Avoid stagnant inventory performance

Transcription

1 Insights for 5executives Avoid stagnant inventory performance Use a holistic approach to drive sustainable improvements Of special interest to Supply chain executives Chief financial officers

2 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. 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. 2 5 Insights for executives

3 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

4 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. 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. 4 5 Insights for executives

5 Improve forecast Improve the Service Level Target Level Replenishment accuracy and lead time Optimization Calculations Policies demand triggers performance Operational improvement goals The following initiatives The following are initiatives recommended are recommended for detailed design for detailed and design and implementation implementation Short to mediumshort termto medium term 1 advanced probability advanced based probability forecasting based forecasting 2 statistically derived statistically safety derived and cycle safety stocking and cycle levels stocking all based levels on all based on ABC-type segmentation ABC-type segmentation 3 management management 7 organization organization A2: DP Stat. Forecasting A2: DP Stat. (SKY) Forecasting Visibility (SKY) Visibility 9 A1: Planning Effectiveness A1: Planning Effectiveness Consistency Consistency Longer-term structural Longer-term structural A11: Replenishment A11: Replenishment Model (STAR) Model Consistency (STAR) Consistency 14 A3: DP System Replacement Visibility A3: DP System Replacement Visibility A6: Network Planning Enablement Visibility A6: Network Planning Enablement Visibility Phase I* Phase I* A6: Network Planning Enablement Visibility A6: Network Planning Phase Enablement II Visibility Phase II A7: Network Optimization Visibility A7: Network Optimization Visibility A8: Network Planning Org. Realignment Org. Re- Flexibility Flexibility A8: Network Planning alignment A9: Value-Driven S&OP Flexibility A9: Value-Driven S&OP Flexibility A12: Replenishment Consistency A12: Replenishment Standardization Consistency Standardization A13: TPM Replenishment (assumes Visibility A13: TPM Replenishment SNC) (assumes Visibility SNC) A4: Collaborative Forecasting Flexibility A4: Collaborative Forecasting Flexibility A15: Collaborative Materials Responsiven A15: Collaborative Replenish. Materials Responsiven ess Replenish. ess A16: Advanced Planning Pilot Responsiven A16: Advanced Planning Pilot Responsiven ess ess Initiative Prioritization by Level of Effort and Return Potential Initiative Prioritization by Level of Effort and Return Potential High Value Low Value Low Effort High Effort 0-6 months to 0-6 complete months to complete 6-12 months 6-12 to complete months to complete 12+ months to complete 12+ months to complete 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: 1. Holistic approach 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. 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. 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. performance management: stages to sustainable performance improvement Merging Merging practice Merging assessment practice practice assessment assessment and data analytics and and data data analytics analytics Defining Defining strategy, Defining strategy, initiatives strategy, portfolio initiatives and road map portfolio portfolio and and road road map map Establishing program program governance, governance, execution execution and monitoring and monitoring Baseline Parameters Baseline Baseline Baseline Parameters Baseline Parameters Baseline Aggregate Form Component Aggregate Form Aggregate ComponentForm Component Finished Excess Finished Finished Excess Excess Opportunity Opportunity Opportunity Baseline Baseline Baseline Maximum Maximum Maximum W.I.P. Cycle W.I.P. Stock Target Cycle Stock Target Maximum Maximum W.I.P. Cycle Stock Target Maximum Demand Demand Demand Minimum Cycle Stock Minimum Cycle Stock Target Target Operations Planning & Scheduling Execution Minimum Cycle Stock Operations Target Operations Planning & Scheduling Execution Planning & Scheduling Execution Sales & Sales & Raw Sales & Raw Sales Safety Raw Sales Order Demand Network Analysis Sales Order Demand Minimum Network Analysis Order & Safety Demand Network Analysis Material Planning Control Minimum Supply Network Site Planning Supply Network Manufacturing Site Planning & Manufacturing & Safety & Minimum Supply Operations Material Network Planning Site & Control Operations Manufacturing Procurement Procurement Material Material Planning Control Operations Procurement Material Lifecycle Material Design Stock Safety Deployment Replenishment & Design Planning Scheduling Execution Mgmt. & Design Stock Safety Deployment Replenishment Planning Scheduling Execution Lifecycle Mgmt. Lifecycle Stock Mgmt. Safety Deployment Replenishment Planning Planning Scheduling Planning Execution Stock Stock Planning Service Level Stock Service Level Batch Sizing & Batch Sizing & Service Level Batch Sourcing/P2P Sourcing/P2P Part Numbering Agreements & Process Maturity Part Numbering Process Maturity Agreements Process & Process Maturity Maturity Process Process Maturity Maturity Process Process Maturity Maturity Process Process Maturity Maturity Process Process Maturity Maturity Process Process Maturity Maturity Sizing & Sourcing/P2P Process Process Maturity Maturity Process Maturity Manufacturing Process Maturity Manufacturing Part Numbering Agreements & Process Maturity Process Maturity Process Maturity Process Maturity Process Maturity Process Maturity Process Maturity Process Maturity Process Maturity Manufacturing