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Five Strategies for Improving Inventory Management
Across Complex Supply Chain Networks
How Companies Think about Growing Network Pressures -
and Ways they can Effectively Respond
Introduction
Effective inventory management is at the core of supply chain management excellence.
in-process, partner inventories and more, truly sits at the intersection of demand and supply.
Yet our understanding of inventory management practices in many respects still has a long way to
go. In fact, it is really only in the last decade or so that the direct link between inventory management
Consultant Gerry Marsh, who works with some of the world’s largest companies, has
than competitors will usually have higher stock price multiples even if earnings
per share and growth rates are similar between the companies.
Yet, leading up to the recession, inventory levels in most industries had
chains, SKU proliferation and other factors that have been putting upward
pressure on inventory levels actually meant companies were making solid
progress on the basics.
That may very well be true, but in the end leaves companies with little to
show in terms of bottom line improvement.
Most companies did cut inventories sharply in the deep recession year of
2009, but primarily through “slash and burn” type approaches, sometimes with
the goal of corporate survival, using techniques that may not be sustainable as the
economy continues to recover.
Supply Chain Executive Brief
ings
with
as the
“...it is only
in the last decade...
that the direct link between
inventory management
effectiveness and corporate
well understood, (and) has
level interest.”
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Five Strategies for Improving Inventory Management...
Now, coming out of the recession, companies are again facing a number of issues that are adding to their
supply chain network complexity, which serve as headwinds to inventory reduction. Today, many if not
most supply chains are feeling at least several of these sorts of network pressures:
• Increased global scope and reach that must be managed
•
• Increasing virtualization and resulting loss of visibility and control
• Challenges resulting from multi-channel go-to-market strategies
• Shrinking product lifecycles not only in well-recognized areas such as high tech and electronics but
in virtually every manufacturing sector.
As a result, companies realize that effectively managing inventories a node or level at a time is no longer
good enough. The problems and challenges must be tackled more holistically, considering strategies and
tools that can tame the growing network inventory beast in a way that brings those inventory levels down
while maintaining or even improving customer service levels.
CSCO Insights survey on network inventory
management practices.
Survey Results
In late Spring, conducted a survey on supply chain network
inventory management.
First, we will review some of the basic demographics of the respondent population, which we think
represents a very balanced mix of companies and industries.
Enterprise: 57.8%
Business Unit/Division: 42.2%
Scope of Respondent’s Answers
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decentralized).
As can be seen on the previous page, about 58% or respondents were answering for the whole company,
versus 42% for a
In terms of overall size, there was a good mix across all sales levels, with 23% coming from companies
greater than $10 billion in annual revenue, down to 37.5% with revenues under $500 million per year.
However, related to the previous question, about half of the under $500 million respondents are actually
part of larger companies. In general, therefore, we would say the respondents are somewhat skewed
towards larger companies, though today companies in the $1-5 billion range are generally viewed as
“mid-sized” - quite a change from not many years ago.
Size of Company/Division
$1-$10 Billion:
28.9%
Over $10 Billion:
23.4%
Under $500 Million:
37.5%
$500-$999 Million:
10.1%
We also asked companies to rate themselves in terms of their supply chain network complexity (see chart
on page 4).
Respondents provided an answer simply based on their own perceptions.
various levels, as it seemed an almost impossible task.
As can be seen, 24% view their networks as “very complex,” and another 42% see them as “somewhat
complex,” meaning that nearly 66% believe that they have complex networks - a strong preponderance
of respondents.
This is probably not surprising for two reasons: regardless of size, we think most companies do believe
their supply chain network operations are complex today, if nothing else compared to what they might
have had just a few years ago; second, the promotion for the survey probably tended to connect with
companies that saw themselves as having supply chain network/inventory management challenges
versus those that did not.
In fact, only 12% of respondents saw their networks as “simple” or “fairly simple.”
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One dimension of supply chain network complexity is the number of inventory stocking points or
“nodes” the network contains.
Here, we had a very broad mix, with a combined 39% of respondents having 10 or fewer nodes, while an
almost equal number (38%) reported having more than 50 stocking locations.
Of course, these numbers do not represent trading partner inventories (suppliers, contract manufacturers,
co-packers, channels), areas where many companies are also looking to better manage inventory levels
when doing network inventory planning even if they do not “own” the inventory there.
Supply Chain Network Complexity
Supply Chain Network Complexity
0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
1 - 5
6 - 10
11 - 20
21 - 50
More than 50
18.7%
20.3%
15.6%
7.0%
38.2%
Very Complex
Somewhat Complex
Average
Fairly Simple
Very Simple
Not Sure
0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
24.1%
41.7%
20.4%
9.9%
1.9%
1.9%
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Practices and Priorities
With that demographic data as background, we will now turn our attention to the core questions and
responses relative to network inventory management.
We started by asking respondents just how high a supply chain priority improved network inventory
management is for their companies.
The results speak for themselves: 24% called it the top supply chain priority, and another 52% said it was
highly important. Just a handful of respondents said it was a low priority.
Top SCM Priority
Highly Important
Medium Importance
Lower Level Priority
Not Really a Concern
Not Sure
0% 10% 20% 30% 40% 50% 60%
Priority of “Inventory Management Excellence”
in Your Company/Division
24%
52%
19%
3%
1%
2%
In the comments area of the survey instrument, a director of supply chain planning for one consumer
goods company noted that 'We are very highly focused right now at managing across the entire chain,
which we have not really done well in the past. It`s the next natural thing after you optimize locally.¨
We agree - but how do you get there?
We next asked respondents how well their current processes were for managing network inventories. The
results are about what we might have expected: just 8.5% said their current processes have reached an
'excellent¨ level, though 27.5% said their processes were 'good.¨
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Importantly, however, just over 60% said their current processes were average or worse - meaning the
majority of companies have a lot of work to do to tackle the network inventory problem holistically.
The story was much the same when it comes to the maturity of technology enablement companies have
reached to manage complex network inventories.
Here, just 6% of respondents put themselves in the 'excellent¨ group, and 24%
in the 'good¨ category, both numbers down a few percentage points from the
process maturity perspective; some 70% rated themselves as just average or
worse.
Said one electronics industry respondent: 'I think many of us have supply
chain and inventory management technology that was built for a different
time, or at least a different level of understanding. We need something new
to manage this challenge effectively today.¨
Another respondent added that 'There is technology to do this well, but it can
be hard to implement, and not many have done it.¨
Process Maturity for Managing
Inventory Across Full Network
Excellent
Good
Average
Not Very Good
Poor
Not Sure
0.0% 10.0% 20.0% 30.0% 40.0%
8.5%
27.5%
34.1%
24.1%
3.3%
2.3%
Here,
in t
pr
wo
An
be h
70%
rated themselves as
just average or worse
in regards to process
maturity for managing
inventory.
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We also asked respondents on their opinion as to what was more important in terms of effectively
managing network inventories, process or technology.
As shown in the chart below, a majority of 52.6% of respondents said that each area was equally
important. 31% said process was more important, while 16% said that technology was more important.
But the answer to that question really depends on where you sit, as one respondent noted.
