Executive Briefings

Inventory Optimization Is Just One Tool Among Many in Complex Supply Chains

To make multi-echelon inventory optimization more impactful, it must take a more holistic approach that accounts for the implications of inventory decisions on total supply chain costs, for organizational realities and weaknesses in supporting functional areas.

Companies are facing harsh economic realities that directly impact how they manage their supply chains, including:

• Volatile transportation costs challenge single-minded focus on lean inventory. If you're a high-tech manufacturer who has religiously practiced lean across your supply chain, you've probably viewed inventory optimization as the crown jewel of your lean strategy. But this summer, your logistics operations required more of your attention. Seemingly never-ending rises in fuel cost combined with transportation capacity imbalances and immature or aging transportation infrastructure added up to a big transportation bill. The lesson learned in Summer 2008 was that the cycles of change in macro-economic factors are rapid. Therefore, companies cannot pursue inventory optimization independently from transportation expenditure and total supply chain costs.

• Growing demand and supply variability make for a constantly moving target. With rising demand and supply variability-due to shorter product lifecycles, new product introductions and remote suppliers in low-cost countries-companies are having a harder time understanding the exact customer requirements and supply patterns. Because of that, global manufacturers might decide to focus on demand forecasting and sensing as foundational initiatives before tackling inventory optimization. Without a more accurate demand and supply picture, a sole focus on an inventory optimization solution can generate inventory decisions based on erroneous demand requirements and supply constraints.

• Operating profitably in a global environment emphasizes the need for frequent network reevaluation. More manufacturers and retailers have witnessed their supply network expand globally as they target new emerging markets for their products and services and reevaluate their sourcing strategies. To ensure the profitability of their action, they must continually reassess their network structure. They must ask: Do we have the right number of suppliers in the right locations? Are our distribution centers located to best serve their demand fulfillment needs? And are we using the best transportation modes to minimize their costs and meet their customers' requirements? These questions are answered by conducting a network design and business planning exercise that evaluates their strategic decisions-like capital investments, supplier selection and new-product introduction-against total supply chain costs and their business goals for growth and profitability. This exercise is a required foundation for inventory optimization.

• Shortage in balanced analytical and supply chain skills constrain the adoption of analytical tools. While the technology has made strides in model transparency, optimizing inventory across multiple echelons is a highly analytical exercise that requires a combination of modeling skills and supply chain domain expertise.

The Outlook

To reap the benefits of multi-echelon inventory optimization, this solution category must be viewed as one component of a bigger solution that spans network design, product flow management, demand management and many more areas. Providers must work with their customers to align the tool's goals with the company's current practices and organizational goals. They should work with clients to tackle weaknesses in foundational areas, like demand management, that can impact the success of deploying their solution. Conversely, companies should select vendors who can offer on-going professional services that combine the right mix of analytical and business expertise to help them grow users' acceptance and adoption of the tools.

Companies are facing harsh economic realities that directly impact how they manage their supply chains, including:

• Volatile transportation costs challenge single-minded focus on lean inventory. If you're a high-tech manufacturer who has religiously practiced lean across your supply chain, you've probably viewed inventory optimization as the crown jewel of your lean strategy. But this summer, your logistics operations required more of your attention. Seemingly never-ending rises in fuel cost combined with transportation capacity imbalances and immature or aging transportation infrastructure added up to a big transportation bill. The lesson learned in Summer 2008 was that the cycles of change in macro-economic factors are rapid. Therefore, companies cannot pursue inventory optimization independently from transportation expenditure and total supply chain costs.

• Growing demand and supply variability make for a constantly moving target. With rising demand and supply variability-due to shorter product lifecycles, new product introductions and remote suppliers in low-cost countries-companies are having a harder time understanding the exact customer requirements and supply patterns. Because of that, global manufacturers might decide to focus on demand forecasting and sensing as foundational initiatives before tackling inventory optimization. Without a more accurate demand and supply picture, a sole focus on an inventory optimization solution can generate inventory decisions based on erroneous demand requirements and supply constraints.

• Operating profitably in a global environment emphasizes the need for frequent network reevaluation. More manufacturers and retailers have witnessed their supply network expand globally as they target new emerging markets for their products and services and reevaluate their sourcing strategies. To ensure the profitability of their action, they must continually reassess their network structure. They must ask: Do we have the right number of suppliers in the right locations? Are our distribution centers located to best serve their demand fulfillment needs? And are we using the best transportation modes to minimize their costs and meet their customers' requirements? These questions are answered by conducting a network design and business planning exercise that evaluates their strategic decisions-like capital investments, supplier selection and new-product introduction-against total supply chain costs and their business goals for growth and profitability. This exercise is a required foundation for inventory optimization.

• Shortage in balanced analytical and supply chain skills constrain the adoption of analytical tools. While the technology has made strides in model transparency, optimizing inventory across multiple echelons is a highly analytical exercise that requires a combination of modeling skills and supply chain domain expertise.

The Outlook

To reap the benefits of multi-echelon inventory optimization, this solution category must be viewed as one component of a bigger solution that spans network design, product flow management, demand management and many more areas. Providers must work with their customers to align the tool's goals with the company's current practices and organizational goals. They should work with clients to tackle weaknesses in foundational areas, like demand management, that can impact the success of deploying their solution. Conversely, companies should select vendors who can offer on-going professional services that combine the right mix of analytical and business expertise to help them grow users' acceptance and adoption of the tools.