast of demand
 Low share in total
value
 constant usage
forecast of
demand
Y
total value
 neither constant nor
sporadic usage
 Medium reliability
of forecast of
demand
 Medium share in
total value
 neither constant nor
sporadic usage
 Medium reliability
of forecast of
demand
value
 neither constant
nor sporadic
usage
forecast of
demand
Z
total value
 Sporadic usage
 Low reliability of
forecast of demand
 Medium share in
total value
 Sporadic usage
forecast of demand
value
 Sporadic usage
forecast of
demand
Figure 4: Characteristics of the item categories under the ABC/XYZ
matrix
AX, AY and BX Category
Materials in group AX, AY and BX have a medium or a
large share in total values, stable consumption and
medium to high reliability of forecasting the
demand. This group accounts for a quite large share
of all items and it should be given adequate
attention in order to achieve as favourable
purchasing prices as possible and supply with as
lower inventories as possible. The AX group is

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particularly important because it has characteristics
of the A products (i.e. large share in turnover) and X
products by which it is easy to predict sale in
future. This group has a very high potential to
optimize inventories and their costs.
AZ, BY and CX Category
The middle AZ, BY and CX group is quite
heterogeneous, both as regards the share in total
consumption value and variations in sale. This group
should be given a normal (average) attention and to
organize individual supply to meet customers'
demand.
BZ, CY and CZ Category
BZ, CY, and CZ groups are given relatively little
attention, the needs are determined stochastically,
i.e. from need to need and supply is realized from
own inventories.
After this detailed analysis of inventories it is much
easier to determine whether some inventories are
too high, and perhaps others are too low. Then we
can, and in the following steps we will, go into
determining the optimal or desired level of
inventories.
Defining a strategy based on the ABC/XYZ
analysis
By combining the ABC and XYZ analyses we get the

26
results and groups of items that involve the common
features of both analyzes. These common
characteristics can help us to define strategies for
sale and procurement and inventory policy for each
group of items, according to their characteristics,
specifics and needs.
Using this combined analysis can provide you with
the improved availability of items, the basis for
more efficient inventory management, reducing
number of non-moving items, improving the delivery
schedules and for "shaking" the item range.
In order to get more from the mentioned benefits
the action in the four directions is recommended:
1. Organization and strategy of procurement –
identification of organizational measures for
individual categories of items
2. Demand forecasting – Selection of appropriate
forecasting method
3. Inventory planning – Selection of appropriate
method and procedure for inventory planning
4. Shaking of the item range – Optimization of
product number
1. Organization and procurement strategy
As we noted earlier, the ABC / XYZ analysis gives
you a basis for implementation of specific actions
you can take supported by the data supplied. The
first action that you can start relates to the
organizational measures and strategies that can be

37
Second Step – Inventory
Management and Cash Flow
Blues
Elimination of slow-movers or dead inventory is next step
aimed to achieve an optimal level of inventory.
Analysis of the inventory turnover ratio will help us to do
it. Two points are important in respect of slow-movers:
Firstly, trying to get rid of them in every possible way
(sell-off, write-off, etc.) so that they do not burden
you in terms of cash-flow and space (Let’s call in mind
the example of a company that set its targets, but it did
not rid of slow-movers which hindered its sale).
Secondly, introducing regular monitoring of these slow-
movers in order to respond promptly to their repeated
occurrence.
What is the turnover ratio anyway?
To measure whether some item is slow or fast-
mover you can use turnover ratio. Generally
speaking, the turnover ratio is an indicator of
efficiency at which a company uses its assets; it
shows how many times in a given period, individual
types of assets in a company are turned over. It can
be calculated for total business assets or for current
assets (which include inventory).
The turnover ratio of working capital is obtained by
dividing the sale value by the average working

38
capital used in a business year. In addition to these
general turn over ratios, partial ratios, i.e. ratios
showing the turnover for certain types of working
capital (in our case - inventory) are also used (as
seen in Equation 2). The larger turnover ratio means
faster turnover of the capital in the company (it is
possible to finance same volume of business with
smaller amount of working capital) and is generally
considered it has a positive impact on increase of
the company’s efficiency.
Thus, the turnover ratio should to be examined in
every stage of business. Taking into account that a
huge part of working capital is hidden and trapped
in the inventory, the Inventory turnover ratio should
always be kept under control. For keeping it under
control, the 3-step plan from the next chapter
should be made and carried out): Determining the
criteria for slow-movers, Slow-movers analysis and
Regular write-off.

