Inventory Velocity: All the Right Moves
The need for speed is clear to retailers, manufacturers, and distributors—especially at this time of year. How are companies speeding their freight and inventory to meet customer demands? By collaborating with technology firms and outside logistics experts to gain greater visibility into the supply chain, increase inventory turns, and get the right products to the right place at the right time.
"The benefits generated by streamlining the supply chain and reducing inventory and carrying costs dwarf the benefits produced by any other type of improvement," says Brooks Bentz of consulting firm Accenture's Supply Chain Management Practice.
Bentz' statement is not surprising, given the sheer size of inventory investment in global supply chains. In 2004, the average investment in all business inventories in the United States was $1.63 trillion, a record number and $133 billion higher than 2003, according to the 2004 State of Logistics Report prepared by the Council of Supply Chain Management Professionals.
"The pressure to reduce inventories is enormous," notes Doug Christensen, CEO of NAL Worldwide, a third-party logistics provider (3PL). "At the same time, businesses are under pressure to shorten cycle times and increase availability to promise. This poses a tremendous challenge."
Meeting the Challenge
Companies of all sizes are attempting to address this challenge. "A lot of businesses just push inventory around the channel," Christensen says. "To truly take out inventory you have to work with your channel partners to find ways to totally remove it—not just relocate it."
Leading companies are starting to do just that, with considerable success. In the grocery sector, where profit margins often are in the single digits, companies have reduced order-to-delivery cycle times to less than four days on average and are targeting even shorter cycle times of three days.
Order-to-delivery cycle time has decreased 31 percent—from 5.2 days to 3.6 days—in the past two years, according to the Grocery Manufacturers of America's 2005 Logistics Survey. This achievement not only reduces cycle inventory for consumer products companies, it also allows retailers to decrease safety stock inventory levels.
How do leaders achieve such success? In part, by changing the way they view and manage inventory, says Sridhar Tayur, CEO of software firm SmartOps.
This change takes four distinct forms, he explains. Companies:
1. Recognize that uncertainty is real and won't go away. So they tackle uncertainty head-on with uncertainty modeling solutions, and factor these calculations into their core inventory strategies.
2. Realize that uncertainty varies over time. Promotions, holidays, new product introductions, and seasonality all affect demand differently at different times.
3. Understand that inventory is a network problem, not a single stage or node problem. "In the past," Tayur says, "companies went after one stage of inventory at a time. A DC in Memphis worries about the problem, for example, but the one in Oklahoma City doesn't."
4. Learn that inventory optimization is not a one-off issue. "You don't diet for one week then say, 'I'm good to go for the rest of my life,'" Tayur says. "You watch your diet constantly. Companies used to do inventory optimization periodically. They should optimize inventory as part of everyday operations."
Predictability through Visibility
As part of their inventory streamlining efforts, companies constantly work to improve forecast accuracy. The best forecast in the world, however, won't make a difference unless the supply chain is predictable.
"What's really important in managing inventory is service predictability," says Bentz. "Without a predictable supply chain, there's only one solution—buy more products further ahead of time. This leads to a repetitive cycle of excess inventory, lower margins, returns, and reverse logistics. If a company's supply chain is 21 days door-to-door and it hits that 99 percent of the time, it can ease up on buying."
Better visibility across the supply chain is critical to enabling predictability. Bentz offers an example:
"If a category manager for shoes can see all inventory in the pipeline—not just what's in the DC, but what's in transit, at the receiving port, on the vessel, at the port of debarkation, at the consolidator in Asia, on the manufacturer's shipping dock—he can make dynamic decisions about deploying inventory.
"If a trailerload of patent leather pumps is bound for New York, but they are selling hot in Seattle and inventory runs out, the category manager can strip that container when it arrives at Long Beach and send half those shoes to Seattle," Bentz says.
"Visibility is important because knowledge of inventory in transit enables companies to better plan manufacturing, kitting, or assembly lines," notes Claude Germain, COO of freight forwarder Schenker of Canada Ltd.
