Executive Briefings

The Three Rings of Inventory Optimization

Analyst Insight: Ever wonder why a majority of inventory optimization projects struggle to completely realize potential benefits? Most companies focus solely on inventory strategy, without taking a comprehensive, holistic approach. Taking the holistic approach introduces two additional levers to inventory optimization - business alignment and execution excellence - which, coupled with inventory strategy, enable supply chains to achieve strategic and targeted performance improvement goals. We call these the three rings of inventory optimization. - Rodrigo Cambiaghi, Principal; Claudio Menegusso, Senior Manager; Mark Johnson, Manager; and Saurabh Jha, Senior, all in the Advisory Services of Ernst & Young LLP

The Three Rings of Inventory Optimization

Business alignment - establishing one message

Business alignment brings leadership together to establish and communicate a single set of expectations, priorities and goals across the business to align inventory strategies and execution decisions into one message. Together, leadership must define the balance among five key attributes: speed of delivery, flexibility to accommodate last-minute changes, reliability in promises, cost to serve, and asset efficiency. These attributes have natural trade-offs, with differing stakeholder groups favoring certain ones over others. If leadership cannot come to a consensus on how to orient the supply chain, individuals or functions may strive for different ends, limiting the company’s ability to reach its potential. For instance, what if leadership has not properly aligned Finance, Production and Sales? Sales may try to increase inventory to reduce lost sales and make customers happy. Finance may want to reduce inventory to improve the working capital position. Production may try to increase component inventories so that speed is increased and costs are decreased. These decisions may oppose one another. That is why having one consistent message for supply chain performance orientation is so important.

Execution excellence - aligning the operating model to the message

Another missing link to implementing inventory strategy is execution excellence. Execution excellence requires a series of strategic and targeted supply-chain fixes to drive end-to-end improvement, enabling processes to meet inventory strategies and targets. For example, if the business is aligned toward reliability, the whole supply chain requires fine-tuning toward reliability. Adjustments may include policy changes, planning parameter refinement, process transformations and introduction of tools/enablers. If all executional aspects are not reviewed, one link could be misaligned and weaken the entire chain. This becomes increasingly more likely today as many companies have highly fragmented and matrixed organizations.

Inventory strategy - developing an "optimization" capability

With business alignment attained and execution excellence capabilities in place, inventory optimization methods and tools can be tuned to achieve their potential. These solutions should capture real-world complexities and be driven by the overarching purpose of the supply chain. The complexity should be reflected by internal and external elements that capture variability and supply-chain behavior from both the supply and demand sides. The design should include changes in current inventory governance and decision processes, as well as changes in ERP systems, information flow and roles and responsibilities, which must all align with the overall supply-chain strategy. Most solutions today incorporate multi-echelon optimization capabilities and scenario functionality, so inventory impacts can be simulated before decisions are made. Finally, an actionable inventory optimization method should consider various aspects of a transformational performance improvement program, such as business alignment and execution excellence. This all-encompassing approach drives end-to-end inventory management improvements.

The Outlook

In the years to come, global organizations will need to look at their inventory decisions from end to end, necessitating an approach that connects executive decision-making, inventory strategy operationalization and process implementation. Visionary companies have already started walking down this road toward performance excellence and are adopting organization-wide strategies to meet targeted customer service levels at the lowest possible cost of holding inventory.

Business alignment - establishing one message

Business alignment brings leadership together to establish and communicate a single set of expectations, priorities and goals across the business to align inventory strategies and execution decisions into one message. Together, leadership must define the balance among five key attributes: speed of delivery, flexibility to accommodate last-minute changes, reliability in promises, cost to serve, and asset efficiency. These attributes have natural trade-offs, with differing stakeholder groups favoring certain ones over others. If leadership cannot come to a consensus on how to orient the supply chain, individuals or functions may strive for different ends, limiting the company’s ability to reach its potential. For instance, what if leadership has not properly aligned Finance, Production and Sales? Sales may try to increase inventory to reduce lost sales and make customers happy. Finance may want to reduce inventory to improve the working capital position. Production may try to increase component inventories so that speed is increased and costs are decreased. These decisions may oppose one another. That is why having one consistent message for supply chain performance orientation is so important.

Execution excellence - aligning the operating model to the message

Another missing link to implementing inventory strategy is execution excellence. Execution excellence requires a series of strategic and targeted supply-chain fixes to drive end-to-end improvement, enabling processes to meet inventory strategies and targets. For example, if the business is aligned toward reliability, the whole supply chain requires fine-tuning toward reliability. Adjustments may include policy changes, planning parameter refinement, process transformations and introduction of tools/enablers. If all executional aspects are not reviewed, one link could be misaligned and weaken the entire chain. This becomes increasingly more likely today as many companies have highly fragmented and matrixed organizations.

Inventory strategy - developing an "optimization" capability

With business alignment attained and execution excellence capabilities in place, inventory optimization methods and tools can be tuned to achieve their potential. These solutions should capture real-world complexities and be driven by the overarching purpose of the supply chain. The complexity should be reflected by internal and external elements that capture variability and supply-chain behavior from both the supply and demand sides. The design should include changes in current inventory governance and decision processes, as well as changes in ERP systems, information flow and roles and responsibilities, which must all align with the overall supply-chain strategy. Most solutions today incorporate multi-echelon optimization capabilities and scenario functionality, so inventory impacts can be simulated before decisions are made. Finally, an actionable inventory optimization method should consider various aspects of a transformational performance improvement program, such as business alignment and execution excellence. This all-encompassing approach drives end-to-end inventory management improvements.

The Outlook

In the years to come, global organizations will need to look at their inventory decisions from end to end, necessitating an approach that connects executive decision-making, inventory strategy operationalization and process implementation. Visionary companies have already started walking down this road toward performance excellence and are adopting organization-wide strategies to meet targeted customer service levels at the lowest possible cost of holding inventory.

The Three Rings of Inventory Optimization