10 WAYS TO REDUCE INVENTORY IN YOUR SUPPLY CHAIN

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1 ONE PLACE IN THE CLOUD TO RUN YOUR SUPPLY CHAIN WHITE PAPER 10 WAYS TO REDUCE INVENTORY IN YOUR SUPPLY CHAIN

2 KEY TAKEAWAYS Companies challenged by a fast-changing business environment have a number of opportunities for minimizing working capital tied up in inventory while improving supply chain agility and increasing customer satisfaction. New technologies and proven principles are enabling powerful approaches for managing demand and supply, resulting in better planning and execution. INTRODUCTION An efficiently run supply chain has just the right amount of inventory. An agile supply chain is one that can be configured and reconfigured to keep it running efficiently even in the face of demand spikes and supply disruptions. Given how hard it is to be agile, most supply chains err on the side of having more inventory rather than less since inventory can hide a lot of waste in every aspect of a company s operations. What then, are some ways in which excess inventory can be taken out of the supply chain? As the preceding statement suggests, there are a number of wastes that can be eliminated and changes that can be made to reduce the amount of working capital tied up in inventory, without impacting customer satisfaction adversely. 10 WAYS TO REDUCE INVENTORY 1. A MORE ACCURATE DEMAND PREDICTION It is easier to produce just the right quantity when we can know with greater certainty what customers are going to ask for. Today, it is getting easier to better predict upcoming demand because there are many more types of current data available including retail point of sale information, weather, social sentiment, demographics, retailer distribution center (DC) inventory, and the like. Newer machine learning algorithms deployed by demand sensing technology can analyze these data streams, and self-test and selfadjust their parameters regularly to produce highly accurate forecasts for any time horizon. The impact is greatest in the short-term or current timeframe because traditional demand forecasting approaches cannot handle the scale and complexity of execution level decisions. When this lower forecast error is measured correctly over the actual lead time, it can lead to the right decisions about how much inventory must be stocked where in order to meet the greatest percentage of demand on time and in full (OTIF). The result is a more optimal deployment of inventory in the supply chain. Therefore, this approach of using demand sensing technology is the first step that many companies take to start their digital supply chain journeys. 2. LOWER VARIABILITY OF LEAD TIMES While most companies measure the accuracy of demand forecasts in some manner, not enough of them measure the number and severity of alerts and exceptions that get generated in the normal course of supply chain operations, nor do they actively take steps to minimize such expedites, special handling or rush orders. When the need for urgent action reduces, supply chains can operate in a more streamlined fashion. Running a stable supply chain reduces safety stock, both through the algorithmic mechanism of advanced inventory optimization logic working with lower variability of lead time, as well as by reducing buyers risk aversion that makes them hold greater stock on hand. How can companies encourage suppliers to offer them not only lower supply lead times, but to do so more predictably? 2

3 While the typical approach of incentives and penalties for schedule compliance can help, it is more effective to give suppliers the tools to do a better job. Foremost among these is the sharing of mid- through long-term forecasts that gives suppliers the advance notice to get their own supply chain operations in order. In addition to sharing of material and capacity forecasts, leading corporations also generate detailed transportation forecasts by day, lane and mode for inbound as well as outbound shipment timely production is only of value if it reliably reaches your manufacturing sites or customers. Such early visibility to logistics requirements gives 3PLs and transportation brokers time to line up capacity where needed, and has been shown to increase shipment reliability. Forecast sharing is the foundation of deep strategic relationships that characterize direct material supply chains and ensures that suppliers have set aside capacity in advance for supporting your production volumes. 3. FASTER AND BETTER DECISIONS Reducing the time taken to fulfill demand lowers the amount of inventory in the supply chain. Part of the time to respond is taken up by making decisions and communicating them to all parties. Speeding up information flows therefore reduces lead times. The key is to make not just faster decisions, but to make better decisions faster. This comes about by taking a hard look at the supply chain management function and re-engineering processes to speed up decision making, ideally across departments. Another approach is to use newer, more automated decision-support tools, such as rules-based planning engines that not only run faster but also eliminate the need for continuous manual iterations and what-if scenarios, by solving for all material and capacity constraints in a single pass, all the while respecting customer demand priorities. resolution allows a supplier to contact a logistics provider to expedite a shipment meant for a brand owner or a contract manufacturer to request excess inventory from another contract manufacturer to cover a local shortage that impacts the brand owner s customer demands. Enterprise stakeholders monitor this activity from a distance, until an issue is escalated to them, or unless the severity of the disruption requires their active participation. 4. REDUCING LEAD TIMES TO MAKE OR MOVE PRODUCTS Longer lead times to source, make and move products mean more working capital tied up in inventory, and greater exposure to demand that comes higher or lower than was anticipated at the start of production. Long lead times also make it harder to introduce new products quickly and cost effectively. Finally, quality problems take longer to be found as well, implying that a lot of production may carry the defect before problems are noticed. Changes in the designs of products, shop-floors, manufacturing processes, and sourcing and distribution networks can reduce lead times. Examples include: near-shoring or co-located supplier clusters, setup-time reduction initiatives, use of shop-floor robots, use of newer manufacturing techniques like 3D printing, and investment in new smaller and lower cost warehouses that can be located closer to urban centers and are configured to handle high-speed inbound and outbound shipments of smaller packages (rather than large but infrequent shipments). Other examples are: use of pre-fabricated or standard modules, quality improvements that reduce rework, material handling strategies like cross-docking, and so on. Yet another way of solving problems faster is by rethinking the network-wide issue resolution process. Traditional approaches involve bringing all information to an internal planning department, making decisions centrally, and communicating them outward to all supply chain nodes. A number of companies have instead set up the infrastructure for their partners to speedily resolve execution level problems by communicating directly with each other, although this is done under a structured framework established by the enterprise in advance. Such decentralized issue 3

