Supply chain management is a discipline that came about to streamline the materials management process. But over the years, inertia set in, and supply chain managers relied on tired old strategies instead of attempting to come up with new ones.
It became the default strategy for many a supply chain manager: accumulating inventory to ensure that the company’s own needs and those of its customers were met. But at what cost? And is there an alternative?
It’s only gotten worse in the last couple of years, when supply chains have been challenged as never before. The COVID-19 pandemic brought on supply and demand whipsaws, and the war in Ukraine bought chaos to supply chains. In the last few months, a two-headed monster of spiking inflation combined with fears of recession has emerged to complicate the situation even further.
For some supply chain managers, the upheavals of recent years have justified their entrenched approach of relying on excess inventory as an insurance policy. After all, they say, they need insurance to protect against elevated risk.
“It's really what everyone did,” says Paul Noble, founder and chief executive officer of Verusen, a materials intelligence company. “Supply chain managers understood that that they were tying up their company’s working capital and warehousing space to keep excess inventory. But they did it because they couldn’t balance capital and risk decisions effectively. They didn’t have the full picture.”
There’s another way of looking at the predicament facing today’s supply chains, one that finds in the current situation an opportunity to go in a different direction. Supply chain organizations can reinvigorate their missions by adopting innovations that contribute to the efficiency and agility of company operations even in these difficult times.
The practice of keeping excess inventory often compels companies to write some of it off — sometimes, in the case of large companies, to the tune of tens of millions of dollars a year. “It's an expensive proposition,” says Melissa Dietz, head of customer success at Verusen.
And it’s a strategy that quite often falls flat on its face. “The fundamental reason why a manufacturer would stock up on inventory is because they’re afraid of running out of parts,” says Dietz. “But sometimes, the parts have been in the warehouse so long, they’re now obsolete. I've seen situations where companies have been keeping parts for a piece of equipment that they pulled out five years before.”
In many cases, companies actually budget for annual inventory write-offs. “They plan on writing off 5% or 10% of their inventory every year,” says Baljeet Bolina, an industry advisor at Verusen. “They run their budget on failure mode, instead of considering how they could redirect all of that working capital.”
“There's just so much waste and inefficiency in the system that people have become accustomed to it,” comments Noble. “They think of it as a cost of doing business.”
The expense that companies incur by writing off inventory suggests the need to more appropriately optimize risk. Eventually, chief financial officers look at their balance sheets and ask, “Why are we carrying so much inventory? How can we drive that number down?” As with many of today’s business challenges, the solution lies by deploying the power of data and automation.
“Many companies still rely too heavily on manual processes,” says Noble. “Those companies are correct to be concerned that they won’t be able to make decisions and execute upon them quickly enough to weather the next storm.”
The alternative is represented by a new set of emerging intelligent technologies that allow companies to build virtual networks and run what-if scenarios and models. “By running predictive and future scenarios, companies are able to see outcomes prior to an event happening,” says Noble. “That way, they’ll be positioned not be stuck in a bad situation.”
The essential quest is to balance the risk of lead-time fluctuation with inventory allocations. “As lead times grow, you're not caught short because your inventory levels are too low,” explains Dietz. “And conversely, when they get shorter, you're not caught with too much.”
“It doesn't have to be an either/or decision,” adds Noble. “You should be able to balance risk and inventory, to pull whichever lever you need at any time.”
This strategy that has implications for many areas of business operations, from contracting decisions and procurement spending to inventory strategies. For example, a contract for a part critical to a manufacturer’s operations might be awarded to the vendor with the most consistent delivery record. Less critical parts, and those for which there are plentiful sources of supply, might go to the lowest bidders.
“Having data visibility allows sourcing professionals to think strategically about their supplier base,” says Dietz.
The same visibility allows supply chain managers to hold vendors to account for their performance guarantees. If a supplier guaranteed a lead time of two weeks and the data show that they’re fluctuating between two and six weeks, managers can take action to remedy the situation.
Intelligent systems that provide visibility of data across networks also allow organizations to source critical parts internally. It’s not uncommon, when companies are searching for a particular item, to find what they require at a sister facility within their own enterprise. But in order to do that, they need visibility into inventory data from end to end.
“When I ask companies if they’re able to find parts internally when they need them, the usual answer is, ‘Sometimes,’” says Bolina. “So they’re not able to find parts, but they’re keeping $30 million in inventory. There's a disconnect here.”
It’s sometimes impossible to source the required inventory from a third party in a timely manner, and it’s often less expensive to source it internally. “One manufacturer had a facility go down because of a motor blowout and was losing $100,000 a day, plus opportunity costs,” relates Bolina. “The lead time from their suppliers was five weeks, which would have meant close to $3 million in lost revenue. But they were able to identify the part under a different name at another facility, have it overnighted, and they were back up and running on day three. They avoided 36 days of downtime, and they did it by finding a part that was labeled differently within their own network.”
What enabled the company to identify the part, even though it was called by a different name in a second enterprise system, comes from the capabilities of intelligent materials technologies. By applying artificial intelligence and machine learning, these platforms, besides providing data visibility, are also able to understand divergent data formats, without having to go through the lengthy and costly process of data cleansing and standardization.
Many of the supply anomalies and price increases brought about by COVID-19 and the Ukraine war came as a result of unnecessary panic, according to Bolina. “Very often, companies felt that they had to go into the spot market, where prices were skyrocketing, because they didn’t know they had the product in a different facility within their own enterprise,” he explains. “But with the correct visibility and planning, they would know what inventory they were holding and could have had procurement contracts negotiated in advance and saved lots of money. You don't need to pay the spot market price when you have contracts with suppliers in place with a sustainable and continuous supply of material coming in. By establishing strategic relationships, companies can experience price and supply stability.”
That same visibility enables companies to optimize inventory across their enterprises at a strategic level. “A company might find that it has 20 of the same part sitting in three different sites,” explains Dietz. “If they consider the risk, they may decide they need only five parts stored in one site and to transfer them elsewhere as needed. That way, they reduce their use of working capital without increasing risk, which is really what supply chain organizations should be looking for.”
At the end of the day, keeping excess inventory is not a winning strategy for companies. If the inventory is no longer usable or is obsolete, then the acquisition and carrying expenses, often over a period of years, represent a dead loss for the company. In many sectors, such as in electronics, parts and inventory obsolesce quickly as new generations of technology are introduced.
“The safety stock they think they’re buying doesn’t really provide any safety,” says Bolina. “The insurance they think they’re taking out isn’t providing the protection they’re seeking.”
“Sometimes you need a big event to spark change,” says Noble. “COVID and the war in Ukraine, followed by concerns over the state of the global economy, boosted awareness and the desire to do things that people knew they could and should do, but weren't driven to do sooner.”
In the last couple of years, many companies have been shaken out of inertia. They’ve learned the hard way that old methods don’t cut it anymore. And they’ve taken the required steps to optimize their supply networks by deploying intelligent materials systems.
Resource link: https://verusen.com/demo-reprise-trusted-network-overview-access/
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