“Most companies have a number of people and process issues that they need to address to get better at
network inventory management,” one consumer durables manager said. “But after you reach a certain
level of process excellence, the only path left to get much better is new technology.”
Technology Maturity for Managing
Inventory Across Full Network
Excellent
Good
Average
Not Very Good
Poor
Not Sure
0.0% 10.0% 20.0% 30.0% 40.0%
6.1%
24.1%
34.8%
20.8%
8.0%
19.0%
Process Versus Technology Importance
Process
Technology
Both Equally Important
0% 10% 20% 30% 40% 50% 60%
31.3%
52.6%
16.1%
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We also wanted to understand what levels of inventory improvement respondents thought were possible
in their supply chain networks - and the results were eye opening.
More than a quarter of respondents (26.5%) thought they could reduce inventory by 15 days or more -
presenting a compelling opportunity.
All told, some 79% thought their inventory improvement capability was at least 5 days - representing
More than 15 Days
11 - 15 Days
5 - 10 Days
Less Than 5 Days
Little/
No Improvement Possible
0.0% 10.0% 20.0% 30.0% 40.0%
26.5%
17.5%
34.6%
17.0%
4.3%
Potential Inventory Reduction Through
Process/Technology Improvement
We also took another look at this question from a percentage standpoint, with similar results.
As can be seen on the next page, about 29% thought their total opportunities to reduce network inventory
was at least15% - meaning a company that carries a billion dollars worth of inventory could reduce
increased sales.
Again here, only a small percentage saw little opportunity for improvement.
Five Strategies for Improving Inventory Management...
that amount by
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What are the Barriers to Improved Network Inventory Management?
Companies obviously understand the potential opportunity to reduce network inventories, as illustrated
in the last couple of charts above taken from the survey data.
Given that the prize is large, what is preventing companies from making those improvements?
We asked respondents to rate a number of potential barriers as being low, medium or high, as shown in
the chart below.
Some things stand out. For example, senior management vision/focus is not perceived to be an issue
for most companies; nearly 42% rated it as a low barrier, and 66% combined rated it as either low or
medium.
The annual planning process and supplier collaboration challenges also rated fairly low as barriers.
On the other hand, 56% of respondents cited their inability to optimize the network holistically as a high
barrier.
More than 15%
11 - 15%
5 - 10%
Less Than 5%
Little/
No Improvement Possible
0.0% 10.0% 20.0% 30.0% 40.0%
28.9%
24.6%
34.6%
9.5%
2.3%
Potential Inventory Reduction Through
Process/Technology Improvement
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Other areas receiving high scores included lack of technology integration, having internal functional
silos, misaligned metrics (related, no doubt, to functional silos) and demand volatility (as always seems
to be the case).
We were most surprised that a low percent of respondents planned to make investments in improving
multi-channel management - perhaps that area was viewed as a people/process issue that did not require
much investment to improve. However, a look at the respondent companies planning to make investments
in multi-channel management showed the vast majority were in either the consumer goods or retail
sectors. The challenge of multi-channel management does not seem high yet in most other industries.
Perceived Barriers to More Effective
Cross Network Inventory Management
Organization Alignment
Sr. Mng’t Vision/Focus
Technology Integration
Level of Expertise
Annual Planning Process
Lack of Visibility
Can’t Optimize Network Holistically
Functional Silos
Misaligned Metrics
Technology Capabilities
Supply Variability
Multi-Channel Issues
Demand Volatility
Level of Trading Partner Collab.
0% 100%
High Barrier
Medium Barrier
Low Barrier
27.1% 33.0% 38.3%
41.8% 24.2% 33.9%
21.5% 33.3% 45.2%
33.9% 28.2% 37.9%
41.8% 29.4% 28.8%
23.71% 34.5% 41.8%
16.9% 27.1% 55.9%
20.9% 33.3% 45.8%
28.8% 26.6% 44.6%
30.0% 32.8% 37.3%
30.5% 37.9% 31.6%
26.6% 42.4% 31.0%
25.4% 27.6% 45.9%
25.0% 30.5% 34.5%
Five Strategies for Improving Inventory Management...
Where do companies plan to invest to improve network inventory management? As shown on the
chart on page 11 technology scored high, with improving supply chain visibility (41.7%) and general
enhanced inventory management/planning technology (also 41.7%) listed as areas many respondents
in over the next 2-3 years. said they were quite sure to make investments
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Summing up the Data
The survey results support our belief that growing supply chain network complexity is making it
number of challenges to getting it done.
While there are many process improvements that can be deployed, the sheer scope and scale of managing
network inventories “holistically” is a challenge that many believe will require a new level of technology
support.
improving network inventory levels we will summarize in the next section.
Where Companies Plan to Invest
for Cross Network Inventory Management
27.1% 33.0% 38.3%
41.8% 24.2% 33.9%
33.9% 28.2% 37.9%
23.71% 34.5% 41.8%
16.9% 27.1% 55.9%
20.9% 33.3% 45.8%
30.0% 32.8% 37.3%
30.5% 37.9% 31.6%
26.6% 42.4% 31.0%
0% 100%
Lack of Visibility
Can’t Optimize Network Holistically
Functional Silos
Misaligned Metrics
Technology Capabilities
Supply Variability
Multi-Channel Issues
Demand Volatility
Level of Trading Partner Collab.
High Likelihood
Medium Likelihood
Low Likelihood
Five Strategies for Improving Inventory Management...
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Five Strategies for Improving Inventory Management
Across Complex Networks
There obviously is no single bullet for improving inventory management in the face of these network
challenges, and many companies continue to chase increasing forecast accuracy as a key weapon - and
one often especially resistant to improvement.
inventory management challenge.
1. Get Much More Granular with Safety Stock Management
Many companies today continue to use rather simplistic means to determine safety stock levels at
different echelons of the supply chain.
The most common is a simple SKU segmentation approach in which products are put into three or
policies are then set the same across each of these categories.
companies have taken their safety stock policies much further in terms of both
granularity and cycle times.
The most common of the process improvements is to use many more
attributes associated with each SKU to in effect create a much larger
number of item classes to which different policies are assigned - well
beyond the standard three or four levels most companies still use.
These attributes can include lead times, supply and demand variability,
consumption patterns, criticality, velocity, and several others. The more
dimensions a company uses, the greater the precision a company will have
in managing inventories. It is not uncommon to see 10-12 dimensions being
used in best-in-class companies.
This obviously requires a lot more work, both in terms of upfront analysis and
tweaking of the policy settings over time, but can pay rich dividends in terms of both
reducing inventories for the SKUs for which excessive safety stocks are held, and in some cases actually
increasing safety stock levels for SKUs that are regularly experiencing out-of-stock conditions.
This more granular segmentation also clearly requires some level of skill in terms of identifying the
appropriate attributes to use for the groupings, and in understanding how to best apply differentiated
inventory policies. Here outside expertise may be required if a company is looking to make the move to
higher level of safety stock management, as this is a relatively uncommon skill set.
of both
“There
is no single
bullet for improving
inventory management...
companies continue to
chase increasing forecast
accuracy as a key
weapon...”
Five Strategies for Improving Inventory Management...
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Leading companies are also increasing the frequency in which they review and tweak safety stock
policies. Still today, some companies can go multiple years without a comprehensive review, other than
.
