Chapter 15. Inventory Management Contingency Planning

Welcome to Chapter 15 of our inventory management guide. In this chapter, we will cover contingency planning in inventory management. Sometimes, even when you masterfully forecast demand (see Chapter 14 for more on inventory forecasting), inventory management disasters can strike, and you need a fallback plan to keep operations moving smoothly.

Why Is Contingency Planning Important to Inventory Management?

Contingency planning is important to inventory management because inventory must be balanced to continue to meet demand, which is important for the survival and success of a business. If inventory stops flowing to meet customer demand, it can put a business at risk, especially if it runs on tight margins. That’s why you’ve got to have a contingency plan for as many potential scenarios as possible.

At first, it may seem like unnecessary overplanning, but when you land in one of these situations, you will be glad you were prepared. Here are a few examples of some of the many sudden and unexpected things that happen:

• Supply chain disruptions—These can be caused by all manner of things, from natural disasters to strikes. Suppliers may not be able to produce goods or might not be able to transport them to merchants.
• Demand fluctuations—While seasonal fluctuations are expected, dramatic market changes cannot always be predicted.
• Quality control issues—A supplier may need to recall products because of safety concerns or defects, leaving you with limited inventory.
• Equipment breakdowns—If you use machinery in the warehouse (or manufacture products yourself), breakdowns and technical problems can be a major blow.
• Supplier delays or bankruptcy—Your supplier may suddenly go out of business due to financial problems, leaving you unable to replenish inventory.
• Inventory theft, shrinkage, or damage—Missing inventory, particularly large quantities, can reduce your ability to meet orders.
• Currency exchange rate fluctuations—Changes in exchange rates can impact your purchasing power when ordering products from overseas suppliers.
• Labor shortages—When you don’t have enough staff to handle your operations. It could result from something simple, like staff (including yourself) getting sick or injured.
• Economic downturn—A poor economic outlook can impact consumer behavior and result in fewer sales.

What Are the 5 Steps of Contingency Planning in Inventory Management?

You may have multiple contingency plans for different scenarios, as many may require different courses of action. Ensure you document the different scenarios and how to deal with them, as you will forget them, especially if some are uncommon.

When you find yourself in a situation where you need to activate a contingency plan, you can also learn from what works and doesn’t and further adapt the plan to be more useful to your team. However, remember to be flexible. Sometimes, it is better to abandon a plan and be reactive. Ultimately, it’s more important to keep inventory moving than to follow a plan.

Step 1: Risk Assessment

Typically, when preparing a contingency plan, you should identify risks to your inventory operations first. You may plan a separate contingency plan for each scenario or group some together, depending on what actions must be taken.

You can use historical data to determine which risks have caused the biggest disruptions to your business’s output in the past. It will also help you spot patterns and vulnerabilities (some you might be able to patch up now). Patterns can also help inform you when a problem may occur and when to activate your contingency plan.

Step 2: Set Objectives

Once you have identified the biggest risks to your inventory management operations, you need to determine what the acceptable inventory churn rate should be in those circumstances. For example, what is an acceptable output level when productivity is down for one of the many reasons listed above?

As some impact your operations more than others, your objectives will probably differ. Demand fluctuations might not impact operations as much as malfunctioning machinery.

Once you have determined the acceptable output level, you can set up KPIs and metrics that you could strive to reach in those circumstances. The level of output you decide should be realistic and not cause too much disruption to profit margins. However, you may only be able to determine this level based on previous experiences.

Step 3: Develop Strategies to Meet Your Objectives

Now that you have objectives, how are you going to meet them? Here is where you need to come up with the details of your contingency plan. Ask yourself how you will divide tasks and if you must refocus your priorities. Perhaps some tasks will need to be left on hold until you have the capacity to work on them.

Simulating your contingency plan with your staff in a test environment can be a great way to see what does and doesn’t work. You may then make further changes to make the plan more effective, dropping or adding certain elements, or changing the order in which steps are done.

Your contingency plan should also include a step for communication with other teams and departments. This way, they’ll know the potential disruptions to the normal workflow and any other important changes. Lastly, there should also be a step to reforecast demand if it has been severely impacted.

Step 4: Document The Process

As mentioned above, your contingency plan must be documented when you have agreed on it. The documentation needs to be placed somewhere easily accessible so that when the time comes to activate the contingency plan, it’s ready and available. Be open to updating the documentation. It shouldn’t be set in stone as your warehouse operations will evolve over the years, new steps will need to be added, and old ones will become irrelevant.

Keep points simple and direct. The documentation should also allow flexibility in your approach to your contingency plan.

Step 5: Implementation

In the final step, you should train your staff on the contingency plan. You may need to do refresher training every so often. Set roles and responsibilities for staff, have a chain of command, and decide who will implement the plan if you are unavailable. Be open to improving the plan and taking in feedback from staff who may notice areas that can be improved.

Key Points From Chapter 15

You are now well and truly prepared for any inventory management disasters. Remember these key points.

• Contingency planning is a strategy of setting up a backup plan to continue handling the flow of inventory when major unforeseen events occur that may put a stop to your operations.
• Contingency planning is important because no matter how prepared you are, there will always be times when something unexpected happens, and you need to find a way to keep inventory moving.
• The first step of contingency planning is to identify common risks that impact the normal flow of inventory from the warehouse.
• Set objectives based on achievable KPIs and metrics. To do this, you need to decide what the acceptable level of output is when a crisis strikes.
• The final steps are to document and implement your inventory management contingency plan, though do allow room to be flexible and reactive.

In Chapter 16, we will cover how to automate inventory management.