The Great Lever of Power

I shan't be pulling the levers there, but I shall be a very good back-seat driver. - Margaret Thatcher

A number of years ago, I saw a television interview with President Ronald Reagan after he left office. In that interview, he reminisced on his political career, including when he first stepped into the Oval Office in 1981.

I can't find any transcripts or direct quotes from that interview, but I do distinctly remember him saying something to the effect of: "Before I assumed the presidency, I imagined a great lever of power on the Resolute Desk. When I took office, I learned that the lever actually existed - but it wasn't connected to anything." (If anyone out there has the exact quote, please share!)

I think of that whenever I hear senior leaders in retail say things like "our inventory is too high - we need to get it under control".

What often follows this declaration is a draconian set of directives to "bring the inventory down":

• "Look at all of our outstanding purchase orders and cancel anything that's not needed"
• "We can't sell excess stock out of the DCs, so return as much as possible and push the rest out to the stores where it can sell"

[One quarter later...]:

• "Oh shit, our in-stock has nosedived and we're losing sales! Buy! Buy! Buy!"

Rinse and repeat.

It has been described to me as a "swinging pendulum" in terms that would lead one to believe that these inventory imbalances are cyclical in nature, like the rate of inflation in the economy. When it gets too high, the central bank steps in with an interest rate hike to steer it to an acceptable range.

A couple of problems with that:

1. The behaviour of consumers drives the inflation rate and this behaviour can't be directly controlled. In contrast, the processes that drive inventory flow are internal to the retailer and, as such, are directly controllable.
2. The pendulum swings themselves are caused by management's efforts to control the pendulum swings - that popping sound you heard was my head exploding

I should note that I rarely hear "We need to review our inventory management policies and processes to determine what's causing our inventory levels to be higher than expected, so that we can improve the process to ensure that we can flow stock better in the future without sacrificing in stock."

Inventory is not an "input variable" that can be directly manipulated by management and brought to "the right level" in the aggregate. It is an output of policies and processes being executed day in, day out for every item at every location over a period of time. Believing that inventory levels can be directly controlled with blunt instruments is like believing that you can directly impact your gross margin without changing the price or the cost (or both).

It may sound trite, but if management doesn't like the output of the process, then they must necessarily be taking issue with the process inputs or the process itself (both of which, by the way, are owned by management).

On the input side:

• Are your stocking policies excessive compared to variability in demand?
• Are you purchasing in higher quantities or with higher lead times than you used to (e.g. container loads from overseas versus pallets from a domestic source)?
• Are you buffering poor inbound performance from suppliers with more safety stock?

On the process side:

• Are demand planners striving to predict what will happen in an unbiased way or are they encouraged to be optimistic?
• Are people buying first and figuring out how to sell it later?
• Is your inventory higher because your sales have been increasing?

Management does not "own results".

Management owns the processes that give rise to the results. If you make the determination that "inventory is too high" and you don't know why, then you're not doing your job.

Or to put it another way:

The aim of leadership should be to improve the performance of man and machine, to improve quality, to increase output, and simultaneously to bring pride of workmanship to people. Put in a negative way, the aim of leadership is not merely to find and record failures of men, but to remove the causes of failure: to help people to do a better job with less effort. - W. Edwards Deming

Jeff Harrop is a supply chain educator and consultant, co-author of Flowcasting the Retail Supply Chain and co-founder of Demand Clarity Inc. Visit our blog and sign up for our monthly email newsletter to get articles like this one delivered directly to your inbox on the first Wednesday of every month.