"Knowing where products are, with a fair degree of predictability in transit times, allows companies to lean out the supply chain. The more visibility they have, the less they depend on expensive transportation modes."
Companies today look to their logistics service providers—carriers, warehouse operators or full-service 3PLs—and the tools they offer to help manage pipeline inventories. In fact, the role of the third-party logistics provider has never been more important.
"Gone are the days when third-party providers simply brokered carriers and shippers," Germain says. "Today, they have to engage in managing their customers' working capital. That implies responsibility for cash-to-cash cycle speed and transit predictability."
3PLs can provide sophisticated visibility solutions that are useful for both the vendor and the original equipment manufacturer (OEM).
"In the past," Christensen says, "the OEM would buy product by the truckload or palletload. The vendor would see that every few weeks, an order came through for six pallets. But the vendor never saw actual consumption, so it hedged its bets by padding production inventories.
"Now, thanks to better visibility and data collection tools, the vendor can access true consumption patterns, and reduce safety stock further up the chain."
Other Issues Make a Difference
Better inventory management isn't all about visibility and technology, however. There are other strategies and tactics that make a tremendous difference.
Postponement. Factoring postponement into product design can help cut inventories.
"Redesign the product so the base-level item is the same and the end product is configured at the last minute in response to an actual order," Christensen says.
Dell, for example, has base desktop computer chassis sitting in vendor managed inventory (VMI) waiting to be configured to orders. LL Bean stocks men's pants in waist sizes and cuts the length only when it receives a customer order.
"Postponement pushes inventory back into the supply chain, as close to the point of manufacture as possible, where inventory is not unique and has more uses," Christensen says.
Freight routing. Businesses can accelerate inventory flows by changing how they route their freight. As a result of the explosion in offshore production, companies have many more choices today with regard to routing. Carriers that used to sail once a week between destinations now sail once a day.
"Routing sophistication has an impact on the velocity of inventory in transit," Germain notes. "With so many flight options in the Far East, for instance, it's easy to cut a day or two off transit times by changing the point of departure."
Documentation. Getting customs documentation right the first time has a huge influence on transit times. "You can easily lose three days to incorrect paperwork," Germain says.
Warehousing. Companies are a lot smarter about how they utilize warehousing. "They may set up a large centralized facility for slow-moving products and smaller, advance locations for fast movers," Germain explains. "These smaller facilities can feed a same-day market within a few hundred miles with good reliability. This accelerates turns for fast-selling items."
Accountability. Companies can change their accountability and incentive systems to reward better inventory management behavior. "In many companies, marketing doesn't care about assets, but gets angry when inventory is not there to sell," says Tayur. "So they typically build in sizable buffers.
"These inventory bad habits stemmed in part from the fact that the people responsible for generating forecasts were never held accountable. There was no penalty for over-stocking," he adds.
Holding marketing accountable for its forecasts, and rewarding employees in their performance reviews based on demand forecast and inventory management accuracy, changes this behavior.
Inventory Practices at Work
Most companies deploy a number of inventory reduction strategies. Here's a look at how three U.S. firms approach the issue.
IBM has been in the process of transforming its supply chain for a number of years, shifting to a demand-driven integrated global operation. (Inbound Logistics reported on some of these efforts in the January 2005 issue.)
"We've done a lot of work around speed and responsiveness," says Joseph DiPrima, manager, supply chain planning and optimization, IBM Integrated Supply Chain. "Many processes used to have delays and latency built in.
"For example, we used to capture an order and put a block on it until someone looked at it to see if it was okay. Then we would wait to schedule it to figure out which orders got priority. It could take us two to three days with our old manual processes just to bring an order to the point where we could execute on it.
"Now," DiPrima says, "we can receive an order, schedule it within seconds, and begin executing right away. Over the last decade, we've cut the time to process a purchase order from one month to less than one day, and saved more than $2 billion.
