Leveraging the Supply Chain Operations Reference Model for Inventory Management

In a previous article, we covered value stream concepts and characterized the value stream in the context of supply chain major sub-processes. We covered some important key performance indicators related to order fulfillment.

This article will look at work-in-process (WIP) and inventory using the Supply Chain Operations Reference (SCOR) model.

The SCOR model can be leveraged to assess and improve supply chains / value streams, directly leading to improved operational performance.

Recall that the SCOR model describes the business activities associated with all phases involved with satisfying a customer’s demand. SCOR is the only comprehensive, universally accepted and open-access supply chain standard. It has been used by thousands of public and private organizations around the world to assess and improve their supply chains, directly leading to improved operational performance.

Let’s go into the SCOR framework FOUND HERE and see what it reveals about WIP and inventory. In SCOR, WIP and Inventory is represented by keywords “inventory”, “product” and (non-fixed) assets. One can search on the keywords to get a sense of how the model accounts for WIP and inventory.

Of course, the supplier product, as well as the product made (or transformed) comprises the WIP and/or inventory (ie. keyword search the word “product” in the process model). I more detailed and customized value stream map would identify WIP and inventory locations in your specific process.

Inventory is emphasized in the metrics under Asset Management as follows:

One can see the emphasis on time (or inventory turnover) to minimize the cash-to-cash cycle time. “Inventory turns” is a key performance indicator that correlates to correlates to cash-to-cash cycle time and would be expected to be a highly emphasized KPI for monitoring and ensuring improvements to supply chain_value chain efficiency.

Inventory turns – Inventory turns, also known as inventory turnover, is a financial metric that measures how efficiently a company manages its inventory. It indicates how many times a company sells and replaces its inventory during a specific period, typically a year. A higher inventory turnover rate generally suggests better efficiency, as it means the company is selling goods quickly and not holding onto excess product.

Inventory Turns = Cost of Goods Sold (COGS) / Average Inventory:

Cost of Goods Sold (COGS): The direct costs associated with producing or purchasing the product sold during the period.
Average Inventory: The average value of inventory held over the period, often calculated as (Beginning Inventory + Ending Inventory)

Generally, this KPI would be provided by the finance function in your company. However, operations would likely have enough visibility into inventory to understand the drivers (ie. supplier materials, WIP, quality defects, finished goods inventory).

In a make-to-stock, contract manufacturer model, finish goods inventory is significant driver of inventory turns since it represents a high cost paid for by the company for the finished product. Unsold product stored (held over) in a warehouse for a period time is emphasized by:

For example, if an FG inventory of 400 units is sold at a rate of 20/month, the inventory days of supply is 20 months (1 year, 8 months). The product might be obsolete by that time, implying a sharp drop-off in the product plan might be warranted. It therefore makes sense to measure inventory days of supply as it helps get a sense of when inventory might run out, but also to optimize this time period.

Here again, we’re leveraging the SCOR model guidance, standardizing on language, and we’d expect the production planning function to provide these important KPIs in regular reporting.

There are many important key performance indicators in the reference model, the list is quite extensive and granular but useful. There are many important key performance indicators in the reference model, the list is quite extensive and granular but useful. The SCOR digital standard is open to all professionals online. Learn more and interact with the full model at scor.ascm.org.

The SCOR model can be leveraged to assess and improve supply chains / value streams, directly leading to improved operational performance.

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