Inventory Philosophy: K3S SOOP
We have all heard the saying, “You can’t see the forest through the trees”. Have you ever stopped to think about what it really means? Sometimes you can be so close to a situation, you lose sight of the big picture. Nowhere is this truer than with inventory replenishment. Often when buyers sit down to build and place their orders, they get so stuck on the details of the here and now, they are unable to focus on the big picture and larger goals. With this in mind, we have developed a philosophy we call “Inventory SOOP”.
SOOP is an acronym introduced by K3S in 2012 that describes the 4 stages that a company’s inventory can be in at any given time. Really, it describes inventory at the supplier level, not necessarily the company level. Before we discuss these states, it should be understood these are dynamic. That is, depending on the circumstance within a company and the economic conditions, inventory can switch states rapidly if not properly maintained.
Survival: Often when we begin working with a new client, all of their suppliers are in disarray. They may or may not know the lead-time from the supplier. If they do, it is almost certainly not a forecasted lead-time, rather it is hard coded into their ordering process. In addition, they may have a simple demand forecast, if they have one at all. They will review their suppliers on a fixed interval to simplify the process. These factors lead them to a point where placing orders is simply a function of survival. There is no strategy behind their orders besides “What do I need today so I don’t get in trouble tomorrow?” If your current system requires you to modify more than 25% of the ordering suggestions, chances are you’re in survival mode.
Organization: At some point, the executives will realize that the business can no longer continue to grow if the inventory remains in the “Survival” state. They know there has to be a better way. This is the point when they will often seek out additional tools to help them get their inventory and ordering processes under control.
During the organization state, the products will get a more accurate and dependable forecast adjusting for seasonality where needed, supplier lead-times will be dynamic, brackets are set and implemented, and service targets are factored into all orders. It’s simple…it’s just not easy. For this reason, many organizations will abandon the process and fall back into a survival state of buying. For those who continue, however, they can rapidly move into the 3rd state of inventory.
Optimization: This is the area most companies strive to reach. Companies in the “Optimization” state have done what is necessary to balance their inventory, keep high service levels, and reduce their carrying costs. The company is now happy because they have typically seen a dramatic increase in their available cash flow, their customers are happy with higher service levels, and the amount of time required to place orders is kept to a minimum. This is the point where most software and ERP companies stop.
Prosperity: Once the inventory for a supplier has been successfully optimized, companies are presented with an opportunity to use their inventory as a tool to truly boost profits. There are several ways to do this. The first is forward buying to take advantage of deals or ahead of price increases. In either instance, the goal is to buy product now and carry it longer than you normally would in order to take advantage of the additional profit it will present later. A second way is to reduce the number of orders placed in order to reduce receiving cost. Finally, it may make sense to buy larger quantities of items in order to take advantage of the volume discounts suppliers offer.
There is no doubt that if a company enters into the prosperity state too early, or with the wrong tools, they assume great risk in doing so. This has certainly backfired on plenty of distributors. However, our goal as a company is to provide our clients with the advanced tools required so they can confidently enter the prosperity state with minimal risk and maximum reward.
It’s important to understand that while each of these states is unique, they are not permanent. Without the proper ongoing maintenance, a supplier can rapidly fall from Optimization or Prosperity down to Survival. At the same time, they can take a supplier who has always been purchased in a “Survival” state and move them through the process of Organization and Optimization in the matter of a few weeks.
Copyright 2013 by Dan Kiefer