By Terry Harris, Chicago Consulting

Inventory-Based Service Strategy
Service-based strategies are demonstrably effective – see virtually every past HBR issue in the last ten years.

Inventory service dominates service. Having what customers want to buy available to them, is normally the their first issue. Frequently it’s the largest portion of the whole service picture. (What do other services matter if the product is not available? It might as well be free!) Suppliers are selected and purchases made frequently based on product availability alone.

This is clearest in mature markets where the products themselves are less differentiated and service controls relationships often dictating who gets the order. E-commerce, helping shoppers find what they want faster and simpler, is just an example of a strategy that responds to consumers seeking to buy what they want.

Inventory service, like other service components, retains customers when it performs well. But it “sends” customers to competitors when it doesn’t. In this way inventory service goes beyond just retention. It captures competitors’ customers when the company is quizzed due to those competitors’ own poor inventory service. Superior inventory service succeeds simply by garnering more customers.

Buyer behavior makes the case for inventory service. Buyers try to find what they want. Having found it they buy it and look there next time. Those they buy from are obviously more successful than others are. It’s self-reinforcing feedback – economic “Mother Nature”.

Inventory Service Internally
Operationally service provided by inventory – availability, fill rates and so on – is straightforward. It’s quantifiable. Easier to measure and manage than other more abstract services.

Inventory’s influence on customers’ buying and its operational simplicity combine to make it the most productive and effective service-based strategy for a large number of businesses. Often it’s the only strategy that will achieve long-term competitive success. What distributor, for example, could survive with poor inventory availability?

Because it’s based on customers’ response to inventory service, the same opportunity is available to competitors. This strategy is both offense and defense in one making one vulnerable to competitors high service strategies.

Inventory service’s power and its competitive exposure summons senior management attention. Inventory management is too important to be left to inventory managers.

The service an inventory provides can always be increased by carrying more inventory – investing more capital. To be sure, it matters which items are carried in greater amounts, but all inventory increases provide (at least some) service increases.

Moreover, any service level can be met with enough inventory – enough capital. It’s even possible to be imperfect or inefficient about carrying inventory. All that’s needed to meet a service level (any service level) is “enough”.

But to get more “service bang” for the “capital buck”, the inventory has to provide high service per capital dollar, preferably the highest.

Service Per Dollar as an Objective
Service per capital dollar is the only sound measure of inventory effectiveness. Maximizing it provides an organization with the chance to increase service, decrease capital or both over its existing inventory management method.

There are no more important characteristics of inventory than the service it provides and the capital it requires.

Current Inventory Management
Current inventory management approaches don’t even measure service per capital dollar. They don’t specify inventory levels that provide high service per capital dollar let alone the highest.

Many approaches manage all items the same – the fast items, the slow, the expensive and inexpensive. Some group items into classes containing thousands then manage all thousand in the same way. In many ABC Class systems the controls that manage classes actually negate objectives of high service and low capital.

In more sophisticated inventory systems a service target is input whereupon the system establishes an inventory that provides the service, rather than the inventory that provides the service with the lowest capital.

No commonly used systems are able to recommend an inventory that meets a capital budget let alone one that maximizes service within a capital limit.

Until now no system maximized service per capital dollar.

The Optimized Approach
The Optimized approach specifies inventory that maximizes service per capital dollar. Managed in this way an inventory will meet a service level, say 98%, with the lowest capital investment. Alternatively a capital budget can be specified, say $50 million. The Optimal approach will then achieve the highest service for the $50 million.

The Optimal approach specifies inventories that are “better” than any others – ones that provide higher service and lower capital. Accordingly it’s a better inventory management approach at the things that matter most – service and capital.

Cummins Engine has applied the Optimal approach to its parts business – both at its distributors and its own parts inventory. Cummins decreased capital in its distributor channel by over 20% and decreased emergency orders by about 30%. It decreased its own inventory by about 20%.

GTE Supply applied the Optimal approach to $200 million of inventory it manages for Bell South and decreased capital by 40% in six months time.