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Are you leveraging the asymmetry in cost of stockouts and excess inventory?
There are several cost components that are left unleveraged in a conventional cost mindset. One such common occurrence is costs which are asymmetrical in nature, such as cost of inventory.
A large number of industry sectors, such as FMCG, work with good gross contributions (Throughput in TOC terms). Their cost of a stockout is much higher than the cost of carrying excess inventory. On the other hand, in case of perishables with low gross contributions (Throughput), excess inventory could lead to spoilage and a write-off.
How do we leverage such asymmetry in costs? The first and foremost requirement is to acknowledge and be aware of this asymmetry. Once we are conscious of it, we should leverage it in setting the targeted service levels used for dynamic inventory buffers.
FMCG should focus on very high service levels, whereas perishables should focus on exhausting their stocks by the end of the day.
Supply chains need to be designed accordingly.