The global financial crisis has affected virtually every company, regardless of industry, product or market. Symptoms of economic volatility, such as upheaval in financial markets and rapid fluctuation in price and availability of key commodities, create challenges for how companies source, manufacture and distribute products, disrupting CP supply chains. Internally for CP companies, financial pressures and constraints continue to ramp up the need to reduce costs and increase efficiency across the supply chain. Inventory policies play a significant role in carrying out that mandate; after all, cash tied up in inventory is unavailable to finance growth or provide liquidity when needed.
Despite what CP brands are trying to do to combat economic volatility, they still have to deal with an unpredictable source: the consumer. These buyers, unsure about their economic future, have cut their spending by switching to lower-cost, private-label products or reducing total purchasing. According to research from Neovian Partners in 2011, the rise of private labels is a global phenomenon and constitutes one of the key growth engines for the retail sector.
Premium label brands are trying to combat the explosive growth of private label products with sales, coupons and other special promotions. But, while promotions may achieve their objectives"”temporarily boosting sell-through by enticing consumers to purchase products they otherwise might not buy"”they also increase demand variability. This sort of variability distorts the demand side of the equation and creates more challenges for the supply side in terms of forecasting and planning inventory deployment. As a result, CP companies are consistently working to be smarter about managing inventory to offset economic volatility and demand variability.
Demand Variability Affects Relationships with Retailers and Suppliers
Research shows that demand variability in retail networks has been increasing. The financial risks associated with unpredictable consumer buying not only affects how CP companies design and manage their supply chains, but it also affects their relationships with retailers and suppliers. For retailers, this means slashing the amount of inventory they are willing to hold. This inventory streamlining at the retail level affects the entire CP manufacturing supply chain, re-shaping decisions about inventory and product assortment. CP firms respond by producing in smaller batches to avoid costly excess inventory, and by achieving faster throughput to meet retailers' smaller, more frequent orders. That, in turn, puts pressure on CP companies' suppliers to handle more rapid changes in demand while maintaining less inventory of raw materials and components.
So, what can companies do to combat economic volatility and unpredictable consumer behavior? One U.S. food manufacturer implemented a postponement strategy, holding product upstream as long as possible. In the past, when consumers were more predictable, the company produced product and pushed it downstream close to the customer. With cheap fuel costs, it didn't matter if inventory was in the wrong location, the company just moved it. Now, with freight costs so high and consumer behavior so unpredictable, the company has begun to hold product upstream as long as possible. By postponing deployment downstream, the company may increase safety stock, but it spends far less on repositioning product, saving time and money.
To help make decisions regarding its network and inventory positioning, the company deployed inventory optimization software alongside its ERP system. By running inventory optimization checks monthly, it can identify cycle changes in manufacturing, sourcing changes or forecasting error rate reductions and react more quickly. Plus, it can better engineer its supply chain and make more informed decisions, such as quantifying the risk-reward trade-offs of changing service levels. So whereas in some companies management may just decree a 10-percent reduction in inventory without any science behind the order - the impact of which is not always positive - the company, instead, has the ability to assess the risks to customer service reducing inventory will cause. By implementing the inventory analysis, the company's goal was to reduce inventory levels by one day. What it got was a two-day improvement, resulting in $5m in savings.
As this food manufacturer demonstrates, by implementing smart inventory planning across the entire supply chain, inventory optimization can help reduce inventory and working capital costs and speed responsiveness to changing market demands. Ultimately, inventory optimization tools free up capital and resources for more productive uses - growing the company, improving the bottom line, and strengthening customer and consumer relationships.
Keywords supply chain, supply chain management, supply chain management IT, inventory management, inventory management IT, inventory control, logistics & supply chain, supply chain planning, supply chain solutions, warehouse management systems
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