Leading companies both review products and policies more frequently, and have a formal schedule for
monthly Sales and Operations Planning (S&OP cycle), as we discuss in the next section, but then also
look at higher level demand and variability data quarterly and may tweak certain inventory parameters
on a weekly basis.
This safety stock and inventory policy management challenge becomes even greater when a company
considers the multi-echelon aspect. Many companies in effect hold redundant safety stocks at each level
of this report. Many companies also lack insight into where in a complex supply chain inventory buffers
should optimally be held.
Meeting that challenge well is almost impossible to do manually today and really requires a new level of
technology support, an area where the category of inventory optimization software comes in to play, as
we discuss in the last section.
2. Add Inventory Planning to the S&OP Process
While Sales and Operations Planning has been successfully employed as a process discipline by some
through their S&OP evolution.
inventory decisions were often left out of the S&OP process. While S&OP delivered a “one number
forecast” that the company could act on, supported by a high level supply plan that is capable of meeting
decision process. That usually meant middle managers were responsible for inventory decisions that
could have impact on sales or cost in the millions of dollars.
“...many have pushed use of the new term Sales, Inventory &
Operations Planning (SIOP) to more forcefully drive home the
need for the process to make policy decisions on target inventory
levels needed to support the demand and supply plans.”
OP
SI
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Recognizing that gap, many have pushed use of the new term Sales, Inventory & Operations Planning
(SIOP) to more forcefully drive home the need for the process to make policy decisions on target
inventory levels needed to support the demand and supply plans. In effect, this means senior company
executives need to set the direction based on a given plan as to what the trade-offs are going to be
meet demand. This is especially critical for new product introductions, and for companies that have a lot
of complexity in their product “mix.”
Some have argued that these inventory-related decisions were always inherent
to the S&OP process. That may be true from a theoretical perspective, but was
clearly often not the case in the actual monthly practice of S&OP. There are
many case studies of companies which have transformed their processes
from a traditional S&OP basis to an SIOP one with added steps related to
inventory targets and which have achieved impressive results.
Moving to SIOP in practice if not in name is a process improvement that
at one level is fairly easy to accomplish, with the right level of expertise
in terms of how the new elements to the S&OP cycle will be added (See
Sidebar on page 15).
support becomes necessary for robust S&OP performance, especially as decisions
about inventory levels are added to the mix. This technology is usually in the form of
“workbenches” and exception-based decision-making that provide supporting data for the
supply and demand plans, and importantly, allow managers and executives to conduct a series of scenario
SIOP is not a cure all for the challenges of inventory management across complex networks, but it is a
necessary change to take some steps forward and to set a platform for other initiatives, in part by getting
senior company executives more engaged in the inventory planning process.
of complexit
Some h
to the
clea
ma
from
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at
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“SIOP
is not the
cure-all for the
challenges of inventory
management... but it is
a necessary change... to
step forward and set a
platform for other
initiatives...”
Five Strategies for Improving Inventory Management...
analyses to understand
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SIOP Adds One Step to Traditional S&OP Process
Below, we have added one additional step and one change in the output of the process to Gartner`s
original nine-step S&OP process to highlight what is different with SIOP.
· Step 1: Collect sales and market input. Gather data from sales and marketing using simple and
intuitive electronic forms. Best-in-class processes review and accept input after applying a flter for
bias based on an analysis of historical input.
· Step 2: Develop a demand plan. Using statistical analysis and/or management input, build
a multi-period forecast plan. Key elements to focus on in the defnition of requirements are the
forecasting of new product introductions, product lifecycle forecasting, seasonality profles, causal factors,
promotion and rebate modeling, and revenue management.
· Step 3: Rehne demand consensus. Compare the multi-period output of the statistically generated
forecast against the various sales and channel partner forecasts to identify and understand
exceptions. Use the outcome of this collaborative forecast as the base forecast for demand shaping
in Step 4.
· Step 4: Shape demand based on ~what-if¨ analysis for demand and supply. Develop plans and
analyze opportunities for demand-shaping actions such as promotion planning, price management,
contract compliance, and the timing of new product introductions. Package these key scenarios
with the base-level forecast for operational planning in Step 5.
· Step 5: Develop a constrained plan. Using the forecasting output generated in Step 3, analyze
the best alternative for the business based on proftability, revenue, customer service, and targeted
inventory levels. Identify constraints, demand shortfalls, and capacity opportunities for the
consensus meeting review.
· Step 6: Conduct ~what-if¨ analysis. Determine tradeoffs on the measurements and identify
demand-shaping opportunities. Evaluate the 'what-if,¨ demand-shaping scenarios in Step 4 based
on proftability, revenue, customer service, and inventory targets. Identify constraints, demand
shortfalls, and capacity opportunities for the consensus meeting review.
· Step 7: Inventory scenario planning and analysis: Set target inventory levels to
support the plan and make decisions about where buffer inventories should be helping
across the network.
· Step 8: Develop a consensus plan. Review scenario alternatives and gain consensus on the
operating plan, including target inventory levels.
· Step 9: Publish the constrained plan. Communicate the constrained plan to the operational teams
for execution.
· Step 10: Measure the plan and publish the metrics. During the month, measure the success
of the plan and use this information as the starting point for the next cycle. Monitor plan success
based on forecast accuracy, expected-versus-actual proftability, expected-versus-actual revenue,
expected-versus-actual inventories, and expected-versus-actual customer service levels (e.g.,
perfect order or case fll rates).
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3. Make Regular Use of Supply Chain Network Optimization Tools for Tactical Planning
Supply chain network optimization tools have traditionally been used at a strategic level to support
redesigns of an entire supply chain or distribution network. Often, such exercises were performed every
3-5 years, or triggered by a major change, such as a merger or acquisition.
There is a major change going on in this area, however, with more and more companies using the
supporting network optimization technology tools not only in this strategic way, but on a tactical basis to
support supply chain decisions on a quarterly or even more frequent basis.
The core function of these tools is to help companies make decisions about the network trade-offs
between inventories, transportation costs, and customer service. But the reality is that as soon as the
'optimal¨ strategic plan is set at a given point in time, it begins to degrade.
That truism is more pertinent than ever today, with rapid changes in oil and commodity prices, the
uncertainties of globalization, and other dynamics challenging any current network strategy.
While changing the supply chain network at a high level is obviously a slow process, many changes
ZLWKLQ the network can and should be made on a more frequent and near continuous basis. Such
decisions as:
· Which products should be made and sourced where?
· What is the current optimal trade-off between inventory and transportation?
· How should product fow within the existing network?
can all be improved with decision support from the network planning tools, as a variety of companies
from Procter & Gamble to PepsiCo are demonstrating today.
While the potential improvements may come from transportation savings or other operating buckets, it is
certainly likely that inventory improvements versus the baseline will also often be achieved.
What does making this change mean? It usually generally requires that instead of just 'renting¨ a
network optimization tool for a given planning process, that tool is acquired and brought in-house
(though on-demand versions are also coming to market). But the point is that in either case, the tool
becomes a permanent part of the on-going decision process, not used for a one time analysis.