42
o Higher transport costs per unit - if you are
ordering more frequently and in smaller
quantities in order to increase the turnover
ratio it will increase transportation costs per
unit of product.
o Higher purchase cost per unit - the purchase
cost of a product per unit will increase for
same reason as we mentioned in the previous
paragraph.
The inventory turnover ratio is an adequate measure
of operating efficiency, when used for comparison.
One should, of course, be aware that the high and
low turnover ratio is a relative term, which is
calculated for historical data and in relation to a
specific industry and is difficult to generalize and
say what ratio is optimal for you.
3-step plan for increasing inventory turnover
Some companies analyze slow-movers once or twice a
year, while some do it every month. Optimal control
should be conducted at least once in a quarter,
however, the best- in- class companies do it once a
month or even more frequently. The essence is to do it
on a regular basis. The following plan should be followed
to achieve this:
1. Determine criteria for slow-movers - What is the
inventory turnover ratio (TR) which would be
satisfying for your company? Is it 5, 10 or 20
turnovers per year? I know some companies

49
to be done and then quick action was taken
to resolve this issue. We are talking about
three hundred thousand U.S. dollars, which
should be written off at the time when the
market was not exactly prospering, and thus
still further reduced profits.
The point of the story about Pokémon and gutters
and of the whole topic of slow-moving inventory is
that the slow-movers should be regularly analyzed,
and regularly got rid of while they are still small.
When they grow, it is much more difficult to get rid
of them and the pain caused is much stronger.
How to convert dead inventory into cash?
So if you're looking at a build up of your dead
inventory, and feel overwhelmed by the enormity of
it, in this chapter, we will introduce to you some of
the ideas proposed by Ted Hurlbut, in his article
The Challenge of Turning Dead Inventory into Cash
and by Nick Bragg in his article Strategies for Dead
Stock, but also some other ideas of our own to help
you in turning dead inventory into cash.
1. Patience and persistence.
You didn't get into this situation overnight, and
you're not going to get out of it overnight. Build ups
of dead inventory are frequently accompanied by a
cash flow crunch, so the instinct to search for a

62
Third Step - Diagnose Before
You Prescribe
The cause of death of dead inventory
Inventory will not die just like that overnight. In
most cases, causes of dead inventory are poor
purchasing decisions. However, you must know what
the main causes are and how they could be
improved.
It's hard to avoid piles of dead inventory if you have
no control over the purchasing process. Often, the
thrill of increased growth, expansion into new areas
and new products result in numerous items of dead
inventory.
When we talk about new products for which there is
no historical experience to rely on, we use other
methods. Depending on the product category, it is
possible to take some of the products and test them
on our key customers. If you get the blessing of the
customer, then there is a good chance that the
product will be successful.
Even after a product review by the customer, there
is still a chance that the product will fail and stuck
in dead inventory. So, before investing in a new
product, you must provide and arrange with
suppliers that, if a particular product doesn't sell,

63
you can return it with little or no cost. Without
prior agreement (or contract) with suppliers, you
will much harder return the dead inventory.
Wholesale distributors are a great resource for the
purchase of special items or products requested by
a few customers. Manufacturers often have high
order minimums and with only a few customers who
need these goods, the rest is converted into a dead
inventory. Wholesales allow their customers to buy
as many products as they need.
Wholesalers to end customers and retailers allow
low inventory because they do not have to keep a
lot of SKUs.
So, here's a tip: products with larger volumes are to
be purchased from the manufacturer and products
with smaller volumes from wholesalers. The
wholesalers will supply you on a daily or weekly
basis, so you don't have to carry more than two
weeks worth of inventory.
Find out the Causes of Excessive Inventory
Without a doubt, poor inventory management is the
most common cause of dead inventory and it
increases the problem of dead inventory in the
distribution and warehousing. When people aren't
paying close and regular attention to the movement
of their inventory, dead inventory occurs.

64
Unfortunately, we must admit that most of
companies still don't have any software to track
inventory in the warehouse, or if they have it, they
still don't utilize it to its maximum potential. The
most important thing that companies need to learn
is how to extract and manipulate data in their
warehouse management software program.
As we have already discussed in the section on dead
inventory, one of the main tasks of the warehouse
staff is to read regularly the inventory reports
paying close attention to the slow-movers (those
that are sold poorly or not sold in the last 12
months) in order to find out on time that they are
converting into "dead" inventory.
These reports allow professionals responsible for
inventory management to get ahead of the problem,
i.e. to detect the first signs of a product losing
favour with customers and get rid of it. The worst
that can happen is that someone comes and buys a
product from the list of "dead" inventory and you
will need to re-purchase it.
Another tip. Thus, the power of a professional who
deals with inventory management is to detect dead
inventory before they die, and to take proactive
and preventive actions in order to resolve them.

