With logistics costs outpacing growth of the US Gross Domestic Product (GDP) for the past three years, AMR Research lays out nine actions accompanies can take to lessen the impact. Two of these steps involve inventory and network optimization:
1. Don't take inventory for granted: For the third consecutive year, inventory carrying costs have risen faster than transportation costs. In 2006, total business inventories rose 6.2% with a continued push of inventories back into the supply chain. The idea was to move inventory responsibilities from the channel to the manufacturer and from the manufacturer to the supplier. Inventory carrying costs also rose 13.5% to represent 3.4% of the nominal US GDP.
Reversing this trend requires continued focus on inventory management. Make inventory management part of the S&OP, use demand shaping strategies to run out excess inventory, and consider the implementation of technologies with deeper statistical modeling, such as those from LogicTools, a division of ILOG, Optiant, SmartOps, and Terra Technology, and ToolsGroup, for multi-tier supply chain environments. Our 2004 analysis showed an average of three months to return on investment (ROI) for these technologies. With the rise in inventory levels and inventory carrying costs, now may be the time for your organization to evaluate these technologies.
Additionally, if inventory responsibility shifts backwards in the supply chain, be sure that your organization is not lulled to sleep. Transferring inventory ownership is a quick way to shift costs off of your books, but it is a real cost of doing business. A lack of attention to the buffer inventories between supply chain tiers, if not managed, will increase total costs. In AMR Research studies, we see that when companies shift inventory responsibility only 20% improve supply visibility and reduce demand translation and latency. These are important abilities but you may be caught with unwanted inventory in the case of an economic downturn.
2. Face reality, redesign your network: One of the shocking pieces of data we see consistently in quantitative research is the lack of focus on network design optimization. Even in the face of these changes in supply chain logistics for distribution-intensive industries like CP, only 7% of companies analyze their logistics networks more frequently than yearly, with 67% evaluating their networks annually and 36% redesigning every two years or more.
Action Item: Leaders are reevaluating network strategies systemically as part of their quarterly S&OP processes. They recognize that each of their supply chains requires a unique design and fine-tune networks as supply chain parameters change.
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