Once the original supply chain network model is built, maintaining that model over time is
comparatively easy, but does take some resources. Some companies maintain a small staff to support this
process, acting in a 'share services¨ capacity across multiple business units, but others can get by with
just one person dedicated only part time to the effort.
Some consultants or software vendors themselves offer analysts that companies can hire to do the work
instead of using internal staff.
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A few large companies have reported hundreds of millions of dollars in supply chain savings, much
of it related to inventory, from investment in technology and staff to use network planning tools for
continuous tactical planning. In today`s highly dynamic environment, it would seem the business case to
support such an investment would be strong for many large and even mid-sized companies.
4. Consider Distributed Order Management Tools to Manage Multi-Channel Complexity
and Reduce Inventories
Both retailers and a growing number of manufacturers are dealing with the challenges of multi-channel
management, primarily but not exclusively driven by web channels.
A substantial percentage of traditional retailers have already developed dot com channels, and a growing
number of manufacturers are doing the same, as the once powerful fear of reprisals coming from
competition with their retail partners is rapidly falling and more and more brand companies take to the
web.
A variety of other channels, from vending machines to distributors, are
increasingly also coming into the mix for many companies.
With dot com business especially, many companies have let web
channels emerge as quasi-independent business units to enhance
speed and fexibility. That, in turn, often means that the dot com unit
maintains its own inventory. This is sometimes true for other channels
as well.
While the overall independence often has real business advantages,
especially at start up, the dual or more inventories can add real cost to
the company overall.
As companies mature these new channels, they often decide to look at how
multiple channels can be served out of one inventory pool.
There are a number of challenges to doing so, such as how forecasts are aggregated or allocation policies
by each channel for that inventory are developed and enforced. These challenges can be tackled in many
ways, one of which is a relatively new class of software called distributed order management, or DOM.
DOM solutions are about much more than inventory management; at their core they are designed to
capture orders from multiple sources and identify the most effcient way to fulfll those orders. They
enable the company to present a consistent face and process to the customer regardless of channel, if
well implemented.
But as a part of that basic capability, some DOM solutions can also improve inventory levels in multi-
channel environments.
ow
'A
substantial
percentage of
traditional retailers
have... developed dot com
channels... a growing
number of manufacturers
are doing the
same...¨
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Some, for example, have the capability to support inventory rules and policies by channel within
common inventory pool, allowing companies to more quickly or aggressively pursue combined cross
channel inventory strategies.
In addition, many solutions provide the ability to dynamically identify the optimal sourcing location,
whether it be in the company’s own supply chain network, or a possible drop ship directly from a
drop ship items, a company may also be able to take a good bite out of current inventory levels.
Distributed order management has been the province of mostly best-of-breed vendors, and normally
sat over top of existing order management systems. It is an ideal solution for companies with complex
channel issues, or where a company is running multiple order management systems and looking for a
single front to customers across channels. Now, even large ERP providers themselves have released their
own DOM solutions.
DOM software varies considerably in capabilities and focus, and so an evaluation of different
s current needs - and just
as importantly with its future direction.
5. Step Up to Inventory Optimization Software
Probably the most aggressive step a company can take to manage multi-echelon inventory challenges is
to adopt a relatively new category of software solution called inventory optimization, or IO.
Traditional supply chain planning software really only optimizes inventory levels one node or echelon at
a time - it really is not concerned with the impact on up and downstream inventories. It focuses primarily
on “local” optimization.
Inventory optimization software, which has been around for about a decade, looks at the inventory
even distribution channels simultaneously, so that network inventory levels themselves are optimized,
not just an individual node or channel.
Inventory optimization software... looks at the inventory problem
holistically, considering optimal inventory levels from raw
simultaneously, so that network inventory levels themselves are
optimized, not just an individual node or channel.
Five Strategies for Improving Inventory Management...
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The knowledge source for Supply Chain and Logistics executives
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Most of these solutions also use what is called 'probabilistic¨ modeling, which means rather than
relying on 'discrete¨ or single number forecasts for supply and demand, IO software uses history and
other factors to consider the probability of different lead times and demand patterns, providing a richer
inventory plan.
Many companies have achieved signifcant results from their IO implementations, as the survey data
supports, often reducing overall network inventory levels by well into the double digit percentages.
IO software also lets companies manage the complex process of setting inventory policies and tuning
those policies at a SKU level much more effectively by enabling them to move to a much more
automated process. The focus turns to 'management by exception¨ versus trying to
deal with these policies and settings across hundreds or thousands of SKUs using
a more manual, spreadsheet-based approach.
But getting to these kinds of results, frankly, is often not easy. The holistic
nature of the analysis and recommendations means a company has to
get wide buy-in to the program across its supply chain. Sometimes
inventories reduced at one level come at the 'cost¨ of more inventory at
another, which might contradict existing goals and measures. Relatively
few managers inside a company are probably well-versed in IO
solutions.
We believe that inventory optimization software will become
commonplace over the next fve years, but that companies will usually
need skilled guides to help them reach the destination smoothly and
effectively.
Summing It Up
We are clearly in an era of unprecedented supply chain network complexity.
Our survey data supports the many and diverse challenges supply chain managers are facing to get better
control of inventories across these network challenges - and that they are looking for solutions and
signifcant potential from doing so.
Many companies have taken traditional approaches, such as efforts to improve forecast accuracy or
development of traditional S&OP processes about as far as they can go. New tools and technologies are
needed to fght the next rounds of the ongoing inventory battle.
The majority of survey respondents also believes that process and technology improvements were
equally important in better managing network inventories.
Us using
'Many
companies
have achieved
signifcant results from
their IQ implementations...
reducing overall network
inventory levels... into
the double digit
percentages.¨
Five Strategies for Improving Inventory Management...
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not formally including inventory targets as part of an SIOP program, clearly have a major process
opportunity in front of them.
But the size and complexity of the network inventory management challenge today means that newer
technology tools, such as distributed order management or inventory optimization software, may need to
be a large part of the answer.
Of course, that new technology will bring its own process (and people) challenges, but we believe for
hands will often need to be part of the team to ensure success.
For many companies, the “low hanging fruit” is nearly gone. Step changes in inventory management
effectiveness will mean use of relatively new tools and techniques.
It is time to start looking at the opportunities now to see which might have the greatest impact on your
supply chain success.
This research was made possible by support from:
Five Strategies for Improving Inventory Management...
www.cognizant.com
CSCO (Chief Supply Chain Officer) Insights offers research and analysis focused on providing
actionable information and intelligence to senior supply chain executives and those aspiring to
reach executives levels. The research arm of Supply Chain Digest, the industry’s leading on-line
publication and web site, CSCO Insights is becoming the preferred source of insight for supply chain leaders.
Cognizant is a leading provider of information technology, consulting, and business process outsourcing
services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered
in Teaneck, New Jersey, Cognizant combines a passion for client satisfaction, technology innovation,
deep industry and business process expertise, and a global, collaborative workforce that embodies the
future of work. A member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune
500, Cognizant is ranked among the top performing and fastest growing companies in the world.