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Fourth Step - Determining
Inventory Policy
The wolf is full and no sheep are missing
Defining inventory policy is one of the most
important elements of inventory management. That
is - determining the value of target inventory. What
is target inventory? - I thought you'd never ask ...
Well, here's a short answer. It is the total amount of
inventory, with total value and structure sufficient
to enable us carrying out our planned sales strategy,
and still not having "excess fat”, i.e. costs that
hinder us in these efforts. If you are not satisfied
with this answer, you can find detailed and specific
answers hereinafter.
Most small and medium-sized (but also a number of
large) companies do not have a defined inventory
policy, but they follow "Forest Gamp" policy: We
need as much inventory as we need ... I have a
friend who works as an assistant logistics director in
a regional pharmaceutical company and is
responsible for all warehouses, inventory and
production planning. In the first year of recession he
was often hold accountable by the management for
overstocking. He opposed saying: "OK, how do you
know we have excessive inventory? Firstly, such
inventory level we had last year, and nobody said
anything, and secondly, what the indicator or
criterion you use as the basis for your opinion we

80
are overstocked, when you did not set any targets in
this regard." Of course they did not define any
indicators, but only estimated by "approximation"
method that they had excessive inventory, because
the revenues simply reduced and they realized that
it was too difficult to finance so many inventory and
that a part of cash was ‘frozen’ in them. The lesson
of this story is that the inventory policy must be
defined so that we know at any time what our
position is in relation to the goals we have set.
Some companies define inventory policy something
like this: If our lead time is 20-30 days, then we
should hold in stock the inventory for
approximately 60-90 days... Good side of this
inventory policy is that you will find quite rare in
the stockout situation. However, negative side is
that you will definitely have excessive inventory and
sooner or later the issue of optimization will
emerge. Exactly this happened to one client, who
noticed that certain goods was too long in stock and
slowly turns into slow-movers or even dead
inventory. The inventory policy of the client
described above is simply not sustainable because it
treats all the items equally and creates the
potential of future costs due to too much space
occupied by it, financing of excessive inventory,
insolvency and write off the dead inventory.
However, good news is that there are methods that
can approach each category of items in an
individual way enabling to hold an exact inventory

81
amount a particular product as needed, and thus
achieving a win-win situation.
Here's another example. Again from
pharmaceutical industry: A large regional
pharmaceutical company had the inventory policy
(as it is proper for a well organized company) which
determined they could have an average of 15
inventory days (inventory days answer us the
question: How many days on average is required to
turn inventory into sales revenue? – Inventory
related indicators will be further discussed in Step
Six). When it was acquired by other global
pharmaceutical company, the new owner introduced
a new policy. And, what do you think – what this
inventory policy said? I am happy you asked that.
You thought that the answer is eight inventory days
or so...? Wrong! Their new inventory policy said
that they should have 30-45 inventory days. How’s
that? Didn’t they have to keep the same 15 days if
not even reduce the number of inventory days?
However, we all know that a policy is neither good
nor bad, but it simply reflects the current situation
i.e. balance on the market and implements the
planned strategy. In this case the new owner had a
new strategy for this market and he wanted to
increase sales, i.e. take an additional percentage of
the market share from competition.
Inventory policy is directly related to the level of
customer service. Therefore, the higher inventory
level, the higher percentage of customers who can

82
meet their needs. But the costs of their holding are
also higher. However, there is another catch. This
catch-22 says that the inventory level must not
simply identify with availability because the
availability depends not only on the level but also
on the structure of inventory. It is also impossible to
satisfy customers in all 100 percent of cases,
because it just costs too much. Therefore, in order
the wolf (in this case, customer) is full, and no
sheep (inventory) are missing (optimum), it is
necessary to determine the preferred inventory
level consisting of the optimal inventory level for
each item according to the specific demand for such
item.
Inventory types
The question now is how to determine the preferred
optimal inventory level? To answer this question, we
should first define the inventory structure,
categories of inventories, and how much of each
category is actually needed. In fact, we can talk
about three types of inventory:
1. Cycle inventory – is operating inventory to
satisfie demand for the product in the period
between two orders. Companies tend to
produce and to purchase in large lots in order to
gain the advantages that economie of scale can
bring. The order size is determined by Lead
Time average consumption, i.e. sales or
consumption during this period.
2. Safety inventory – is necessary to cover the

84
To obtain total optimal inventory it is necessary to
calculate the optimum for each of these inventory
types.
Inventory and Strategy
The question of all questions in determining the
inventory policy is: What is our strategy? The
strategy of a company determines what level of our
inventory should be. So, in case we want to have a
good inventory policy we must have a defined
business strategy. In some cases, we can perhaps
have inventory policy without clear strategy, but
then the inventory is not in function of
implementing the strategy. In any case, in order to
determine the target inventory we need a strategy
to match inventory policy.
The second thing we need to know is what are
inventory comprise of. In the previous section, the
types comprising our inventory in the warehouse are
presented. We mentioned that they include safety
inventory, cycle and seasonal inventory. As the last
one (seasonal inventory) are not characteristic of all
companies, we will concentrate on the two other
ones - safety and cycle inventory that all companies
have or should have.
The following formula can be used to determine the
target inventory value
+ Determining preferred service level

