Achieving New Heights with Transformative Inventory Management Solutions

Manufacturing firms are consistently faced with the ongoing challenge of enhancing operational efficiency to reduce operating costs while satisfying customer demand. In today’s operating environment, improving inventory management capabilities has emerged as a key opportunity for these organizations, with many companies aiming to reduce inventory holding costs while preventing disruptions to their operation. However, challenges like the number of active SKUs, unpredictable customer demand, varied manufacturing techniques, reliance on third-party logistics companies (3PLs), evolving technology, and the absence of uniform procedures and controls can make inventory increasingly difficult to manage. These challenges can influence inventory inaccuracies leading to excess inventory and disruptions to production.

Our client was experiencing that same situation in one of its commercial HVAC facilities. The team faced frequent disruptions to production due to material shortages, driven by inconsistent procedures and compliance with standard inventory management practices across their 3PL network. Additionally, the lack of a standardized cycle counting program and defined controls around inventory transactions contributed to frequent fluctuations in inventory, making it difficult to manage excess warehouse inventory.

Due to the level of complexity surrounding our client’s operation, and in preparation for its upcoming physical inventory, the company engaged Protiviti’s supply chain experts. The goal was to develop a robust cycle counting program tailored to the operation and assess inventory management functions to identify improvement opportunities that would create value and alleviate the inventory integrity issues the client was experiencing.

Comprehensive assessment of inventory management functions

The initial phase of the project began with a comprehensive assessment of the client’s current state, utilizing Protiviti’s Six Elements of Infrastructure to identify key gaps and challenges within the inventory management functions. Data for this assessment were gathered through more than 30 interviews with key stakeholders and numerus floor audits. This allowed Protiviti to collaborate with their client to identify opportunities within existing processes, systems, and documentation. Utilizing Protiviti tools and processes, the team identified four key areas to improve inventory management processes:

1. Formalize strategies, policies, and governance controls. Due to the lack of standardized strategies, policies and governance controls, each team among the 3PL network operated independently, which created inconsistencies with how inventory was managed, as well as confusion around performance expectations and the priorities of each team.
2. Strengthen inventory management processes and controls. The absence of standard procedures and controls, along with irregular adherence to existing practices, led to discrepancies in task execution and reliance on "tribal knowledge" for crucial inventory management tasks. These inconsistencies contributed to material mismanagement, causing inventory discrepancies, material shortages, and a buildup of excess inventory.
3. Develop a culture of operational excellence. Misalignment of roles, responsibilities, expectations, and focus for individuals or a team can result in operational inefficiencies and communication breakdowns that negatively impact performance. By clearly defining roles and utilizing proven performance monitoring techniques, a team enhances its ability to act as one ecosystem and enable timely issue resolution.
4. Embrace new tools, technologies, and analytics. Today, the need to develop capabilities that improve organizational agility is becoming more and more of a necessity. This requires organizations to adopt tools and technologies that enable employees to make informed decisions in real time. This held true for the client as customer demand grew.

Developing recommendations to enhance capabilities

Upon completing the comprehensive assessment of the client 's current state, Protiviti experts were able to identify key recommendations to improve inventory management capabilities. These recommendations ranged in topics and were backed by business cases. Overall, there were five recommendations:

1. Adopt leading practices for inventory management
2. Development of policies, procedures, controls, and metrics
3. Strengthen performance monitoring and governance controls
4. Define roles, responsibilities, and cross-functional hand-offs
5. Update tools and systems

Additionally, each recommendation was ranked based upon complexity and effort to implement, allowing the team to develop a prioritized roadmap for the client. This roadmap would allow the company to properly instill these recommendations over a set timeframe, while considering the resources and investment needed to make these changes. By understanding the current state and how to improve its inventory management capabilities, our client was able to make meaningful changes that would positively impact the organization.

Developing a future state cycle counting program

In addition to improving inventory management capabilities, the client wanted greater control over inventory accuracy and to better manage unplanned adjustments to inventory. To achieve this goal, they turned to Protiviti’s supply chain experts to develop a future state cycle counting program uniquely tailored to their operating environment. Protiviti utilized its expertise and methodologies to deliver an effective counting program, including:

• Establishment of an inventory categorized methodology based upon the client’s unique business requirements, which provides the counting frequency for each inventory SKU based upon its criticality to the organization.
• Development of detailed cycle counting policies, procedures, and controls providing the client standardized ways to conduct and manage cycle counting activities, which are clearly defined. 
• Analysis of the clients’ systems, capabilities, and operation to develop count management tools and detailed SOPs that list step-by-step instructions on how to conduct each counting activity and what to do when various issues arise.
• Partnering with the client to pilot the new cycle counting program, to test the counting program’s feasibility and identify where changes need to be made. 
• Creating robust training materials for each role in the cycle count process to equip employees with detailed work instructions that can be easily referenced.   
• Defining key metrics and KPIs to manage counting performance and developing procedures to outline what actions are to be taken if performance thresholds are not met.

By rigorously testing the new cycle counting program, the client was able to effectively implement the counting program. This program provided the client greater control over inventory accuracy and ensures counting activities provide the proper amount of inventory turns.