About Cognizant
About CSCO Insights
doc_742886507.pdf
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Five Strategies for Improving Inventory Management
Across Complex Supply Chain Networks
How Companies Think about Growing Network Pressures -
and Ways they can Effectively Respond
Introduction
Effective inventory management is at the core of supply chain management excellence.
in-process, partner inventories and more, truly sits at the intersection of demand and supply.
Yet our understanding of inventory management practices in many respects still has a long way to
go. In fact, it is really only in the last decade or so that the direct link between inventory management
Consultant Gerry Marsh, who works with some of the world’s largest companies, has
than competitors will usually have higher stock price multiples even if earnings
per share and growth rates are similar between the companies.
Yet, leading up to the recession, inventory levels in most industries had
chains, SKU proliferation and other factors that have been putting upward
pressure on inventory levels actually meant companies were making solid
progress on the basics.
That may very well be true, but in the end leaves companies with little to
show in terms of bottom line improvement.
Most companies did cut inventories sharply in the deep recession year of
2009, but primarily through “slash and burn” type approaches, sometimes with
the goal of corporate survival, using techniques that may not be sustainable as the
economy continues to recover.
Supply Chain Executive Brief
ings
with
as the
“...it is only
in the last decade...
that the direct link between
inventory management
effectiveness and corporate
well understood, (and) has
level interest.”
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Five Strategies for Improving Inventory Management...
Now, coming out of the recession, companies are again facing a number of issues that are adding to their
supply chain network complexity, which serve as headwinds to inventory reduction. Today, many if not
most supply chains are feeling at least several of these sorts of network pressures:
• Increased global scope and reach that must be managed
•
• Increasing virtualization and resulting loss of visibility and control
• Challenges resulting from multi-channel go-to-market strategies
• Shrinking product lifecycles not only in well-recognized areas such as high tech and electronics but
in virtually every manufacturing sector.
As a result, companies realize that effectively managing inventories a node or level at a time is no longer
good enough. The problems and challenges must be tackled more holistically, considering strategies and
tools that can tame the growing network inventory beast in a way that brings those inventory levels down
while maintaining or even improving customer service levels.
CSCO Insights survey on network inventory
management practices.
Survey Results
In late Spring, conducted a survey on supply chain network
inventory management.
First, we will review some of the basic demographics of the respondent population, which we think
represents a very balanced mix of companies and industries.
Enterprise: 57.8%
Business Unit/Division: 42.2%
Scope of Respondent’s Answers
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decentralized).
As can be seen on the previous page, about 58% or respondents were answering for the whole company,
versus 42% for a
In terms of overall size, there was a good mix across all sales levels, with 23% coming from companies
greater than $10 billion in annual revenue, down to 37.5% with revenues under $500 million per year.
However, related to the previous question, about half of the under $500 million respondents are actually
part of larger companies. In general, therefore, we would say the respondents are somewhat skewed
towards larger companies, though today companies in the $1-5 billion range are generally viewed as
“mid-sized” - quite a change from not many years ago.
Size of Company/Division
$1-$10 Billion:
28.9%
Over $10 Billion:
23.4%
Under $500 Million:
37.5%
$500-$999 Million:
10.1%
We also asked companies to rate themselves in terms of their supply chain network complexity (see chart
on page 4).
Respondents provided an answer simply based on their own perceptions.
various levels, as it seemed an almost impossible task.
As can be seen, 24% view their networks as “very complex,” and another 42% see them as “somewhat
complex,” meaning that nearly 66% believe that they have complex networks - a strong preponderance
of respondents.
This is probably not surprising for two reasons: regardless of size, we think most companies do believe
their supply chain network operations are complex today, if nothing else compared to what they might
have had just a few years ago; second, the promotion for the survey probably tended to connect with
companies that saw themselves as having supply chain network/inventory management challenges
versus those that did not.
In fact, only 12% of respondents saw their networks as “simple” or “fairly simple.”
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One dimension of supply chain network complexity is the number of inventory stocking points or
“nodes” the network contains.
Here, we had a very broad mix, with a combined 39% of respondents having 10 or fewer nodes, while an
almost equal number (38%) reported having more than 50 stocking locations.
Of course, these numbers do not represent trading partner inventories (suppliers, contract manufacturers,
co-packers, channels), areas where many companies are also looking to better manage inventory levels
when doing network inventory planning even if they do not “own” the inventory there.
Supply Chain Network Complexity
Supply Chain Network Complexity
0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
1 - 5
6 - 10
11 - 20
21 - 50
More than 50
18.7%
20.3%
15.6%
7.0%
38.2%
Very Complex
Somewhat Complex
Average
Fairly Simple
Very Simple
Not Sure
0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
24.1%
41.7%
20.4%
9.9%
1.9%
1.9%
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Practices and Priorities
With that demographic data as background, we will now turn our attention to the core questions and
responses relative to network inventory management.
We started by asking respondents just how high a supply chain priority improved network inventory
management is for their companies.
The results speak for themselves: 24% called it the top supply chain priority, and another 52% said it was
highly important. Just a handful of respondents said it was a low priority.
Top SCM Priority
Highly Important
Medium Importance
Lower Level Priority
Not Really a Concern
Not Sure
0% 10% 20% 30% 40% 50% 60%
Priority of “Inventory Management Excellence”
in Your Company/Division
24%
52%
19%
3%
1%
2%
In the comments area of the survey instrument, a director of supply chain planning for one consumer
goods company noted that 'We are very highly focused right now at managing across the entire chain,
which we have not really done well in the past. It`s the next natural thing after you optimize locally.¨
We agree - but how do you get there?
We next asked respondents how well their current processes were for managing network inventories. The
results are about what we might have expected: just 8.5% said their current processes have reached an
'excellent¨ level, though 27.5% said their processes were 'good.¨
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Importantly, however, just over 60% said their current processes were average or worse - meaning the
majority of companies have a lot of work to do to tackle the network inventory problem holistically.
The story was much the same when it comes to the maturity of technology enablement companies have
reached to manage complex network inventories.
Here, just 6% of respondents put themselves in the 'excellent¨ group, and 24%
in the 'good¨ category, both numbers down a few percentage points from the
process maturity perspective; some 70% rated themselves as just average or
worse.
Said one electronics industry respondent: 'I think many of us have supply
chain and inventory management technology that was built for a different
time, or at least a different level of understanding. We need something new
to manage this challenge effectively today.¨
Another respondent added that 'There is technology to do this well, but it can
be hard to implement, and not many have done it.¨
Process Maturity for Managing
Inventory Across Full Network
Excellent
Good
Average
Not Very Good
Poor
Not Sure
0.0% 10.0% 20.0% 30.0% 40.0%
8.5%
27.5%
34.1%
24.1%
3.3%
2.3%
Here,
in t
pr
wo
An
be h
70%
rated themselves as
just average or worse
in regards to process
maturity for managing
inventory.
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We also asked respondents on their opinion as to what was more important in terms of effectively
managing network inventories, process or technology.
As shown in the chart below, a majority of 52.6% of respondents said that each area was equally
important. 31% said process was more important, while 16% said that technology was more important.
But the answer to that question really depends on where you sit, as one respondent noted.
“Most companies have a number of people and process issues that they need to address to get better at
network inventory management,” one consumer durables manager said. “But after you reach a certain
level of process excellence, the only path left to get much better is new technology.”
