Executive Briefings

Inventory Planning & Optimization: Management Is Key to Unlocking Working Capital

Analyst Insight: Optimizing inventory safety-stock policies without considering capacity and material constraints is not enough. Inventory management should be viewed within the context of a supply and demand balancing process associated with S&OP. Rough-cut capacity planning within the S&OP process should be augmented with inventory analysis.

Reducing inventory is the top action companies have taken to date in response to the recession (reported by 54 percent). Companies want practical initiatives that unlock working capital while maintaining customer satisfaction. With 62 percent reporting a drop in customer demand over the past year, focusing on inventory is critical to avoiding a spike in write-offs due to obsolescence when the stock builds up but cannot be sold. Working capital is a major driver of cash flow and ties up money that could be used to pay back debts and interest on short-term loans, to reduce the cost of financing, and to invest in growth.

Best-in-Class companies are:

• 1.5 times as likely to determine safety stock targets for inventory at critical nodes in the supply chain. Companies facing high customer-service-level requirements, short product lifecycles, or multi-tier manufacturing or distribution networks have the most to gain from moving toward item-location level inventory policies.

• 40 percent more likely to replenish inventory into distribution buffers based on customer demand, typically owned by the inventory analyst and is a weekly / daily process.

• Twice as likely to segment inventory based on customer-service requirements, typically owned by the demand planning organization and is a quarterly / monthly process. Different products have different costs and lead-times.

• 1.5 times as likely to leverage a statistical method for computing inventory targets. Seasonal industries can see large swings in demand as well as lead-time variability across demand peaks and lows driven by seasonality.

The Outlook

In 2010, expect to see more focus on inventory planning integrated with overall supply chain suites. Instead of stand-alone multi-echelon solutions, companies are likely to integrate inventory planning and optimization into extended processes like S&OP. Inventory management capabilities will be extended into execution processes (i.e. inventory replenishment). Replenishment has been an afterthought in inventory management implementations, but it can be a market differentiator.

There will be a greater focus on analytics. Companies will need to embed business intelligence and analytics into existing inventory management in order to perform segmentation of their customer base, products and regions.

Reducing inventory is the top action companies have taken to date in response to the recession (reported by 54 percent). Companies want practical initiatives that unlock working capital while maintaining customer satisfaction. With 62 percent reporting a drop in customer demand over the past year, focusing on inventory is critical to avoiding a spike in write-offs due to obsolescence when the stock builds up but cannot be sold. Working capital is a major driver of cash flow and ties up money that could be used to pay back debts and interest on short-term loans, to reduce the cost of financing, and to invest in growth.

Best-in-Class companies are:

• 1.5 times as likely to determine safety stock targets for inventory at critical nodes in the supply chain. Companies facing high customer-service-level requirements, short product lifecycles, or multi-tier manufacturing or distribution networks have the most to gain from moving toward item-location level inventory policies.

• 40 percent more likely to replenish inventory into distribution buffers based on customer demand, typically owned by the inventory analyst and is a weekly / daily process.

• Twice as likely to segment inventory based on customer-service requirements, typically owned by the demand planning organization and is a quarterly / monthly process. Different products have different costs and lead-times.

• 1.5 times as likely to leverage a statistical method for computing inventory targets. Seasonal industries can see large swings in demand as well as lead-time variability across demand peaks and lows driven by seasonality.

The Outlook

In 2010, expect to see more focus on inventory planning integrated with overall supply chain suites. Instead of stand-alone multi-echelon solutions, companies are likely to integrate inventory planning and optimization into extended processes like S&OP. Inventory management capabilities will be extended into execution processes (i.e. inventory replenishment). Replenishment has been an afterthought in inventory management implementations, but it can be a market differentiator.

There will be a greater focus on analytics. Companies will need to embed business intelligence and analytics into existing inventory management in order to perform segmentation of their customer base, products and regions.