Managing Inventory for Quality Results

A telling story is recounted in The Deming Guide to Quality and Competitive Position (Howard S. Gitlow and Shelly J. Gitlow, Prentice-Hall, Inc. – Englewood Cliffs, NJ – 1987, p.32) quoting a story that originally appeared in the Toronto Sun (25 April 1983):
They’re still laughing about this at IBM.

Apparently the computer giant decided to have some parts manufactured in Japan as a trial project. In the specifications they set out that the limit of defective parts would be acceptable at three units per 10,000.

When the delivery came in there was an accompanying letter. “We Japanese have hard time understanding North American business practices. But the three defective parts per 10,000 have been included and are wrapped separately. Hope this pleases.”

“Defect rate” is a commonly used metric for “quality” in the U.S. Unfortunately, your customers probably measure much more than “defect rates” when doing business with your company. And, what is the customer’s defect rate when they buy only one item from you and it happens to be defective? Suddenly, the defect rate is 100% for that particular customer.

Quality is More than Defect Rates

Toyota has grown to become the world’s largest maker of cars and light trucks in part due to its definition of “quality.” For Toyota, “quality” is not primarily a measure of the rate at which defects occur or, worse, are delivered to their customers. Toyota’s definition is dramatically different from the traditional calculation of “quality.”

For Toyota, the only view of quality that matters is the customer’s view, and Toyota believes that what the customer defines as quality is a combination of two factors:

• The customer’s experience
• The customer’s results
• Your Customer’s Experience + Results = Quality

Of course, measuring your customers’ experience and results is much less scientific than measuring “defect rates.” But, then again, the act of buying is never scientific. While a customer may take a large number of facts and figures into consideration when moving toward a buying decision, the actual commitment to buy is always an emotional decision. It is emotion that pushes the would-be buyer over the edge to making a commitment. This is true because there are always more unknowns in a transaction than there are knowns; there are more elements to the decision that are unquantifiable than there are quantifiable elements.

It is beyond the scope of this present article to discuss the full implications of your customers’ experience and results as the prime measure of quality. However, if you are in the business of selling and distributing any kind of inventory, I believe we can all agree that a very basic and key element in your customers’ experience of doing business with you is whether you are delivering your products on-time and as promised. In inventory management we refer to the metric that calculates an organization’s ability to ship product in-full and on-time as customer service level and it is calculated as:

• Customer Service Level = Number of Sales Order Lines for Stock Items shipped Complete by Scheduled Ship Date / Number of Sales Order Lines for Stock Items
• Calculating Your Customer Service Level

Your firm’s customer service level may be calculated for any period:

• Yesterday
• Last Week
• Last Month
• Year-to-Date

Your customer service level may be calculated comparatively:

• Yesterday vs. Year-to-Date Average
• Last Month vs. Same Month Last Year
• Last Week vs. Last Six Weeks

Your customer service level may be calculated by other factors:

• By Warehouse
• By Sales Product Line
• By Purchase Product Line
• By Inventory Ranking
• By Salesperson
• By a range of SKUs or Item IDs
• By Sales Territory
• By Customer
• By Customer Class

Of course, you may also take any of these various customer service level calculations and show trends over time. The trend would indicate whether your organization is improving or not and would also reflect the corresponding changes in your customers’ experience in doing business with you.

Why Calculate Customer Service Levels?

You should be concerned with customer service levels precisely because delivering in-full and on-time is such a basic metric of how your customers “experience” doing business with you. If you use “defect rates,” and your defect rate is 1%, you get feedback on defects from 1% of your transactions. However, every sales order line you ship can provide you with accurate feedback about how you are likely to be experienced and perceived by your customers using customer service level as a metric. Beyond that, however, consider the following:

1.Higher customer services levels lead to better customer experiences with your organization.
2.Better customer experience means your customers will have an improved perception of “quality” in every aspect of your business.
3.Improved customer perceptions lead to more repeat business.
4.More repeat business leads to increasing customer loyalty.
5.Increasing customer loyalty means fewer lost customers.
6.Fewer lost customers means you have to spend less on sales and marketing efforts to attract new customers.
7.Increasing customer loyalty and more repeat sales are a key component to gaining market share.
8.Operating expenses are reduced because orders need only be processed one time – not multiple cycles of picking, packing and shipping.
9.One-time shipments will also reduce shipping costs if your practice is to pick up the costs on subsequent shipments on incomplete orders.
10.Shipping orders on schedule also reduces “excess freight” costs – the money you pay for expedited shipping methods to get products shipped “late” to your customers when they were promised.

A Big Payoff

As you can see, calculating and taking actions to improve customer service level can reap big rewards through increasing sales, taking more market share away from your competitors and by driving down operating expenses. At another time we will talk about steps you can take with inventory to help improve your customer service levels without driving inventory on-hand quantities through the roof.