Management by Exception: How to Focus on What Really Matters

In modern supply chain management, the exponential growth of product assortments and the increasing number of stores and warehouses present a constant challenge. As catalogues expand with new entries, the complexities of efficiently managing each item also increase. This is where management by exception comes into play, offering a structured methodology to prioritise tasks, mitigate risks, and maximise profitability.

What is Management by Exception?

Management by exception is an operational approach that identifies and prioritises elements deviating from what we would consider normal conditions. In practical terms, it means focusing efforts on specific products or situations that require immediate or specialised attention, while leaving those operating smoothly within expected parameters to run their course.

In inventory management, this approach moves away from the idea of reviewing all items equally. Attempting to manage thousands of products uniformly is not only inefficient but can also lead to a poor allocation of resources, internal friction, and often, financial losses.

The Challenge of Managing Extensive Assortments

For many organisations, adding new products to the catalogue is relatively straightforward. However, removing obsolete or underperforming items tends to be a slower and more complex process. This creates an operational environment where assortments grow continuously, making daily management increasingly complicated.

Impact on Operational Efficiency of Suboptimal Assortments

With large assortments, it is common for operational teams to face issues such as:

• Resource Waste: Significant efforts are directed towards low-relevance items.
• Lack of Coordination: The absence of a clear focus leads to tensions and operational errors.
• Financial Losses: Stock surpluses and stockouts directly affect financial results.

To overcome these challenges, effective category management must be supported by exception-based workflows. By combining both approaches, businesses can define clear assortment strategies while ensuring operational teams focus only on items that deviate from expectations.

This is where exception management proves to be an effective solution, offering a structured and results-oriented approach to support successful category execution.

What criteria should be considered in exception management?

The key to successful exception management lies in the proper classification of products. This process allows tasks to be prioritised and tailored strategies to be designed for each product group.

1. Product Lifecycle

Each product goes through three phases in its lifecycle:

Launch Phase:

This phase is marked by demand uncertainty. The focus here is on managing risks and ensuring a successful market introduction.

Maturity Phase:

The most stable phase of the product lifecycle, offering the best opportunity for process optimisation. Here, management aims to achieve operational excellence.

Decline Phase:

During this stage, demand decreases, and the risks of obsolescence increase. Key strategies include liquidation promotions and inventory control to avoid unnecessary stockpiles.

Grouping products according to their lifecycle allows actions to be adapted to the specific needs of each phase, avoiding unnecessary efforts.

2. Product Profitability

A comparative analysis of the revenue generated and the associated costs of each product reveals crucial insights. In many cases:

• More profitable products tend to have lower operational costs.
• Low-profit items can incur high costs, affecting overall efficiency.

This type of analysis helps decide where to focus operational efforts and which products require more efficient management.

3. Crossed ABC Classification

ABC analysis is widely used in inventory management. When combined with additional factors such as sales, margin, or turnover, it provides a much more accurate segmentation.

Benefits of Crossed Analysis

• It identifies strategic products with greater clarity.
• It allows a more targeted approach to critical references, maximising the impact of operational decisions.

For example, a product that is an “A” in sales and “C” in turnover will require a different strategy from an item that ranks “A” in both criteria.

Creating Task Selections

Once products have been classified, the next step is to create specific selections that streamline daily operational tasks. These selections group items with common characteristics, improving both efficiency and prioritisation.

Selections Based on the Nature of the Task

In management by exception, selections are divided into five main categories:

• Assortment Selections: Focused on the product lifecycle.
• Demand Selections: Identify changes or anomalies in consumption patterns.
• Supply Planning Selections: Monitor delivery dates and delays.
• Inventory Selections: Control stock levels and obsolescence risks.
• Master Data Selections: Ensure the quality and consistency of information.

Selections Based on the Task’s Objective

Selections are also differentiated according to the type of task:

• Operational: Daily actions to prevent disruptions (e.g., stockouts).
• Analytical: Provide analysis elements to optimise processes and patterns.
• Strategic: Assist with long-term decision-making, such as product delisting.

Practical Examples of Management by Exception

Identifying Demand Anomalies

A product experiencing exceptionally high demand may require adjustments to forecasts. Management by exception helps determine whether these changes are temporary or structural, allowing for corrective decisions to prevent future errors. This process can be significantly enhanced by using advanced demand sensing software, which improves forecast accuracy by rapidly detecting demand shifts and anomalies.

