Supply Chain Executive Brief
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
ings
per share and growth rates are similar between the companies.
“...it is only
in the last decade...
Yet, leading up to the recession, inventory levels in most industries had
that the direct link between
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.
inventory management
effectiveness and corporate
well understood, (and) has
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.
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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,
inventory management.
conducted a survey on supply chain network
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.
Scope of Respondent’s Answers
Enterprise: 57.8%
Business Unit/Division: 42.2%
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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%
$500-$999 Million:
10.1%
Under $500 Million:
37.5%
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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Supply Chain Network Complexity
Very Complex
24.1%
Somewhat Complex
41.7%
20.4%
Average
9.9%
Fairly Simple
Very Simple
1.9%
Not Sure
1.9%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
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
18.7%
1-5
20.3%
6 - 10
15.6%
11 - 20
21 - 50
7.0%
38.2%
More than 50
4
0.0%
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10.0%
20.0%
June 2011
30.0%
40.0%
50.0%
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Practices and Priorities
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Priority of “Inventory Management Excellence”
in Your Company/Division
Top SCM Priority
24%
52%
Highly Important
Medium Importance
19%
Lower Level Priority
Not Really a Concern
3%
1%
2%
Not Sure
0%
10%
20%
30%
40%
50%
60%
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Process Maturity for Managing
Inventory Across Full Network
8.5%
Excellent
27.5%
Good
34.1%
Average
24.1%
Not Very Good
3.3%
Poor
2.3%
Not Sure
0.0%
10.0%
20.0%
30.0%
40.0%
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Technology Maturity for Managing
Inventory Across Full Network
6.1%
Excellent
24.1%
Good
34.8%
Average
20.8%
Not Very Good
8.0%
Poor
19.0%
Not Sure
0.0%
10.0%
20.0%
30.0%
40.0%
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.”
Process Versus Technology Importance
Process
31.3%
16.1%
Technology
52.6%
Both Equally Important
7
0%
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10%
20%
30%
June 2011
40%
50%
60%
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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
Potential Inventory Reduction Through
Process/Technology Improvement
More than 15 Days
26.5%
11 - 15 Days
17.5%
34.6%
5 - 10 Days
17.0%
Less Than 5 Days
Little/
No Improvement Possible
4.3%
0.0%
10.0%
20.0%
30.0%
40.0%
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
that amount by
increased sales.
Again here, only a small percentage saw little opportunity for improvement.
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Potential Inventory Reduction Through
Process/Technology Improvement
28.9%
More than 15%
24.6%
11 - 15%
34.6%
5 - 10%
9.5%
Less Than 5%
Little/
No Improvement Possible
2.3%
0.0%
10.0%
20.0%
30.0%
40.0%
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.
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Perceived Barriers to More Effective
Cross Network Inventory Management
Organization Alignment
27.1%
33.0%
41.8%
Sr. Mng’t Vision/Focus
Technology Integration
21.5%
33.9%
Functional Silos
Misaligned Metrics
Technology Capabilities
Supply Variability
Multi-Channel Issues
Demand Volatility
Level of Trading Partner Collab.
28.2%
37.9%
29.4%
23.71%
34.5%
16.9%
High Barrier
Medium Barrier
Low Barrier
55.9%
33.3%
28.8%
45.8%
26.6%
30.0%
44.6%
32.8%
30.5%
37.9%
26.6%
42.4%
25.4%
28.8%
41.8%
27.1%
20.9%
33.9%
45.2%
41.8%
Annual Planning Process
Can’t Optimize Network Holistically
24.2%
33.3%
Level of Expertise
Lack of Visibility
38.3%
27.6%
25.0%
31.6%
31.0%
45.9%
30.5%
0%
37.3%
34.5%
100%
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).
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
said they were quite sure to make investments in over the next 2-3 years.
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.
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Where Companies Plan to Invest
for Cross Network Inventory Management
27.1%
Lack of Visibility
Can’t Optimize Network Holistically
33.0%
38.3%
41.8%
24.2%
33.9%
Functional Silos
Misaligned Metrics
28.2%
23.71%
34.5%
16.9%
Technology Capabilities
Demand Volatility
30.5%
Level of Trading Partner Collab.
26.6%
High Likelihood
Medium Likelihood
Low Likelihood
55.9%
33.3%
30.0%
Multi-Channel Issues
37.9%
41.8%
27.1%
20.9%
Supply Variability
33.9%
32.8%
37.9%
42.4%
0%
45.8%
37.3%
31.6%
31.0%
100%
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.
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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.
“There
is no single
bullet for improving
inventory management...
companies continue to
chase increasing forecast
accuracy as a key
weapon...”
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.
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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.
SI
OP
“...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.”
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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
complexit in their product “mix.”
“SIOP
is not the
Some hhave 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
clea
cure-all for the
many case studies of companies which have transformed their processes
ma
challenges of inventory
from a traditional S&OP basis to an SIOP one with added steps related to
inventory
targets and which have achieved impressive results.
in
management... but it is
a necessary change... to
step forward and set a
platform for other
initiatives...”
Moving
to SIOP in practice if not in name is a process improvement that
Mo
at one level is fairly easy to accomplish, with the right level of expertise
in tterms of how the new elements to the S&OP cycle will be added (See
Sidebar
on page 15).
Side
support becomes necessary for robust S&OP performance, especially as decisions
inventory levels are added to the mix. This technology is usually in the form of
about invent
“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
analyses to understand
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.
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SIOP Adds One Step to Traditional S&OP Process
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15
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-(,<(.#%*,'(,%*,%.&/(%Y66%,&#(/d:
Chief Supply Chain Officer Insights
June 2011
CSCOinsights
The knowledge source for Supply Chain and Logistics executives
Five Strategies for Improving Inventory Management...
3. Make Regular Use of Supply Chain Network Optimization Tools for Tactical Planning
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"3/#(&'%*<%2/"3+%"3#(,3&6%/#&<<:
16
Chief Supply Chain Officer Insights
June 2011
CSCOinsights
The knowledge source for Supply Chain and Logistics executives
Five Strategies for Improving Inventory Management...
S%<(5%6&,+(%.*)-&3"(/%$&8(%,(-*,#('%$23',('/%*<%)"66"*3/%*<%'*66&,/%"3%/2--69%.$&"3%/&8"3+/4%)2.$%
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4. Consider Distributed Order Management Tools to Manage Multi-Channel Complexity
and Reduce Inventories
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.$&33(6%(38",*3)(3#/:
17
Chief Supply Chain Officer Insights
June 2011
CSCOinsights
The knowledge source for Supply Chain and Logistics executives
Five Strategies for Improving Inventory Management...
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.
18
Chief Supply Chain Officer Insights
June 2011
in ights
ight
CSCOins
The knowledge source for Supply Chain and Logistics executives
Five Strategies for Improving Inventory Management...
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6'$7'5&%1',:>
Summing It Up
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19
Chief Supply Chain Officer Insights
June 2011
CSCOinsights
The knowledge source for Supply Chain and Logistics executives
Five Strategies for Improving Inventory Management...
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:
www.cognizant.com
About CSCO Insights
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.
About Cognizant
20
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.
Chief Supply Chain Officer Insights
June 2011
in ights
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The knowledge source for Supply Chain and Logistics executives