When you were a kid, you probably played hot potato. That's where you toss an object from one player to the next as quickly as possible before someone yells stop. No one wants to be caught holding the hot potato.

Inventory is the hot potato of the supply chain: no warehouse or distribution center manager wants to be caught with too much inventory in case someone yells stop.

With that in mind, warehouses have already been transformed from places to store inventory into high-throughput distribution centers where nothing sits for long. Meanwhile, DCs have also become quasi-light manufacturing and assembly operations, where value is added to a product at the point closest to the customer.

Winning at this new game involves successful inventory management, both at the enterprise and the facility level.

To hear the latest in best practices in inventory management today, we turned to two veteran consultants, John A. White III, vice president, supply chain management, Cap Gemini Ernst & Young (404-817-4222) and Jeff Hutchinson, associate partner, supply chain execution practice, supply chain management, Accenture (617-454-4000).

MMH Just what does inventory management mean today and how has it evolved lately?

White Inventory management has a much higher profile. There's a real recognition at the corporate level now of the importance of inventory. Go into a boardroom today, and you will hear the words inventory management more often now than you did in the past. Clearly, inventory management has taken on new importance at the highest levels.

MMH Why is that?

White One reason is that inventory is a core component of working capital. And with a more stringent focus on holding people accountable for results, you're starting to see multiple areas of an organization talking about inventory.

Hutchinson That's right. There has been an evolution around historical challenges versus emerging challenges. Historically, you had to have inventory to provide high service levels. That meant inventory buffers and inventory management were used to hide operational issues. Since no one wanted to be the one who failed to meet a service commitment, everyone built up inventory buffers.

Today, companies are trying to survive by looking at their margins. They have to meet service levels, but they have to do it more profitably. With that, it's not uncommon now to see more focus around the overall inventory management strategy.

MMH What's the impact of those strategies on best practices in inventory management?

White The focus now is on inventory from one end to the other end of your pipeline. The question is: how can I maximize my sales and minimize my exposure by enhancing the visibility into my inventory? Then I need a mechanism to throttle that inventory forward or backward based on new information, and to do it with a shorter cycle time.

Hutchinson There's also the recognition that no matter how great a product you make, if Wal-Mart or another big retailer won't bring it into their store, you're out of luck. And you can't do the value-added services demanded by the big retailers in a manufacturing plant. That has to be done closest to the demand—at a distribution center.

That's affecting the use of 3PLs (third party logistics providers). The trend we're seeing is to let the 3PL own the building and the materials handling systems and to hire the employees. But the enterprise is going to control the inventory management software and manage the overall operations.

MMH Is the corporate-wide focus on inventory management impacting how managers do their jobs at the warehouse or the DC?

Hutchinson Yes. Their focus is on keeping inventory in motion, and that is a leading best practice. Sure, there's got to be some buffer stock, but managers want that product in and out of that facility with as few touches as possible. In order to do that, they need to have visibility into customer demand. And they need visibility into the product coming into the facility. Managers need to recognize that retailers like a Wal-Mart are going to continue to place more requirements on them and need to position their operations to be agile. That means distribution center managers can rapidly change the way they operate.

MMH Does that change the processes in a facility?

Hutchinson Yes. We used to see huge amounts of conveyor and materials handling equipment to drive efficiencies during peak picking operations. But those systems don't adapt easily to change when customer demands change. So, the focus is being put back on the software side of the operations. That's how you manage change.

MMH Can you provide an example?

Hutchinson Sure. Interleaving in orderpicking is a piece of cake with a WMS (warehouse management system) and RF (radio frequency) terminals. With a paper-based, batch system it's much more difficult.

MMH John, what do you see as important at the DC?

White One of the first things that has to be considered is: what's the unit of measure being used to manage that inventory? If I'm managing something just at a pallet level, then I may not be able to understand the picking efficiencies that can be gained by actually managing at a case level or at a unit level.

And if I do my forecasts based on pallet quantities or truckload quantities as a lot of facilities do, I need to be able to translate that into units of measurement of how I'm actually picking and replenishing my pick areas.

You also have to understand perpetual inventory—the inventory that's in place when you receive or send out shipments. Often you get reports that say: here's what came in and here's what went out. But there's no view of what was already in place at the time. Being able to understand your perpetual inventory and to constantly compare that to your inputs and outputs is important.

MMH If inventory in motion is a best practice, how important are others like flow through distribution?

White Well, there is a distinction between inventory management and inventory flow. They are different but complementary processes. Clearly there is a correlation. If I'm effectively flowing goods through my warehouse, my inventory carrying costs are lower, and the inventory I need to have in my warehouse may in fact be lower. But the resulting processes and systems that support the management of that inventory still have to be there. I have to be able to balance my inventory and my demand, regardless of how I'm flowing that inventory.

MMH How do inventory management and inventory flow complement one another?

White Here's a perfect example. By adjusting my ordering frequency, I can decrease the amount of inventory that I have in my supply chain. Let's say that I need 100 units of a product on a monthly basis. The old way of doing things was to order a shipment of 100 units once a month. But, if I have better visibility into my demand, I may order 35 units one week; 35 units the next week; 10 units the next week; and 20 units the next week. I still get 100 units, but there is less inventory in my pipeline because of my ordering practices.

MMH You've both talked about visibility. How important are information systems to inventory management?

White You can't talk about inventory management without also talking about visibility. Often, people order more because they can't find the inventory. Information systems have a tremendous impact on how adaptive you can be and how proactive you can be in the management of that inventory.

Hutchinson I agree. DC managers really need to get a handle on their inventory management at multiple levels across the supply chain. Like it or not, that's software driven. You should be looking at event management systems that alert operations about trends taking place within your facility and across the supply chain. The Tier One WMS packages from industry leaders all have that capability built into them.

MMH It sounds like on the one hand managers need to be thinking about more flexible physical processes in their operations so they're not tied down. And the way they compensate for that is through the intelligent side of operations. Is the information technology side alone going to allow a manager to be more efficient at what they do?

Hutchinson You still have to have the discipline and processes there. The business drives the process that must be in place. The technology enables that to take place. It's a circular loop between the two.

White That's right. The adaptive supply chain is the goal. That's realized through modifying the frequency by which you do things; the way in which you do things; how you communicate things; and the visibility you have into things so that you're proactive and not reactive. So, it all ties together. Inventory management crosses the entire supply chain, and it crosses all functional areas of an organization because everyone is affecting it.