Technology Maturity for Managing
Inventory Across Full Network
Excellent
Good
Average
Not Very Good
Poor
Not Sure
0.0% 10.0% 20.0% 30.0% 40.0%
6.1%
24.1%
34.8%
20.8%
8.0%
19.0%
Process Versus Technology Importance
Process
Technology
Both Equally Important
0% 10% 20% 30% 40% 50% 60%
31.3%
52.6%
16.1%
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We also wanted to understand what levels of inventory improvement respondents thought were possible
in their supply chain networks - and the results were eye opening.
More than a quarter of respondents (26.5%) thought they could reduce inventory by 15 days or more -
presenting a compelling opportunity.
All told, some 79% thought their inventory improvement capability was at least 5 days - representing
More than 15 Days
11 - 15 Days
5 - 10 Days
Less Than 5 Days
Little/
No Improvement Possible
0.0% 10.0% 20.0% 30.0% 40.0%
26.5%
17.5%
34.6%
17.0%
4.3%
Potential Inventory Reduction Through
Process/Technology Improvement
We also took another look at this question from a percentage standpoint, with similar results.
As can be seen on the next page, about 29% thought their total opportunities to reduce network inventory
was at least15% - meaning a company that carries a billion dollars worth of inventory could reduce
increased sales.
Again here, only a small percentage saw little opportunity for improvement.
Five Strategies for Improving Inventory Management...
that amount by
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What are the Barriers to Improved Network Inventory Management?
Companies obviously understand the potential opportunity to reduce network inventories, as illustrated
in the last couple of charts above taken from the survey data.
Given that the prize is large, what is preventing companies from making those improvements?
We asked respondents to rate a number of potential barriers as being low, medium or high, as shown in
the chart below.
Some things stand out. For example, senior management vision/focus is not perceived to be an issue
for most companies; nearly 42% rated it as a low barrier, and 66% combined rated it as either low or
medium.
The annual planning process and supplier collaboration challenges also rated fairly low as barriers.
On the other hand, 56% of respondents cited their inability to optimize the network holistically as a high
barrier.
More than 15%
11 - 15%
5 - 10%
Less Than 5%
Little/
No Improvement Possible
0.0% 10.0% 20.0% 30.0% 40.0%
28.9%
24.6%
34.6%
9.5%
2.3%
Potential Inventory Reduction Through
Process/Technology Improvement
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Other areas receiving high scores included lack of technology integration, having internal functional
silos, misaligned metrics (related, no doubt, to functional silos) and demand volatility (as always seems
to be the case).
We were most surprised that a low percent of respondents planned to make investments in improving
multi-channel management - perhaps that area was viewed as a people/process issue that did not require
much investment to improve. However, a look at the respondent companies planning to make investments
in multi-channel management showed the vast majority were in either the consumer goods or retail
sectors. The challenge of multi-channel management does not seem high yet in most other industries.
Perceived Barriers to More Effective
Cross Network Inventory Management
Organization Alignment
Sr. Mng’t Vision/Focus
Technology Integration
Level of Expertise
Annual Planning Process
Lack of Visibility
Can’t Optimize Network Holistically
Functional Silos
Misaligned Metrics
Technology Capabilities
Supply Variability
Multi-Channel Issues
Demand Volatility
Level of Trading Partner Collab.
0% 100%
High Barrier
Medium Barrier
Low Barrier
27.1% 33.0% 38.3%
41.8% 24.2% 33.9%
21.5% 33.3% 45.2%
33.9% 28.2% 37.9%
41.8% 29.4% 28.8%
23.71% 34.5% 41.8%
16.9% 27.1% 55.9%
20.9% 33.3% 45.8%
28.8% 26.6% 44.6%
30.0% 32.8% 37.3%
30.5% 37.9% 31.6%
26.6% 42.4% 31.0%
25.4% 27.6% 45.9%
25.0% 30.5% 34.5%
Five Strategies for Improving Inventory Management...
Where do companies plan to invest to improve network inventory management? As shown on the
chart on page 11 technology scored high, with improving supply chain visibility (41.7%) and general
enhanced inventory management/planning technology (also 41.7%) listed as areas many respondents
in over the next 2-3 years. said they were quite sure to make investments
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Summing up the Data
The survey results support our belief that growing supply chain network complexity is making it
number of challenges to getting it done.
While there are many process improvements that can be deployed, the sheer scope and scale of managing
network inventories “holistically” is a challenge that many believe will require a new level of technology
support.
improving network inventory levels we will summarize in the next section.
Where Companies Plan to Invest
for Cross Network Inventory Management
27.1% 33.0% 38.3%
41.8% 24.2% 33.9%
33.9% 28.2% 37.9%
23.71% 34.5% 41.8%
16.9% 27.1% 55.9%
20.9% 33.3% 45.8%
30.0% 32.8% 37.3%
30.5% 37.9% 31.6%
26.6% 42.4% 31.0%
0% 100%
Lack of Visibility
Can’t Optimize Network Holistically
Functional Silos
Misaligned Metrics
Technology Capabilities
Supply Variability
Multi-Channel Issues
Demand Volatility
Level of Trading Partner Collab.
High Likelihood
Medium Likelihood
Low Likelihood
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Five Strategies for Improving Inventory Management
Across Complex Networks
There obviously is no single bullet for improving inventory management in the face of these network
challenges, and many companies continue to chase increasing forecast accuracy as a key weapon - and
one often especially resistant to improvement.
inventory management challenge.
1. Get Much More Granular with Safety Stock Management
Many companies today continue to use rather simplistic means to determine safety stock levels at
different echelons of the supply chain.
The most common is a simple SKU segmentation approach in which products are put into three or
policies are then set the same across each of these categories.
companies have taken their safety stock policies much further in terms of both
granularity and cycle times.
The most common of the process improvements is to use many more
attributes associated with each SKU to in effect create a much larger
number of item classes to which different policies are assigned - well
beyond the standard three or four levels most companies still use.
These attributes can include lead times, supply and demand variability,
consumption patterns, criticality, velocity, and several others. The more
dimensions a company uses, the greater the precision a company will have
in managing inventories. It is not uncommon to see 10-12 dimensions being
used in best-in-class companies.
This obviously requires a lot more work, both in terms of upfront analysis and
tweaking of the policy settings over time, but can pay rich dividends in terms of both
reducing inventories for the SKUs for which excessive safety stocks are held, and in some cases actually
increasing safety stock levels for SKUs that are regularly experiencing out-of-stock conditions.
This more granular segmentation also clearly requires some level of skill in terms of identifying the
appropriate attributes to use for the groupings, and in understanding how to best apply differentiated
inventory policies. Here outside expertise may be required if a company is looking to make the move to
higher level of safety stock management, as this is a relatively uncommon skill set.
of both
“There
is no single
bullet for improving
inventory management...
companies continue to
chase increasing forecast
accuracy as a key
weapon...”
Five Strategies for Improving Inventory Management...
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Leading companies are also increasing the frequency in which they review and tweak safety stock
policies. Still today, some companies can go multiple years without a comprehensive review, other than
.
