Bob Trebilcock

Supply chain management: Inventory optimization delivers the goods

One of the hottest supply chain technologies in 2007 was supply chain inventory optimization, an application that grew by 32% while the overall supply chain management space grew about 7%. And, yes, I did say 2007. No one really wants to talk about 2008 or 2009 these days, but you’ll be able to read about it in our annual Top 20 supply chain software list in July.

Just what is supply chain inventory optimization? These applications are designed to plan inventory policy across multiple dependent echelons of a supply chain, in multiple planning periods, according to Simon Ellis, practice director, supply chain strategies, at IDC Manufacturing Insights. “Essentially, they set inventory targets up and down the supply chain on a simultaneous basis,” Ellis says. “These applications can also provide the ability to create what-if quantification of the impact of certain business decisions on overall inventory management.”

While the market has slowed, thanks to the economy, supply chain inventory optimization is still a potent new application, according to Ellis. Last month, he and Kimberly Knickle co-authored a new report The Modern Supply Chain: Inventory Optimization Competitive Assessment. They identify inventory optimization as among the top three priorities for many supply chain organizations as they seek to create increased efficiencies during the continued global recession. They estimate annual growth rates of 10%, far ahead of the predictions for the overall supply chain management software space.

"If inventory optimization is not on your short list of priority projects,” Ellis wrote at the time the report was released, “you could be failing to capitalize on significant supply chain management benefits."

Ellis and I spoke a couple of weeks ago about what led to the report. One important notion was something he described as the struggle for capital preservation in the global economy over the past year. “Companies aren’t just focused on cost reduction,” he told me. “They’re focused on preserving their capital.” If a company wants to save cold hard cash, there’s not a lot it can do about fixed assets. What’s more, a company still has to serve its customers. “The question is: How do I improve service levels without increasing my inventory levels,” Ellis said.

A second notion of interest was whether a supply chain is focused on delivering first rate service or on minimizing costs. “What I wondered is whether this relatively new application space could bridge these two,” Ellis said. “Could you perhaps manage your bottom line costs in a way that allows you to drive a differentiation through service.” What he means is that there are some things that you have to do for all customers; there are other things that you only have to do for some of your customers. Maybe, you have to maintain inventory levels of some products to deliver a 99% service level for Wal-Mart, but you can operate at a 95% service level for other customers.

“Traditionally, you either incurred costs because you had more inventory than you needed and or you incurred stockouts because you had less than you needed to save money,” Ellis said.

That’s where inventory optimization comes into play. By having a broader view of inventory up and down the supply chain, these systems can set and then enforce inventory levels that allow a company to meet service levels with less by having the right inventory at the right place at the right time.

The savings, Ellis said, can be substantial. A 25% reduction in inventory across a global supply chain, with a one-year ROI, is not unreasonable. The most important takeaway: “Inventory optimization has matured significantly over the last five years,” Ellis said.”It’s viable, and it can drive some pretty significant savings. In this current environment, companies ought to be looking much more closely at these tools than they are.”

I’m going to write more about inventory optimization for the August issue of Modern. In the meantime, click on the link above and read Ellis’ report.

Posted by Bob Trebilcock on June 26, 2009 | Comments (1)