Process Maturity Process Maturity Order Promising Order Promising Process Maturity Lead Times Lead Times Order Promising Lead Times Schedule Schedule Design & Design & Schedule Design & Capabilities & Capabilities & Capabilities Capabilities & Capabilities & Capabilities & Capabilities & Capabilities & & Capabilities Capabilities & & Capabilities Capabilities & & Capabilities Capabilities & & Capabilities Capabilities & & Capabilities Capabilities & & Capabilities Capabilities & & Reliability Capabilities & & Capabilities & Reliability & Capabilities Change Change & Capabilities & Capabilities & Capabilities & Capabilities & Capabilities & Capabilities & Capabilities & Capabilities & Capabilities & Capabilities & Reliability & Change Adherence Adherence Adherence Data Availability Data Availability Data Availability Data Availability Data Availability Data Availability Data Availability Data Availability Data Availability Data Availability Data Availability Data Availability Data Availability Capabilities Data & Availability Data Availability Data Availability Data Availability Data Availability Data Availability Data Availability Data Availability Data Availability Capabilities & $53.8 Data Capabilities Availability & Data Availability Data Availability Data Availability & Reliability Data Availability & Reliability Data Availability & Reliability Data Availability & Reliability Data Availability & Reliability Data Availability & Reliability Data Availability & Reliability Data Availability & Reliability & Reliability Capabilities & Reliability & & Reliability $53.8 Capabilities & & Reliability & Reliability & Reliability & Reliability & Reliability & Reliability & Reliability & Reliability & Reliability & Reliability Capabilities & Reliability & & Reliability & Reliability & Reliability & Reliability & Reliability & Reliability & Reliability & Reliability & Reliability & Reliability & Reliability Data Availability Employee Skills & Employee Skills & Employee Skills & Employee Skills & Employee Skills & Employee Skills & Employee Skills & Employee Skills & Employee Skills & Employee Skills & Employee Skills & Data Availability Data Availability Employee Skills & Employee Skills & Employee Skills & Employee Skills & Employee Skills & Employee Skills & Employee Skills & Employee Skills & Employee Skills & Employee Skills & Employee Skills & Data Availability Data Availability Employee & Reliability Skills & Employee Skills & Employee Skills & & Reliability Employee Skills & Employee Skills & Employee Skills & Employee Skills & Employee Skills & Employee Skills & Employee Skills & Employee Skills & Data Availability & Reliability & Reliability & Reliability & Reliability Lifecycle Lifecycle Lifecycle $53.8 Recommended Recommended focus and focus priorities and priorities When viewed in this balancing matrix we further suggest five (5) short/medium term and one (1) longer term initiative for When Phase viewed II deeper in this diagnoses balancing and matrix implementation we further planning suggest five (5) short/medium term and one (1) longer term initiative for Phase II deeper diagnoses and implementation planning Operational improvement goals Lower overall average inventories Lower overall average inventories Improve work order kit fill rate on-time start Improve work order kit fill rate on-time start Improve assembly throughput by increased component availability 3 8 Improve assembly throughput by increased component availability Reduce inventory obsolescence/ scrap levels Reduce inventory obsolescence/ scrap levels High 1 Challenge and Challenge reduce existing and reduce supplier existing lead times supplier and lead pricing times and pricing Value Improve collaboration Improve and collaboration commitment and with commitment supplier with base supplier base Low Improve accuracy Improve of long-lead accuracy time of long-lead item planning time item by implementing planning by implementing Value Plan Wave Plan 1 Wave 1 Plan Wave Plan 2Wave 2 Reduce raw material Reduce and raw WIP material inventories and WIP by inventories implementing by implementing Implement new Implement planning tools new planning for forecasting tools for and forecasting inventory and inventory FY10 FY10 FY11 FY11 FY12 FY12 FY13 FY13 FY14 FY14 Low Effort High Effort Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Develop and Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 build-out Develop a and comprehensive build-out a comprehensive strategic sourcing strategic sourcing Design and implement Design and JIT implement and other JIT delivery and other strategies delivery strategies Build historical data marts for analysis and BI analytics Build historical data marts for analysis and BI analytics Improve forecast Improve the Service Level Target Level Replenishment Improve forecast accuracy Improve and the lead Service time Level Optimization Target Level Calculations Replenishment Policies accuracy demand triggers lead time performance Optimization Calculations Policies demand triggers performance * Network Planning Enablement Phase I will focus on LEGEND: In Progress Scope, Plan and Design Implementation * Network finance, Planning inventory Enablement visibility, Phase and I demand will focus propagation. on LEGEND: In Progress Scope, Plan and Design Implementation finance, inventory visibility, and demand propagation. 5 Insights for executives 5

6 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

7 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 Bob Bohnsak Senior Manager Americas Advisory Supply Chain & Operations Ernst & Young LLP For related thought leadership, visit 5 Insights for executives 7

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