Leading companies both review products and policies more frequently, and have a formal schedule for
monthly Sales and Operations Planning (S&OP cycle), as we discuss in the next section, but then also
look at higher level demand and variability data quarterly and may tweak certain inventory parameters
on a weekly basis.
This safety stock and inventory policy management challenge becomes even greater when a company
considers the multi-echelon aspect. Many companies in effect hold redundant safety stocks at each level
of this report. Many companies also lack insight into where in a complex supply chain inventory buffers
should optimally be held.
Meeting that challenge well is almost impossible to do manually today and really requires a new level of
technology support, an area where the category of inventory optimization software comes in to play, as
we discuss in the last section.
2. Add Inventory Planning to the S&OP Process
While Sales and Operations Planning has been successfully employed as a process discipline by some
through their S&OP evolution.
inventory decisions were often left out of the S&OP process. While S&OP delivered a “one number
forecast” that the company could act on, supported by a high level supply plan that is capable of meeting
decision process. That usually meant middle managers were responsible for inventory decisions that
could have impact on sales or cost in the millions of dollars.
“...many have pushed use of the new term Sales, Inventory &
Operations Planning (SIOP) to more forcefully drive home the
need for the process to make policy decisions on target inventory
levels needed to support the demand and supply plans.”
OP
SI
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Recognizing that gap, many have pushed use of the new term Sales, Inventory & Operations Planning
(SIOP) to more forcefully drive home the need for the process to make policy decisions on target
inventory levels needed to support the demand and supply plans. In effect, this means senior company
executives need to set the direction based on a given plan as to what the trade-offs are going to be
meet demand. This is especially critical for new product introductions, and for companies that have a lot
of complexity in their product “mix.”
Some have argued that these inventory-related decisions were always inherent
to the S&OP process. That may be true from a theoretical perspective, but was
clearly often not the case in the actual monthly practice of S&OP. There are
many case studies of companies which have transformed their processes
from a traditional S&OP basis to an SIOP one with added steps related to
inventory targets and which have achieved impressive results.
Moving to SIOP in practice if not in name is a process improvement that
at one level is fairly easy to accomplish, with the right level of expertise
in terms of how the new elements to the S&OP cycle will be added (See
Sidebar on page 15).
support becomes necessary for robust S&OP performance, especially as decisions
about inventory levels are added to the mix. This technology is usually in the form of
“workbenches” and exception-based decision-making that provide supporting data for the
supply and demand plans, and importantly, allow managers and executives to conduct a series of scenario
SIOP is not a cure all for the challenges of inventory management across complex networks, but it is a
necessary change to take some steps forward and to set a platform for other initiatives, in part by getting
senior company executives more engaged in the inventory planning process.
of complexit
Some h
to the
clea
ma
from
in
Mo
at
in t
Side
support
about invent
“SIOP
is not the
cure-all for the
challenges of inventory
management... but it is
a necessary change... to
step forward and set a
platform for other
initiatives...”
Five Strategies for Improving Inventory Management...
analyses to understand
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SIOP Adds One Step to Traditional S&OP Process
Below, we have added one additional step and one change in the output of the process to Gartner`s
original nine-step S&OP process to highlight what is different with SIOP.
· Step 1: Collect sales and market input. Gather data from sales and marketing using simple and
intuitive electronic forms. Best-in-class processes review and accept input after applying a flter for
bias based on an analysis of historical input.
· Step 2: Develop a demand plan. Using statistical analysis and/or management input, build
a multi-period forecast plan. Key elements to focus on in the defnition of requirements are the
forecasting of new product introductions, product lifecycle forecasting, seasonality profles, causal factors,
promotion and rebate modeling, and revenue management.
· Step 3: Rehne demand consensus. Compare the multi-period output of the statistically generated
forecast against the various sales and channel partner forecasts to identify and understand
exceptions. Use the outcome of this collaborative forecast as the base forecast for demand shaping
in Step 4.
· Step 4: Shape demand based on ~what-if¨ analysis for demand and supply. Develop plans and
analyze opportunities for demand-shaping actions such as promotion planning, price management,
contract compliance, and the timing of new product introductions. Package these key scenarios
with the base-level forecast for operational planning in Step 5.
· Step 5: Develop a constrained plan. Using the forecasting output generated in Step 3, analyze
the best alternative for the business based on proftability, revenue, customer service, and targeted
inventory levels. Identify constraints, demand shortfalls, and capacity opportunities for the
consensus meeting review.
· Step 6: Conduct ~what-if¨ analysis. Determine tradeoffs on the measurements and identify
demand-shaping opportunities. Evaluate the 'what-if,¨ demand-shaping scenarios in Step 4 based
on proftability, revenue, customer service, and inventory targets. Identify constraints, demand
shortfalls, and capacity opportunities for the consensus meeting review.
· Step 7: Inventory scenario planning and analysis: Set target inventory levels to
support the plan and make decisions about where buffer inventories should be helping
across the network.
· Step 8: Develop a consensus plan. Review scenario alternatives and gain consensus on the
operating plan, including target inventory levels.
· Step 9: Publish the constrained plan. Communicate the constrained plan to the operational teams
for execution.
· Step 10: Measure the plan and publish the metrics. During the month, measure the success
of the plan and use this information as the starting point for the next cycle. Monitor plan success
based on forecast accuracy, expected-versus-actual proftability, expected-versus-actual revenue,
expected-versus-actual inventories, and expected-versus-actual customer service levels (e.g.,
perfect order or case fll rates).
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3. Make Regular Use of Supply Chain Network Optimization Tools for Tactical Planning
Supply chain network optimization tools have traditionally been used at a strategic level to support
redesigns of an entire supply chain or distribution network. Often, such exercises were performed every
3-5 years, or triggered by a major change, such as a merger or acquisition.
There is a major change going on in this area, however, with more and more companies using the
supporting network optimization technology tools not only in this strategic way, but on a tactical basis to
support supply chain decisions on a quarterly or even more frequent basis.
The core function of these tools is to help companies make decisions about the network trade-offs
between inventories, transportation costs, and customer service. But the reality is that as soon as the
'optimal¨ strategic plan is set at a given point in time, it begins to degrade.
That truism is more pertinent than ever today, with rapid changes in oil and commodity prices, the
uncertainties of globalization, and other dynamics challenging any current network strategy.
While changing the supply chain network at a high level is obviously a slow process, many changes
ZLWKLQ the network can and should be made on a more frequent and near continuous basis. Such
decisions as:
· Which products should be made and sourced where?
· What is the current optimal trade-off between inventory and transportation?
· How should product fow within the existing network?
can all be improved with decision support from the network planning tools, as a variety of companies
from Procter & Gamble to PepsiCo are demonstrating today.
While the potential improvements may come from transportation savings or other operating buckets, it is
certainly likely that inventory improvements versus the baseline will also often be achieved.
What does making this change mean? It usually generally requires that instead of just 'renting¨ a
network optimization tool for a given planning process, that tool is acquired and brought in-house
(though on-demand versions are also coming to market). But the point is that in either case, the tool
becomes a permanent part of the on-going decision process, not used for a one time analysis.
Once the original supply chain network model is built, maintaining that model over time is
comparatively easy, but does take some resources. Some companies maintain a small staff to support this
process, acting in a 'share services¨ capacity across multiple business units, but others can get by with
just one person dedicated only part time to the effort.
