The pressure is on for companies to revamp traditional inventory management practices with technology and processes that are better suited to today's global, multi-echelon supply chains. In a recent survey by Aberdeen Group, Boston, more than two-thirds of respondents said they have been asked in the past six months to provide recommendations on how their company can improve inventory management technology; 83 percent have been asked to recommend process improvements.

"Traditional inventory management practices and technologies are simply being made obsolete by increasingly global supply chains and by contract manufacturing, more dynamic product lifecycles and multi-channel distribution," says Nari Viswanathan, research director at Aberdeen and author of "The Technology Strategies for Inventory Management Benchmark Report."

While the majority of the 160 companies surveyed cite cost-reduction as the primary goal of better inventory management, 27 percent are looking to use inventory as a means of gaining market share, through superior service and market availability. "Truly visionary companies are leveraging their inventory as a competitive weapon and have moved to network-based inventory management versus doing it at a facility or company level," Viswanathan says. Instead of trimming inventories across the board to reduce cost, these best-in-class companies segment their customer channels and products and then optimally position supply when and where it is most needed and most profitable, he says. Through this approach, they are able to increase their overall customer service levels while also reducing total inventory costs, which leads to improvement in other key metrics like customer retention, gross margin and inventory turns.

Aberdeen defines best-in-class companies as those that have achieved customer service levels of 96 percent or better, while at the same time reducing inventory carrying costs. Just over 11 percent of respondents were in this category. About 55 percent of these were distribution intensive companies and 45 percent were manufacturing intensive. Roughly 38 percent were large enterprises, with the rest being mid-sized.

Viswanathan says best-in-class companies have a number of differentiating characteristics. They are about twice as likely as their competitors to:

• use network design technology to support business growth and outsourcing decisions;

• use multi-echelon inventory optimization technology;

• have an existing supply chain visibility system;

• have a forecasting system that supports customer-level forecasts;

• use cross-functional product teams; and

• update their inventory policies multiple times a year.

"Best-in-class companies are much less likely than their peers to rely on simple rules of thumb for setting inventory policies," says Viswanathan. "Instead, they are much more likely to be using multi-echelon inventory technology." This technology, he explains, globally optimizes inventory policies across supply chain tiers, accounting for both demand and supply variability using a stochastic approach instead of a rules-based or deterministic approach. Companies using this and other related technologies, such as supplier collaboration, are achieving 20 percent to 30 percent improvements in inventory performance, he says.

However, the use of multi-echelon approaches is still maturing. Most companies that report using this type of inventory optimization tool are doing so only partially, Viswanathan says. "Very few companies are planning at every level in the echelon," he says. "Still, the ability to consider variability and the ability to focus on the critical levels of their supply chain results in better performance," for users of the technology.

One "concerning result" from the survey is that about half of responding companies are managing inventory by location rather than at a network level. Leading companies, on the other hand, use cross-functional teams to manage across the enterprise, or have a single owner of end-to-end inventory. "Companies that have cross-functional teams are able to identify innovative ways to reduce customer lead times and inventory carrying costs across their functions rather than focusing on how to slash inventory within their own functions, which can create undesirable side effects for other parts of the organization," says Viswanathan. Sales and operations planning processes often become the vehicle for these teams to collaborate, he says.

Another concern is that about half of companies look at their network design only once every two to five years. Best-in-class companies, on the other hand, regularly assess distribution networks with an eye toward mitigating transportation time, cost and capacity constraints, says Viswanathan. Similarly, nearly 50 percent of companies say they update their inventory strategies on an annual or less frequent basis. "This frequency of analysis is not sufficient given today's global sourcing and contract manufacturing strategies, which create more variability," says Viswanathan. "Our survey results show that companies that are above-average inventory performers are more than 2.5 times as likely as other companies to update their inventory strategies and policies multiple times a year.

Customer-level forecasting is another indicator of successful inventory management. "Segmentation of customers based on inventory management requirements is critical, since different products have different costs and lead times," Viswanathan says. "A customer who requires a custom part from a manufacturer will have a different service requirement compared with a customer who sells a commodity."

Another challenge facing a significant number of companies (36 percent) is the two years it typically takes to recoup their investment in inventory management solutions. Factors contributing to this long ROI period are: a lack of skilled resources within the company to use the technology, applications that are not integrated to ERP or SCM platforms, and applications that are too complicated to implement and maintain. "Traditional barriers such as management buy-in and internal corporate politics are less of a factor today, as more companies realize the competitive imperative of better inventory management," says " Viswanathan.

To avoid ROI pitfalls, companies can outsource or use a managed services approach to inventory optimization," Viswanathan says, or they can adopt a pilot-based approach. "Then once the ROI and business benefits have been obtained from this pilot project, the implementation can be expanded to the rest of the product lines and business units."

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