91
How to optimize the safety inventory
Although safety inventory is relatively small
compared to total inventory in stock (while cycle
inventory can be quite high if lead time is long), it
should be borne in mind that safety inventory, by
definition, are always in stock. In some way it
makes them fixed and not current assets because, in
ideal case, they are never used.
Considering the above two elements that affect the
level of safety inventory (preferred availability and
variations in demand), well balanced combination of
these two factors can result in optimum level of
safety inventory.
If you now refer to the first step and the section on
Pareto rule and ABC analysis, you can say that our
ABC analysis enables us optimization of inventory by
creating risk profiles for each group of materials (A,
B and C). It means that it is not necessary to have
the same service level for all product categories. It
does matter what service level (meaning:
availability of inventory) you will have for
individual items or group of items. Therefore, risk
profile should be determined for each category.

94
percent AY. In combination with the strategy
planning and procurement AZ group will be
processed manually anyway, and because of large
fluctuations it does not make sense to go to high
availability because it would require too large
safety inventory, which is quite expensive, with risk
that the planned sales will not occur. Group ‘B’ is
now divided to 95 percent availability for BX, 90%
for BY and 80% for BZ. Group ‘C’ is divided as
follows: 90% availability for CX, 80% for CY and 60
percent availability for CZ.
How to determine optimum inventory
In previous sections two very important things in
inventory management are elaborated, i.e. the
current status of inventory (the analysis of inventory
structure) and the preferred status of inventory
(inventory policy). On the one side, we have an
actual status (which depended on the past, either
good or bad, decisions), on the other side we have
the preferred status (which will depend on our
future decisions, which should be based on the
strategy we are implementing). If the previous steps
were done properly, we basically get two points or
figures (representing the inventory value) and what
we should do is to get from one point to other.
The preferred inventory value is the sum of safety
inventory, which were calculated based on the pre-
defined factors (preferred availability for each
category and/or a particular item, fluctuations in

99
Fifth Step – Who Can Tame
the Inventory Beast
When we talk about the responsibility for inventory
at the Inventory management- related workshops
and I ask who is responsible for inventory, no one
answers and they look each other with surprise.
Then I slightly rephrase the question and ask: "Well,
who is to blame if there is not enough inventories or
if there is excessive inventory?" Well, now it's
clearer and they all know what we talk about.
However, it is not always so easy to determine who
responsible person is and who is the scapegoat
whatever happens (good or bad) with inventory. It is
especially difficult when there is a shared
responsibility or, in other words, when they are all
responsible. Well, then, in fact no one is responsible
and such a situation should be avoided.
Conflicting goals
A recent conversation I had in a reputable food
company is the best illustration of the situation
described above. At that meeting I was told about
the following: The biggest problem we have is to
define the responsibilities and conflict situations
arising from it. It is not debatable that the
Procurement Department is responsible for the raw
materials inventory (although production orders raw
materials and packaging under standards), but for

107
Sixth Step – Identifying and
monitoring inventory key
performance indicators (KPI)
Question: For some time I run a small trade
firm that was founded as a family enterprise.
As soon as I took it over, I started, as a CEO,
with the restructuring in terms of leadership
and management of people. Namely, in our
enterprise the question of adequate
remuneration has always be skipped and
personnel was given a 'fair' salary compared
to similar jobs in other enterprises on the
market.
Until now we did not have an adequate
computer program to be able monitor some
processes in a quality manner. The new
software is purchased, we've made decision
about changes, and we already managed to
implement some recommendations on
measuring the sales and customers, but we
are still 'grouping in the dark' in some areas.
My question is whether you could help me
with a few recommendations on the ways of
measuring and assessing the warehouse and

113
"It's not measurable!"
Admit - you've certainly said these words at some
point, when you discussed some goals or results that
were quite immaterial and intangible, and you could
not remember any measure at the moment. Then
you took a deep breath: "It's not measurable!”.
It might be a goal such as rising innovation or
engagement of employees, or quality of customer
satisfaction; or employees’ satisfaction and
willingness to change, or guidance, or future
viability, or... There are so many goals and results
that, at first glance, look immeasurable. However,
do not give up so easily.
Do not give up and so let the goal is not measured
at all. I admit that it is a great temptation, because
anyway all agree with you that it is difficult to
measure. Time is short anyway - you do not have all
the day to devise a measure for one goal. It is
better to move to the next target to see if it is
easier to measure. But before you move on, you
should know that almost every organization is faced
with this challenge. The problem is not that your
goal is not measurable, or that you have chosen the
wrong goal from the beginning. In fact, the language
you use to express your goal may not be specific
enough.
So, when someone says that something is not
measurable and wants to move on to some other

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