Some consultants or software vendors themselves offer analysts that companies can hire to do the work
instead of using internal staff.
Five Strategies for Improving Inventory Management...
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The knowledge source for Supply Chain and Logistics executives
17
A few large companies have reported hundreds of millions of dollars in supply chain savings, much
of it related to inventory, from investment in technology and staff to use network planning tools for
continuous tactical planning. In today`s highly dynamic environment, it would seem the business case to
support such an investment would be strong for many large and even mid-sized companies.
4. Consider Distributed Order Management Tools to Manage Multi-Channel Complexity
and Reduce Inventories
Both retailers and a growing number of manufacturers are dealing with the challenges of multi-channel
management, primarily but not exclusively driven by web channels.
A substantial percentage of traditional retailers have already developed dot com channels, and a growing
number of manufacturers are doing the same, as the once powerful fear of reprisals coming from
competition with their retail partners is rapidly falling and more and more brand companies take to the
web.
A variety of other channels, from vending machines to distributors, are
increasingly also coming into the mix for many companies.
With dot com business especially, many companies have let web
channels emerge as quasi-independent business units to enhance
speed and fexibility. That, in turn, often means that the dot com unit
maintains its own inventory. This is sometimes true for other channels
as well.
While the overall independence often has real business advantages,
especially at start up, the dual or more inventories can add real cost to
the company overall.
As companies mature these new channels, they often decide to look at how
multiple channels can be served out of one inventory pool.
There are a number of challenges to doing so, such as how forecasts are aggregated or allocation policies
by each channel for that inventory are developed and enforced. These challenges can be tackled in many
ways, one of which is a relatively new class of software called distributed order management, or DOM.
DOM solutions are about much more than inventory management; at their core they are designed to
capture orders from multiple sources and identify the most effcient way to fulfll those orders. They
enable the company to present a consistent face and process to the customer regardless of channel, if
well implemented.
But as a part of that basic capability, some DOM solutions can also improve inventory levels in multi-
channel environments.
ow
'A
substantial
percentage of
traditional retailers
have... developed dot com
channels... a growing
number of manufacturers
are doing the
same...¨
Five Strategies for Improving Inventory Management...
Chief Supply Chain Of?cer Insights June 2011 ins in in ights ight ight CSCO
The knowledge source for Supply Chain and Logistics executives
18
Some, for example, have the capability to support inventory rules and policies by channel within
common inventory pool, allowing companies to more quickly or aggressively pursue combined cross
channel inventory strategies.
In addition, many solutions provide the ability to dynamically identify the optimal sourcing location,
whether it be in the company’s own supply chain network, or a possible drop ship directly from a
drop ship items, a company may also be able to take a good bite out of current inventory levels.
Distributed order management has been the province of mostly best-of-breed vendors, and normally
sat over top of existing order management systems. It is an ideal solution for companies with complex
channel issues, or where a company is running multiple order management systems and looking for a
single front to customers across channels. Now, even large ERP providers themselves have released their
own DOM solutions.
DOM software varies considerably in capabilities and focus, and so an evaluation of different
s current needs - and just
as importantly with its future direction.
5. Step Up to Inventory Optimization Software
Probably the most aggressive step a company can take to manage multi-echelon inventory challenges is
to adopt a relatively new category of software solution called inventory optimization, or IO.
Traditional supply chain planning software really only optimizes inventory levels one node or echelon at
a time - it really is not concerned with the impact on up and downstream inventories. It focuses primarily
on “local” optimization.
Inventory optimization software, which has been around for about a decade, looks at the inventory
even distribution channels simultaneously, so that network inventory levels themselves are optimized,
not just an individual node or channel.
Inventory optimization software... looks at the inventory problem
holistically, considering optimal inventory levels from raw
simultaneously, so that network inventory levels themselves are
optimized, not just an individual node or channel.
Five Strategies for Improving Inventory Management...
Chief Supply Chain Of?cer Insights June 2011 insights CSCO
The knowledge source for Supply Chain and Logistics executives
19
Most of these solutions also use what is called 'probabilistic¨ modeling, which means rather than
relying on 'discrete¨ or single number forecasts for supply and demand, IO software uses history and
other factors to consider the probability of different lead times and demand patterns, providing a richer
inventory plan.
Many companies have achieved signifcant results from their IO implementations, as the survey data
supports, often reducing overall network inventory levels by well into the double digit percentages.
IO software also lets companies manage the complex process of setting inventory policies and tuning
those policies at a SKU level much more effectively by enabling them to move to a much more
automated process. The focus turns to 'management by exception¨ versus trying to
deal with these policies and settings across hundreds or thousands of SKUs using
a more manual, spreadsheet-based approach.
But getting to these kinds of results, frankly, is often not easy. The holistic
nature of the analysis and recommendations means a company has to
get wide buy-in to the program across its supply chain. Sometimes
inventories reduced at one level come at the 'cost¨ of more inventory at
another, which might contradict existing goals and measures. Relatively
few managers inside a company are probably well-versed in IO
solutions.
We believe that inventory optimization software will become
commonplace over the next fve years, but that companies will usually
need skilled guides to help them reach the destination smoothly and
effectively.
Summing It Up
We are clearly in an era of unprecedented supply chain network complexity.
Our survey data supports the many and diverse challenges supply chain managers are facing to get better
control of inventories across these network challenges - and that they are looking for solutions and
signifcant potential from doing so.
Many companies have taken traditional approaches, such as efforts to improve forecast accuracy or
development of traditional S&OP processes about as far as they can go. New tools and technologies are
needed to fght the next rounds of the ongoing inventory battle.
The majority of survey respondents also believes that process and technology improvements were
equally important in better managing network inventories.
Us using
'Many
companies
have achieved
signifcant results from
their IQ implementations...
reducing overall network
inventory levels... into
the double digit
percentages.¨
Five Strategies for Improving Inventory Management...
Chief Supply Chain Of?cer Insights June 2011 ins in in ights ight ight CSCO
The knowledge source for Supply Chain and Logistics executives
20
not formally including inventory targets as part of an SIOP program, clearly have a major process
opportunity in front of them.
But the size and complexity of the network inventory management challenge today means that newer
technology tools, such as distributed order management or inventory optimization software, may need to
be a large part of the answer.
Of course, that new technology will bring its own process (and people) challenges, but we believe for
hands will often need to be part of the team to ensure success.
For many companies, the “low hanging fruit” is nearly gone. Step changes in inventory management
effectiveness will mean use of relatively new tools and techniques.
It is time to start looking at the opportunities now to see which might have the greatest impact on your
supply chain success.
This research was made possible by support from:
Five Strategies for Improving Inventory Management...
www.cognizant.com
CSCO (Chief Supply Chain Officer) Insights offers research and analysis focused on providing
actionable information and intelligence to senior supply chain executives and those aspiring to
reach executives levels. The research arm of Supply Chain Digest, the industry’s leading on-line
publication and web site, CSCO Insights is becoming the preferred source of insight for supply chain leaders.
Cognizant is a leading provider of information technology, consulting, and business process outsourcing
services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered
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