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Create a Road Map for Advanced Inventory Management

Analyst Insight: Inventory is the most visible dimension of supply chain performance. It is scrutinized on the balance sheet by the CFO and external analysts. However, inventory performance is more than a financial metric. Supply chain leaders who are charged to act as stewards for inventory performance must ensure sound planning and supply execution while collaborating to influence and align with demand and product managers. – Paul Lord, Research Director, Gartner Supply Chain

Create a Road Map for Advanced Inventory Management

The breadth of influences impacting inventory management goes well beyond product supply constraints like long lead times and risks associated with supplier sustainability, political unrest or natural catastrophes. While the supply chain leader is commissioned as a steward of inventory management for the company, decisions impacting inventory are made across the entire company. 

• Demand characteristics like volatility, seasonality, latency and short order lead times are routinely cited as top challenges for inventory management. 

• Product line issues like shelf life considerations, item proliferation and new product launch are increasingly recognized as major challenges by leading companies due to their impact on demand forecast error and inventory obsolescence. 

• Governance, incentives and performance metrics relating to inventory are complex due to inventory’s unique dual existence as a balance sheet asset and an operational component of supply. 

Gartner’s supply research identifies the following considerations when thinking about achieving inventory management excellence in the supply chain.

Product supply strategy.  Inventory is a form of stored supply capacity.  While it can be liquidated to provide short-term cash flow improvements, these actions increase risks to customer relationships, assets and brand image that must be evaluated and balanced.

Inventory visibility. Visibility is foundational to more confident operating decisions needed for improved inventory performance.  Distribution, allocation and production scheduling decisions enabled with integrated forward projections of demand, supply and inventory balances increase supply chain visibility to identify and mitigate risks and constraints.  This requires process integration with accurate and timely transactional execution for better intelligence about location, packaging and condition.  Companies implementing simple visibility have found investment paybacks related to better outcomes responding to disruptions.

Control and optimization of supply. Once visibility is established, successful inventory management is based on the control and optimization of product supply. This requires clear processes and roles for making replenishment, production and sourcing decisions.

Optimization of supply begins with design of the supply network. Network design is not necessarily an "inventory optimization or reduction" exercise. However, the trade-off decisions involved in design require that the full cost of inventory (including storage, shrinkage, insurance, taxes and financing) be accounted for. 

Synchronization of supply with demand. Numerous consumer and electronics companies have shortened their demand forecast granularity to weekly time buckets, and supplemented ERP planning systems of record with additional functionality that increases visibility and supports faster and more frequent supply planning decisions to align supply more closely with demand.  Advanced supply planning technology is playing an increasingly important role, particularly as companies attempt to reduce the lag in response to changes in demand. This requires a carefully designed synchronization between planning and scheduling process layers, resulting in increased visibility and responsiveness to demand changes.

                                                         The Outlook

In 2014, we expect to see continued investment in inventory management capabilities driven by cash flow pressures.  Successful companies will incorporate these capabilities into broader improvement road maps that enable orchestration of end-to-end supply chain optimization trade-offs rather than isolated functional objectives focused strictly on working capital efficiency.

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