Avoid stagnant inventory performance
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 drive other investment behaviors that may not be in the best interest of supply chain — or the organization as a whole.
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.
1. What’s the issue?
With 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.
This makes optimizing the company’s inventory investment challenging. 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.
2. 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.
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.
3. How does this affect you?
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.
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. 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.
4. What’s the fix?
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:
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.
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 driver-based approach improves a company’s ability to focus investment.
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.
Inventory performance management: stages to sustainable performance improvement
5. What’s the bottom line?
Globalization has expanded both the supply chain breadth and complexity of most companies.
By implementing a holistic, cross-functional approach to inventory performance, companies can expect to achieve some of these 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
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.