5
Insights for
executives
Avoid stagnant inventory performance
Use a holistic approach to drive sustainable improvements
Of special interest to
Supply chain executives
Chief financial officers
“If I were to combine the projected inventory benefits of all recent performance
improvement projects, my company today would be achieving 100% customer service levels
while maintaining negative inventory. Why is it that year after year my company’s actual
inventory performance is stagnant or declining?”
The sentiments of this executive are echoed by finance and supply chain executives
across industries, as many companies struggle to achieve sustainable improvement in
inventory performance.
2
| 5 Insights for executives
Reducing inventory seems like an easy target when companies are seeking improvements
because it is easy to quantify. Yet inventory levels have a significant impact on a number of
functions beyond supply chain, including finance and operations. Cutting inventory without
having a governance structure or proper accountability in place can have a knock-on effect,
driving other investment behaviors that may not be in the best interest of supply chain — or
the organization as a whole.
To achieve material and sustainable improvement in inventory performance, supply chain
executives need to take a holistic, cross-functional approach that aligns supply chain,
finance, operations and other affected stakeholders to a consistent, agreed-upon set of
inventory performance objectives.
What’s the issue?
In an environment of increasing globalization, many companies have
broadened the range and complexity of their supply chains. Traditional
functions, including product development, inventory management,
operations planning and scheduling, manufacturing and procurement, are
often dispersed across geographies and trading partners.
Many companies have made continuous investments to ensure that the
right product is in the right location, in the right quantity, at the right time.
For some companies, this approach has paid off. They’ve seen a combination
of improved order fill and inventory turn rates. However, for a majority of
companies, historical investment has not netted the projected benefits.
This makes optimizing the company’s inventory investment challenging,
particularly because each of these functions can have a material and
sustained impact on inventory performance.
A majority of companies readily admit that historical investment targeting inventory performance
improvement has not netted the projected benefits.
Why now?
Companies are under increasing pressure to maintain continuity of supply
while simultaneously reducing aggregate investment in inventory. Business
objectives creating challenges to inventory performance include:
• Business growth: new and emerging markets increase the rate of
product proliferation and supply chain complexity. Accelerated product
innovation and shorter product life cycles add to inventory challenges.
Increasing customer expectations drive product complexity and compress
order response times.
• Cost reduction: low-cost sourcing tends to lengthen supply lead times
and increase supply variability. Increased outsourcing of supply chain
functions adds inventory management complexity and reduces its
visibility. Financial pressure to rapidly reduce inventory investment
provides temporary benefits while adversely affecting inventory mix.
• Structural changes: global supply chain hubs created to leverage
centralized models and improve tax effectiveness often distance key
functions from core manufacturing and distribution activities. Breakdown
in process, policy and technical alignment adversely affect inventory
performance.
• Supply risk mitigation: increasing supply chain geographic span and
complexity in turn increases risk of supply shortages and breakdowns.
Lack of end-to-end inventory visibility and supply uncertainty prompt
redundant inventory hedging throughout the supply chain.
Historically viewed as a simple means of maintaining supply continuity,
inventory is gaining greater appreciation from supply chain and finance
executives for its role in driving business performance. Incremental
inventory investment is becoming more of a conscious, value-based
decision. Simply viewing incremental inventory investment as a
consequence can put operational performance at risk.
5 Insights for executives |
3
How does it affect you?
As supply chain executives compete with other functional leaders for
limited financial resources, those who control investment (i.e., finance) are
establishing higher thresholds for the magnitude, speed, probability and
sustainability of returns.
Executives with a proven track record for return on investment will gain the
greatest access to financial resources. Conversely, each failed investment,
initially justified by projected improvement in inventory performance,
further limits an executive’s access to financial resources. A fundamental
challenge relating to inventory performance lies in its disparate governance,
control and accountability.
4
| 5 Insights for executives
As supply chain executives compete with other functional
leaders for limited financial resources, those who control
investment are establishing higher thresholds for the
magnitude, speed, probability and sustainability of returns.
Supply chain executives, working in concert with the finance organization,
must broaden their control and drive inventory performance into the
strategies, policies, processes and performance management constructs of
all functions that have the potential to impact inventory performance.
What’s the fix?
2. Driver focus
Companies should identify and analyze the drivers that define the
connections between inventory performance outcomes and the
operational and market activities that impact these outcomes. A driverbased approach improves a company’s ability to focus investment.
Specifically, the company gains a better understanding of the nature
and relative sensitivities of operational elements that drive its inventory
performance. Drivers make inventory strategy actionable within
the organization.
To achieve material and sustainable improvement in inventory performance,
global supply chain leaders need to fundamentally rethink how they
establish and maintain inventory performance over time. In particular,
supply chain executives may want to consider the following:
1. Holistic approach
Inventory performance is affected by policies and competencies across
functions encompassing product development, demand management,
supply management and order fulfillment. Best-in-class inventory
performance starts with an understanding of how all functions
collectively drive inventory performance and of the performance
trade-offs of functionally focused decision-making.
3. Governance effectiveness
Effective governance serves not only to prioritize, organize, execute
and evaluate a company’s investment within the context of its inventory
strategy, but also to drive alignment with its broader operational strategy
and performance objectives.
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5 Insights for executives |
5
What’s the bottom line?
Globalization has expanded both the supply chain breadth and complexity
of most companies. A combination of policies, processes, technology and
data coordinated across a wide array of functions and trading partners
collectively drives inventory performance. By implementing a holistic, crossfunctional approach to inventory performance, companies can expect to
achieve some of the following benefits:
• Warehousing: lower inventory levels that reduce physical handling and
storage costs
• Transportation: appropriate inventory mix that balances transportation
costs and product movement
• Manufacturing: proper product availability, which means less unplanned
manufacturing downtime and its associated cost
• Revenues: higher inventory turn rates that result in higher order
service levels
6
| 5 Insights for executives
By balancing inventory levels to demand, companies can
reduce operating costs and free up much-needed capital
to invest in business growth, creating sustainable value
and return on investment.
Want to
learn more?
The answers in
this issue are
supplied by:
Can Dogan
Principal — Americas Advisory
Supply Chain & Operations
Ernst & Young LLP
+1 312 879 2887
can.dogan@ey.com
Bob Bohnsak
Senior Manager — Americas Advisory
Supply Chain & Operations
Ernst & Young LLP
+1 312 879 5234
bob.bohnsak@ey.com
For related thought leadership, visit www.ey.com/5
5 Insights for executives |
7
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