Tuesday, February 12, 2013

Inventory Management - The Core of Supply Chain Management

“Getting inventory levels right is vital since it not only controls costs but also serves as a barometer of a company’s overall health.” [ii]
It is mainly in the last decade or so that the direct link between managing inventory and cash flow generations has finally received board level interest. We have seen one such example in this week’s article by Bain and Company, July 6, 2011. According to another article by Chief supply chain officer (CSCO) Insights[i], Consultant Gerry Marsh has shown that the companies that can use their supply chain to generate more cash flow have higher stock price multiples than their competitors even if earnings per share and growth rates are same for both the companies. In June 2011, CSCO Insights conducted a survey on inventory management in a supply chain network. The survey revealed some of the following noteworthy results: -

26.5% of the respondents thought that they could improve their inventory management by15 days or more and 79% of them could reduce their inventory by at least 5 days representing significant improvements in cash flow and working capital reduction for these firms.     

More than 24% of the companies mentioned Inventory Management as a top supply chain priority and another 52% expressed that it was extremely important.

70% rated themselves as just average or below in process maturity for managing inventory across full network.

It is quite evident from the survey that the companies have understood the importance of reducing network inventories. Then, what is stopping them from making such improvements? According to this survey, 56% of respondents expressed their inability to optimize the network holistically as a huge barrier.
Lack of technology integration, having internal functional silos, misaligned metrics and demand volatility were some other barriers. Surprisingly, senior management vision, scope, annual planning process and supplier collaboration challenges were not perceived as huge barriers by most of these companies. Furthermore, respondents cited that they are planning to invest in technology, improving supply chain visibility and enhanced inventory management technology over the next 2-3 years. Only consumer goods or retail sectors said that they were interested in investing in multi-channel management.

We can say after seeing the results of the above survey that companies are facing unprecedented challenges in managing their inventories effectively. They are looking for solutions and are aware of the potential benefits of doing so. Many companies are using traditional approaches such as improving forecasting techniques, ABC classification or development of traditional S&OP (Sales and operations planning) processes to meet these challenges. The question is how far they can go with these traditional approaches with the huge size and complexity of inventory management networks today. Is improving the processes sufficient or new tools and technologies are required to face this problem?

Based on my understanding of this week’s readings and the above articles, classification approaches like ABC that take into account only one attribute at a time either value or volume won’t work well with today’s complex supply chains. A better approach is to use much more attributes such as lead times, variation in supply and demand, and consumption patterns etc. to create larger number of classes and assigning different policies to them. Many companies have realized that the traditional S&OP should include processes to make policy decisions on target inventory levels, trade-offs between excess inventory levels and insufficient inventories to meet demand. It’s also important to include where buffer inventories can help across the network. Due to rapid changes in prices of commodities like oil and uncertainties of globalization, the “optimal” strategic plan starts degrading as soon as it is set. Therefore, decisions related to products made and sourced, trade off between inventory and transportation and the product flow within the existing network should be made on a more frequent basis. Large companies like P & G and PepsiCo have reported huge supply chain savings much of it related to inventory by using Network Planning tools for continuous tactical planning. To address the problem of managing inventory networks holistically, new technologies like Distributed Order Management Tools (Takes orders from multiple sources and identifies the most efficient way to complete those orders regardless of channel) and Inventory Optimization Software (Optimize inventory levels for raw materials, finished goods and even distribution channels simultaneously) can have a big impact on supply chain success. Therefore, improvement in both processes and technologies is required. The idea of “low hanging fruit” is nearly gone for most of the companies.

[i] http://www.scdigest.com/assets/reps/exec_brief_network_inventories.pdf

[ii] http://www.bain.com/publications/articles/inventory-management-10-questions-inventory-health.aspx

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