Promotion Planning

Products on promotion require special control. Selections can analyse:

• The effectiveness of the promotion by comparing actual demand with forecasted figures.
• The impact on supply and stock levels.

Anticipating Stockouts

Identifying potential stockouts in advance allows for proactive measures, such as expediting orders or sourcing alternative suppliers. This helps prevent disruptions in the supply chain and reduces associated costs.

Identifying Supplier Issues

Selections can highlight recurring exceptions in products tied to a specific supplier, facilitating negotiations and enhancing collaboration with supply chain partners.

How can you begin to implement an exception-based management model in your company?

Implementing an exception-based management model within an organisation requires a combination of analysis, strategic planning, and the right tools. While each company has its own specifics, the process can be structured into key steps that ensure a smooth and effective transition to this approach.

1. Understand the current situation

The first step is to carry out a thorough diagnosis of existing processes. This includes analysing:

• The volume and variety of the product range: How many SKUs does the company manage, and which ones are the most critical?
• Existing workflows: How are exceptions currently handled, if at all?
• Recurring operational challenges: What common problems arise? For example, stockouts, excess inventory, or delivery delays.

This initial analysis provides a clear map of the starting point and helps identify areas that need immediate attention.

2. Define clear and measurable objectives

Exception-based management should not be implemented as an end in itself, but as a means to achieve specific objectives. These might include:

• Reducing the time spent managing low-priority items.
• Improving service levels for the most important products.
• Identifying and addressing demand anomalies before they become significant issues.

Setting Key Performance Indicators (KPIs) related to these goals makes it easier to assess the success of the model once implemented.

3. Choose the right classification criteria

An essential part of exception-based management is classifying products according to criteria that are relevant to the business. These might include, as we’ve seen earlier:

• Product lifecycle: Identifying stages such as introduction, maturity, and end-of-life.
• Profitability: Assessing the economic contribution relative to operational costs.
• Turnover and margin: Classifying products based on sales frequency and profit margins.

Selecting relevant criteria ensures that operational decisions are consistent and aligned with strategic priorities.

4. Create tailored selections

Once products are classified, the next step is to create selections that group items with common characteristics or similar needs. These selections allow for more efficient exception management. For example:

• A selection for high-turnover, low-margin products that require special attention in stock planning.
• Another for promotional items, where constant assessment of their impact on demand and inventory is necessary.

Advanced technological tools, such as Slim4, help in creating, visualising, and tracking these selections.

5. Implement a monitoring system

The key to a successful exception-based management model is having a system in place that allows for real-time monitoring of exceptions and their assignment to the appropriate team. This includes:

• Automated alerts for critical situations, such as anticipated stockouts or demand anomalies.
• Dashboards to prioritise tasks based on their importance and urgency.
• Detailed reports showing the status of exceptions and the progress in resolving them.

A robust system not only improves efficiency but also reduces errors and ensures that exceptions are handled promptly.

6. Train the operational teams

Adopting an exception-based management model involves a shift in how work is carried out. It is crucial that teams understand the methodology, classification criteria, and the use of technological tools. Training should focus on:

• How to interpret selections and prioritise tasks.
• The use of specialised software to manage exceptions.
• The importance of aligning operational decisions with strategic objectives.

7. Evaluate and adjust the model

Once implemented, the model should be periodically evaluated to assess its effectiveness and make necessary adjustments. Some aspects to consider at this stage include:

• Are the established KPIs being met?
• Are there recurring exceptions that could be handled more efficiently?
• Is the system still relevant to the company’s changing needs?

This continuous improvement cycle ensures that exception-based management evolves in line with the operational and strategic demands of the organisation.

As the company adopts this methodology, it will not only see improvements in operational efficiency, but also be better prepared to tackle the complexities of today’s competitive environment.

Managing by Exception: An Essential for Operational Efficiency

Starting with a management-by-exception model may seem challenging, but a structured implementation makes it a manageable and scalable process.

By focusing on what truly matters, this approach transforms the chaos of managing thousands of products into a structured, agile, and effective strategy. Beyond the immediate benefits, such as risk reduction and time savings, this methodology also encourages data-driven decision-making, empowers operational teams, and strengthens the company’s competitiveness.