RISK MANAGEMENT:There is much literature existing about RISK MGT. However, I have found the following to be useful in providing a concise view of such:

  • RISK is a potential situation for unwanted negative consequences from various events
  • RESILIENCE is an ability to prevent, withstand and recover from those events
  • FAILURES are occurrences that have negative consequences to operations

The following view provides insight as to the sources of failures.

There is a need to manage the risk with the supplier relationship – note the chart below which displays it:


To start with, we need to define what we mean by inventory. It is those stocks or items used to support production (raw materials & work-in-process as well as supporting activities (maintenance, repair and operating supplies – MRO) and customer service (finished goods and spare parts).

Organizations typically deal with ten (10) critical inventory issues:

  1. Inventory strategy by product line
  2. Forecast reliability
  3. Master scheduling stability
  4. Stocking policy
  5. Replenishment lead time
  6. Investment level
  7. Obsolete inventory control
  8. Product change management
  9. Data integrity
  10. Communications between functions

We need to ensure we understand what is the meaning of the following (since it provides insight as to what we will need to do):

  • INVENTORY MANAGEMENT: the function within the enterprise concerned with planning and policy points for inventory
  • INVENTORY CONTROL: Activities and techniques for maintaining the desired level of inventory
    • Execution

    One of the initial things to be established is the determination of a Customer Service Level. This involves:

    • Leadership determining the number of stockouts it is willing to accept
    • Management MUST understand that stock outs are acceptable at a planned level
    • Factors affecting the service level
      • Primary one is SAFETY STOCK


      • Competitive delivery pressures
        • What your competition is doing
      • Warranty commitments (spare parts)
      • Degree of inconsistency of demand
      • Customer service level
      • Level of investment
      • Shelf life
      • Availability from suppliers
      • Production capacity
      • Political/international factors

      Please note the formula for calculating SAFETY STOCK below:

      This protection can increase if a higher level of service to customers is desired by the leadership. However, there is a cost associated with such which is the cost of carrying inventory. Those cost are displayed in the next pictorial.

      The more inventory you have for covering for "JUST-IN-CASE" situations will increase your inventory investment because the cost of carrying it will go up. This number is calculated by your Finance/Cost Accounting group. It needs to be utilized when deciding what is the level of service to be provided to the market-place.

      Some metrics for customer service are:

      • Focus on requested receipt date from the customer as opposed to your commitment date
      • Your on-time delivery performance to both requested date and your commitment date
        • That will give insight to what the customer expectations are versus what the marketplace studies reflect – a hint to what level of service you need to be considering.

        Inventory investment is critical in industries where technology and shelf-life are market consideration – even more important when looking at doing a better job of satisfying customer needs in a a variety of ways to minimize risk & investment!