4 5. RETHINKING DEMAND FULFILLMENT STRATEGIES Product configurations, options and bundles are important parts of a company s go-to-market strategy and customer experience, as are decisions regarding demand fulfillment lead times. These choices have an important impact on the level of inventory in the supply chain as well. If products can be designed to be configurable off of base options, and if customers will accept the additional time required to customize the final product, then there are benefits to such a postponement strategy. Forecast error is lower in terms of the product families and bundles of parts than in terms of the final configurations. Inventory costs may be lower when inventory is retained in a less valueadded form as well. Other decisions pertaining to product and demand strategies that have strong impact on supply chain performance include: what portfolio of products to offer to the customer base and what distribution nodes to stock these products at. As an example, a small fraction of a typical consumer goods company s products is responsible for most of the sales. The long tail of products (when products are ordered by sales volume) accounts for much less in sales, but much more in inventory (typically safety stock) that needs to be stocked due to greater error in forecasting the products in the long tail. It may be a reasonable strategy to periodically end-of-life those products whose revenue-to-inventory cost ratios remain below analytically-derived thresholds. 6. SMALLER BATCH SIZES Smaller batch sizes, driven by shorter, more frequent production runs, reduce the overall inventory in the supply chain. Similarly, replenishing every week instead of say, every month reduces the total stock in a distribution network. While this relationship between batch size and total inventory has always been true, shorter production runs and more frequent replenishments have become even more relevant in today s world. Fast-changing customer tastes driven by the latest trends are leading to shorter product lifecycles. Therefore, companies need to reassess product and category demand patterns frequently and be wary of committing to long production runs, whether for consumer-oriented products driven by customer preference, or business-oriented products driven by fast-changing technology. Orienting the supply chain to handle faster-moving smaller batches of products impacts all functions, from warehousing and distribution to supply chain planning more frequent and faster running planning cycles (through the use of automation and powerful algorithms) mean that the organization can spot opportunities as they arise and react to them with greater agility. 7. ACTIONABLE VISIBILITY AND OPTIMIZATION Knowing how much inventory there is in the supply chain at any time is part of the basics of supply chain management as a result, company leaders are often surprised upon realizing that they cannot confidently account for inventory across all nodes of their supply chain in a timely manner. While most companies have a good grasp of inventory at some locations all the time, and all locations some of the time, few corporations have a reliable picture of inventory from all locations at all times. The most challenging stocking locations and transit lanes are those that are managed by partners consigned materials at contract manufacturers, vendorowned inventory upstream of production locations, stock in channel, product in 3PL warehouses, and the like. Visibility also suffers when material is being handled by multiple third parties one after the other. The involvement of different systems and sub-process owners makes coordination even more difficult. This situation leads to excesses due to over-ordering products that were later found to be in stock and within reach elsewhere in the supply chain, or in shortages because inventory that was thought to be available disappeared once a delayed data refresh completed. Most importantly however, this results in a supply chain that is in a high state of alert at all times, with too many exceptions, expedites and firefighting during execution, instead of a stable supply chain that lets the enterprise commit with confidence. Visibility to inventory from across the entire supply chain, reliably and in near real-time, is immediately actionable because excesses can be used to mitigate shortages, and assets can be deployed correctly in anticipation of demand. Major enterprises are realizing the benefits of inventory visibility not only for themselves but also for their suppliers, helping reduce the bullwhip effect by propagating customer demand deeper into the supply chain, directly and faster. 4

