Executive Briefings

Closed-Loop Strategies for Distributors and Manufacturers

Only 31 percent of organizations are looking at inventory management as a competitive differentiator versus the rest looking at it as a cost impactor. By adjusting the existing processes to configure a closed-loop inventory management process, organizations can gain significant improvement in customer service levels and reduced inventory carrying costs. The concept of closed-loop inventory management involves seven steps within the process: analyze demand, segment inventory, optimize inventory, replenish inventory, track inventory, manage events, and responsively execute.

Examining the key pressures that companies are facing with respect to inventory management, we see that the corporate need to improve return on invested capital (39 percent), rising supply chain costs (39 percent), and pressure to improve service levels (36 percent) are acting simultaneously and creating the need for doing trade-offs across these three mutually exclusive business pressures. The focus on costs is primarily due to the environment of economic uncertainty faced by companies globally, especially in a recession.

In the distribution-centric industries we see, the key pressure is to improve service levels (41 percent) with rising supply chain costs slipping down to 32 percent. This implies that these industries are more focused on serving the retailer segment and meeting customer level expectations. It is also interesting to note that retailers have indicated global sourcing and selling resulting in increased lead-times exert influential pressure. This is driven by the move towards private label manufacturing and direct import models within the retail sector. Distribution-centric companies are focusing more towards improving their inventory optimization processes, improving their forecasting accuracy and replenishment strategies.

On the other hand, manufacturing-centric enterprises are also focusing on improved ability to meet customer-requested order dates and lean manufacturing.

Here is how companies gain competitive advantage through inventory management. They continuously manage their inventory throughout their supply chain to improve customer service levels, forecast accuracies and perfect order metrics. These companies follow the principles of closed-loop inventory management.

Some examples of the Best-in-Class process differentiators are:

• Best-in-Class companies are two times more likely to be able to determine safety stock targets for inventory at critical nodes in the supply chain

• Best-in-Class companies are 50 percent more likely to be able to replenish inventory into distribution buffers based on customer demand

• Best-in-Class companies are 2.5 times more likely to be able to view end-to-end inventory while providing available-to-promise inventory

• Best-in-Class companies are three times more likely to be able to respond quickly to market events while executing to inventory requirements

The Outlook

Based on a survey conducted in April 2007, 50 percent of respondents indicate that they will have increased budget for the organization's initiative with respect to inventory management in the next fiscal year. In terms of actual spend, only about 32 percent of respondents indicate that they will be spending more than $100,000 on new inventory management technology projects in 2008. Sixteen percent of respondents indicated a budget of $500,000 and above. This includes costs for software, hardware, services, implementation and other fees.

With the announcement of a formal recession in December 2008, the above estimates have to be revised downwards to a certain extent, but inventory management is a core area where companies can gain competitive advantage and existing projects in this space should not be discontinued as much as possible.

Examining the key pressures that companies are facing with respect to inventory management, we see that the corporate need to improve return on invested capital (39 percent), rising supply chain costs (39 percent), and pressure to improve service levels (36 percent) are acting simultaneously and creating the need for doing trade-offs across these three mutually exclusive business pressures. The focus on costs is primarily due to the environment of economic uncertainty faced by companies globally, especially in a recession.

In the distribution-centric industries we see, the key pressure is to improve service levels (41 percent) with rising supply chain costs slipping down to 32 percent. This implies that these industries are more focused on serving the retailer segment and meeting customer level expectations. It is also interesting to note that retailers have indicated global sourcing and selling resulting in increased lead-times exert influential pressure. This is driven by the move towards private label manufacturing and direct import models within the retail sector. Distribution-centric companies are focusing more towards improving their inventory optimization processes, improving their forecasting accuracy and replenishment strategies.

On the other hand, manufacturing-centric enterprises are also focusing on improved ability to meet customer-requested order dates and lean manufacturing.

Here is how companies gain competitive advantage through inventory management. They continuously manage their inventory throughout their supply chain to improve customer service levels, forecast accuracies and perfect order metrics. These companies follow the principles of closed-loop inventory management.

Some examples of the Best-in-Class process differentiators are:

• Best-in-Class companies are two times more likely to be able to determine safety stock targets for inventory at critical nodes in the supply chain

• Best-in-Class companies are 50 percent more likely to be able to replenish inventory into distribution buffers based on customer demand

• Best-in-Class companies are 2.5 times more likely to be able to view end-to-end inventory while providing available-to-promise inventory

• Best-in-Class companies are three times more likely to be able to respond quickly to market events while executing to inventory requirements

The Outlook

Based on a survey conducted in April 2007, 50 percent of respondents indicate that they will have increased budget for the organization's initiative with respect to inventory management in the next fiscal year. In terms of actual spend, only about 32 percent of respondents indicate that they will be spending more than $100,000 on new inventory management technology projects in 2008. Sixteen percent of respondents indicated a budget of $500,000 and above. This includes costs for software, hardware, services, implementation and other fees.

With the announcement of a formal recession in December 2008, the above estimates have to be revised downwards to a certain extent, but inventory management is a core area where companies can gain competitive advantage and existing projects in this space should not be discontinued as much as possible.