All Things Inventory

Fix the Mix of Inventory

  

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What is the minimal set of red wines to have at home? The objective is to have some everyday wines and some good ones (for special occasions). The point is zero inventory is not an option.

For the everyday, I decided on the Pinot Noir. But which one? From Oregon or Burgundy? I decided on one from New Zealand, from Marlborough region, not only because it was good and cheap, but also because it had a screw top. What about something good? There is a Chateauneuf-du-Pape (2005) that is decently priced and has been rated 95 by Wine Spectator, and many good choices of California proprietary reds. I decided to constrain the search by insisting that this also be a screw top. The 2004 Pillar Box Red (57% Cabernet, 32% Shiraz, rest Merlot) from Australia is very good. Try it out.

Technically, this is not minimal since two countries were represented. If I removed the screwtop constraint, then a one-country solution becomes feasible. For this 'problem', I chose a Burgundy for the every day wine and the Chateauneuf-du-Pape for the special occasion. Now one may complain that this is not minimal since two regions of France were involved. Then, a one-region solution probably needs to come from California, and in the limit, one may want a one-vineyard owner solution and so on.

Suppose now we look for a solution for a maximal one-case problem. For the everyday, I picked Pinot Noir (from New Zealand), Malbec (from Argentina), a proprietary red from Chile, Shiraz-Cabernet (from Australia), Grenache-Tempranillo (from Spain), and Barbera (from Italy). For the special occasions, I picked the Chateauneuf-du-Pape (France), Barberesco (Italy), Cabernet (California), Shiraz (Australia), Red Zinfandel (California) and Cotes-du-Rhone (France). Look at all the grapes, countries and continents covered in this proposed solution.

How many bottles should one have in the cellar? Well, let us look at the various parameters that may have a bearing on the answer. Since I am not a collector, the goal is to turn the inventory sufficiently quickly. Thus, it depends on how much inventory is depleted per week, and how long you want to keep a bottle (on average) in the cellar. Suppose the weekly base rate is 4 bottles (of everyday wines, but can fluctuate between 0 and 8), and couple times a month (assume 4 weeks long) there is a special occasion (just family, or a small group that depletes 1-4 bottles) and once a month there is a bigger party (for which some new wines may be purchased, some guests bring (good red) wines anyway, and typically depletes 10-16 bottles). The maximum 4-week depletion is 56 bottles, and so having 5 mixed cases (60) should be sufficient if you are able to shop every 4-weeks.

Now applying the maximal one-case solution above identically to 5 cases is the feasible solution I implemented this month. The turns are about 10-12 (per year), and the service level (measured by stockout probability or fill rate) is 100%, assuming perfect substitutability. Now, since folks who come to our parties have preferences, and not all wines are perfectly substitutable, the variety implicit in this solution forces me to have extra inventory of certain lower cost, but acceptable favorites. So I added a couple of mixed cases, one of my minimal screw-top solution and one of my France-only solution discussed above.

A lot of inventory target setting in Fortune 1000/Global 2000 companies have the similar dynamics that I describe above in Wine cellar inventory management. Demands fluctuate, there are lumpy orders, new products become available and replenishment frequency is periodic (and additionally there are stochastic lead times, supply variation, capacity constraints, bills-of-materials, multiple echelons, common components, engineering changes, holidays and events, batch sizes, pricing discounts etc etc). At the end of day, the inventory planner in a global supply chain is attempting to keep the best mix of inventory, at the right levels, at the right location for the right time period to maximize profitability through the right level of customer satisfaction (with low total cost of inventory investment as well as expediting and so on). And so, I founded SmartOps Corporation that provides the Enterprise Inventory Optimization solution to help fix the mix of inventories on an on-going basis in complex supply chains.