5 Large retailers have started providing to leading consumer goods companies, visibility to both demand as well as current inventory levels at stores and DCs. This has enabled replenishment of retailer DC stocks by the consumer goods companies via automated VMI processes. This approach reduces the overall inventory levels in the supply chain because instead of each party planning for safety stock and service levels independently, the retailer DC stocking location can be planned as an extension of the consumer goods company s distribution network. Inventory targets at the retailer DC can therefore be planned by a multiechelon inventory optimization solution dynamically, considering stock available upstream in the supply chain. This upstream stock at the consumer goods company s DC can support multiple retailer DCs and can result in lower inventory overall, due to pooling effects. 8. ASSET-LIGHT OPERATING MODELS Businesses that are prepared to reassess and redesign operations from the ground up have a number of options available to them for adopting asset-light operating models. A common approach is VMI or vendor managed inventory, that shifts inventory ownership to the supplier. However, more importantly for lowering total inventory in the supply chain, suppliers can manage the replenishment buffer as an extension of their own supply chains, as described above, and pool inventory in upstream locations that services multiple VMI replenishment buffers. Another asset-light operating model is facilitated by a buy-sell arrangement. Buy-sell is a common practice in the high-tech industry (but also relevant for other industries that employ contract manufacturing organizations or construction contractors), where the brand-owner intervenes electronically between material call-offs by the contract manufacturer and replenishments by raw material suppliers. It is the electronically-enabled legal entity representing the brand owner that buys materials from suppliers and sells them to contract manufacturers. What is relevant for our discussion on inventory is not the margin or raw material price differential harvested by the brand owner in this arrangement, but the opportunity to sell the raw materials onwards to the contract manufacturer. This is a preferable asset-light alternative to consigning brand-owner owned materials with the contract manufacturer, with the attendant challenges of monitoring and reconciliation of inventory transactions on a remote partner-managed shop-floor. Another example of going asset-light is the leasing of capital equipment, in which case the rental start and end, and productive use vs. idle-time needs to be carefully managed and accounted for. Lastly, corporate equivalents of shared-economy models include pooling of assets with competitors, via joint-ventures and special-purpose vehicles, e.g. for facilitating remote logistics in harsh terrains. The simplest asset-light model of course is to outsource manufacturing operations to contract manufacturers, where it is the property, plant and equipment, rather than the direct materials inventory that is being offloaded to partners. 9. DIFFERENTIATED SERVICE FOR DIFFERENT CUSTOMER SEGMENTS Companies hold inventory in the hope of being able to serve their customers better. The primary determinant of inventory levels then, is the desired customer service level whether measured in terms of items being in stock when demand is received or in terms of orders being met on time and in full. Higher service levels have an outsized impact on inventory in the supply chain, so a robust and proven approach to inventory optimization is advisable. Given that service levels are directly connected to customer satisfaction and often driven by competitors offers, is there anything that companies can do to control inventory by managing customer service levels? We suggest being selective while determining which customer segments (by classes, regions, product lines, and the like) are afforded greater service. The goal would be to monetize the greater investment in inventory that becomes necessary to offer a higher service level. As an example, a leading technology company offers differently priced service tiers for faster response by field service engineers, and enables them by stocking materials within appropriate short driving distances. 5

6 10. GOING VIRTUAL The last advice, definitely possible for new businesses, but also within reach for new business units, product lines, or different market segments of existing enterprises, is to focus on managing the end-customer experience, while leaving material handling entirely to others. This can be thought of as taking the assetlight model to the extreme. The brand owner keeps the customer relationship in-house, but outsources manufacturing, distribution and even after-sales service and reverse logistics to external parties. This operating model can be enabled by direct-shipping products from suppliers and contract manufacturers to customers, while leveraging a supply chain control tower for measuring and monitoring in real-time how every supply chain node is performing and for initiating resolution workflows when intervention is needed. Such a control tower would also enable the digital infrastructure for third-parties to get early visibility to supply chain issues, see the impact of their actions on other supply chain participants, and jointly resolve problems with others, involving the brand owner only when necessary. CONCLUSION An increasingly dynamic business environment is bringing the ever-conflicting goals of efficiency and agility into even sharper contrast. However, there are many opportunities for improving supply chain capabilities some by leveraging newer algorithms and analytical techniques, and others by applying wellknown principles with the help of new technologies to reliably meet the challenges of distance, time and complexity. ABOUT E2OPEN E2open is the one place, in the cloud, to run your supply chain. Powered by the world s largest direct business network and a broad portfolio of next generation solutions, E2open enables the world s largest and most complex supply chains to better plan, execute and collaborate. We understand supply chain. Bring us your challenges and E2open will deliver better outcomes. e2open.com Great Hills Trail, Suite 300E Austin, TX Tel E2open, LLC. All rights reserved. 6