Industry-specific inventory strategies: practical guide with examples

3. Practical guide & industry-specific inventory strategies and example

3. Practical guide & industry-specific inventory strategies and example 

Tying everything together, we will dive into examples of inventory strategies for different types of companies, using the 4-type distinction made in the beginning of this knowledge base.  

 

Before doing that, this is a high-level guide you can walk through when assessing your inventory management/optimization from a planning perspective:

Short version: 

  1. Define company type for most items: Clearly identify the primary production model (ETO, MTO, ATO, MTS) and its unique inventory needs.  

  1. Determine stock levels across locations: Include stock types (e.g., finished goods, WIP) and map out where each is held, explaining the reason for their placement. 

  1. Choose & track metrics for policy assessment: Focus on metrics like inventory turnover or service level that directly reflect policy effectiveness. 

  1. Classify items to set service levels: Use profitability and criticality classifications (like ABC-XYZ) to establish target service levels based on each item’s role and value. 

  1. Evaluate current and potential data availability: Identify available information and any missing data that would enhance tracking and forecasting accuracy. 

  1. Select automated or manual approaches based on data: Decide whether to use automated tools or basic models based on data availability and inventory complexity; evaluate MEIO’s feasibility. 

  1. Set alerts for stock levels: Define threshold alerts for excess or low stock levels, including specific alerts for items with a shelf life. 

Longer version: example of this guide for a company like Tesla 

As an example of this practical guide, we’ll walk through it step-by-step for Tesla. 

1) Identify your company type for most items 

Tesla primarily operates as an assembly to order (ATO) company, where base models are produced in advance, and customization components (or the color) are added based on specific customer orders. This enables flexibility while avoiding high levels of finished goods inventory. 

2) Define inventory levels across the network 

  • Inventory types: Tesla’s stock includes base vehicles and customization components. Base stock is held at manufacturing facilities, and customization parts are distributed regionally to meet customer preferences promptly.  
  • Locations: Base models are stored centrally, while customization parts are positioned closer to distribution centers or assembly hubs to allow for quick response to specific regional demand. 

3) Choose & track metrics to assess inventory policies 

  • Inventory turnover: Measures the frequency with which both base models and customization components are sold and replaced. 
  • Fill rate: Tracks the percentage of customer orders fulfilled without delay, especially for customization options. 

  • Cycle time: Assesses the speed from order to final assembly and delivery, ensuring efficient response to customer specifications. 

4) Set service levels using profitability and criticality classifications 

  • Tesla can apply an ABC-XYZ classification to manage stock levels of base models and customization components: 
  • ABC classification: High-demand and high-value customizations, like battery upgrades or premium interiors, are designated as “A” items with higher service levels. 

  • XYZ classification: Items with stable demand, like standard paint colors, are “X,” while less predictable options, such as rare interior finishes, are “Z” and require higher safety stock. 

5) Assess available data across the business and potential future data 

  • Current data: 

  • Online order and regional demand forecasts: Enables Tesla to adjust stock levels based on demand trends for customization options in different regions. 

  • Supplier lead time reliability: Ensures timely replenishment of key components, such as batteries, which are critical for Tesla’s production timelines. 

  • Potential data: Customization preferences and trends (based on their own website analytics, for instance) could further improve regional stock allocation. 

6) Choose automated vs. manual inventory models 

  • Automated approach: Tesla would benefit from an automated approach that adjusts safety stock levels dynamically for each customization part, as they likely have the required data available to do so.  
  • MEIO consideration: MEIO is highly beneficial, as it allows Tesla to balance base model and customization inventory across distribution centers.  

7) Set alerts and thresholds for stock levels 

  • Excess stock alerts: Triggered when base model or customization parts exceed set thresholds, helping Tesla avoid overstock in low-demand regions. 
  • Low stock alerts: Signals when customization components approach reorder points, ensuring quick replenishment for high-demand items. 

  • Customization feature alerts: Specific alerts for trending features that experience sudden demand changes, enabling proactive adjustments in stock and assembly schedules. 

Hopefully this example allows you to do a similar analysis for your business.