Analyst Insight

Companies are seeking best practices on how to move from working capital optimization theory to practical initiatives that will improve their corporate financial performance. Optimizing their inventory management and financial relations with customers, suppliers, creditors and debtors are critical steps to improving working capital management in the long run.  Companies that are currently using an inventory optimization tool are 70 percent more likely to have improved their days inventory outstanding metric over the last two years.
-Nari Viswanathan, research director at AberdeenGroup

Inventory has been and continues to be the lifeblood of supply chains. Properly managed, it drives revenue as well as efficiency for companies. The supply chain organization realizes that. Now it's the turn of the CFO. 2007 was the year when 65 percent percent of 400 supply chain and finance professionals surveyed for a benchmark study indicated that working capital optimization was a high priority for their company.

The key issues in inventory optimization are:

• Customer service level focus: The majority of companies are looking at inventory as a cost-related item (63 percent) but 27 percent of companies are thinking of inventory as a way of gaining market share through superior service and product availability.

• Network level inventory management: The true visionary companies are leveraging their inventory as a competitive weapon and have moved to network-based inventory management versus doing it at facility or company level. They use inventory to optimally position supply when and where it is most needed and most profitable.

• Shifting more responsibility for working capital optimization to supply chain operations: Best-in-class companies together with average companies are 60 percent less likely to assign the ultimate responsibility for working capital improvement solely to the finance department (among them, about 40 percent report that finance holds such responsibility, compared to about 60 percent among the laggards). In a move to collaborate more across departments, best-in-class and average companies are assigning more responsibility to cross-functional teams (consisting of finance, supply chain, and purchasing professionals) and shifting more responsibility to the supply chain operations group instead of just the finance department.

The Outlook

Inventory optimization continues to be a critical issue for companies going into 2008. We are getting closer to the emergence of a chief inventory officer, but are still not quite there. Inventory optimization continues to be looked at as a component of existing business processes and has too many owners throughout its lifecycle. Instead of looking at inventory optimization as a stand-alone application, companies will look at it as a critical part of business processes and initiatives like sales inventory operations planning, network design, risk management and working capital optimization.