Strategic Inventory

Tuesday, August 21st, 2012

Strategic inventory

The Just In Time principle is fine when it is appropriate to the specific requirements of the buying organisation. Who determines the strategic inventory strategy? Brian Farrington Limited has worked with an international manufacturing company who decided that the suppliers would carry the burden of strategic inventory. Our client insisted that the suppliers contributed to a new storage facility within a close proximity to the manufacturing plant. The contract for the supply of parts would require a guaranteed feed to the production line within 30 minutes of a call off being received. A failure to meet this KPI would result in any production line stoppage being recovered as damages. These were the principles and required extensive discussions and negotiations. The suppliers had to convince themselves that they had a sound business case to agree to this version of strategic stock. The business case would, as a minimum, be based on a long-term contract, cash flow funding and a sole source supply arrangement. It did work!

We have worked with an automotive manufacturer and a pharmaceutical manufacturer who both decided that they would create a ‘secret’ strategic storage location where strategic feed-in stock would be held. The determination of this stock would be by essential feed stock and vulnerability to supply if no stock was available. In the case of the pharmaceutical manufacturer, part of their business case was the risk of a pandemic illness. In the case of the automotive manufacturer it was the risk of supplies from the Far East if there was a shipping strike or Force Majeure situation such as an earthquake.

As an extreme we worked with a Southern African Mining organisation that had > £250 million of strategic inventory in a location central to their mining operations. This principle was extremely sound when it was considered that the lead time for some essential spares was > 3 months. As with all inventory if it isn’t managed effectively many issues arise. In this case it was the fact that inventory was being held for equipment long since disposed of. The burden of working capital had not been truly evaluated.

What is your risk assessment on strategic inventory? Would it warrant a review? Are there operational and financial benefits in doing so?  Who knows if it isn’t examined?