"And, thanks to ongoing automation over the last 10 years, 99 percent of purchase orders are now processed electronically," he notes.
IBM also migrated to a sales 'building- block' approach to forecasting. "Instead of forecasting at the part-number level," DiPrima explains, "we plan product at the building-block level. This ensures we have the components we need to create the product's basic building block, but we postpone final configuration until we receive an actual order."
This building-block approach has helped IBM slash inventories to a 30-year low, and increase inventory turns from the low double-digits to 30 and above now.
"We've improved our forecast accuracy from less than 60 percent to the low-80 percent to high-90 percent, depending on the commodity," DiPrima says. "This greater accuracy allows us to stock much less material in our hubs."
Inventory Stays Near and Deere
Deere & Company, headquartered in Moline, Ill., produces equipment for agriculture, forestry, and consumer use. It sells these products through an international network of independently owned dealers and retailers.
Deere's Commercial & Consumer Equipment (C&CE) division, with $3 billion in sales, set out in 2001 to improve on-time delivery from plants to dealers, and to reduce inventory while simultaneously maintaining service levels for end customers.
The division had 2,500 dealers, 300 product families, five plants and warehouses, and a highly seasonal business.
"The independent dealers each determined how much inventory they needed and sent that request to Deere," explains Tayur of SmartOps. "Deere would review the forecast, disagree, and recommend a different stock level.
"Under this system of complex and conflicting forecasts, Deere's order fulfillment performance from plants to dealers hovered at a poor 52 percent," Tayur continues. "At the same time, Deere was carrying $1.2 billion to $1.4 billion in inventory—almost half its sales revenue. Wall Street said, 'You have to do something.'"
That something was an inventory planning and optimization solution from SmartOps. The system gave Deere better data, visibility into actual demand and inventory throughout the pipeline, and tools to more effectively forecast consumption.
"Deere improved order fulfillment from 53 percent to 92 percent, and reduced total inventory by $1 billion," Tayur says. "This made a big difference in its stock price. Before using the inventory planning solution, its stock price was in the low-$40s per share. Now it's in the $70s. This was a fundamental transformation for Deere."
Plantronics, headquartered in Santa Cruz, Calif., is the world's leading designer, manufacturer, and marketer of lightweight communications headset products. Last year's annual sales reached $560 million.
The company carries 2,300 different SKUs in any given quarter; individual product volumes range from one million a month to 50 a month. "This is a mixed-volume, high-product-mix business," says Terry Walters, senior vice president of operations, Plantronics.
Plantronics' customers are mixed as well. They range from traditional telephony distributors, to large retailers such as Staples and Best Buy, large cell phone carriers, and catalog companies. "Our customers demand very high service levels," Walters notes.
"When their Electronic Data Interchange (EDI) orders hit our system, product has to ship within 24 to 48 hours. From the EDI order's time stamp, we have about seven days to get our product to their dock."
Plantronics operates a manufacturing/distribution facility in Tijuana, Mexico, where it makes most of its products. From there, the company distributes to the United States, Canada, and Latin America. In Europe, Plantronics distributes from a facility operated by a 3PL near Rotterdam.
"In both those locations, we do pack-to-order; in Mexico we do build-to-order as well," says Walters. "We buy materials in the Far East at competitive prices and quickly aggregate them into what the customer wants.
"Our strategy for optimizing inventory is to keep product in our facility at the generic level, and configure it when an order comes in," Walters says. "We can take a generic headset with no logo, customize it to order within 24 hours, and ship it to the retailer."
Each retail customer wants a different product configuration. "The SKUs that go to Best Buy, Radio Shack, and Staples are all different," Walters says. The Best Buy SKU is completely sealed so it cannot be opened in the store. The Radio Shack package is designed to be opened in the store for demonstration, then re-packaged and put back on the shelf. And Staples wants a theft-deterrent tag located inside the package where it is not visible.
"Every customer wants a different bar- code label format on the outside boxes," Walters adds. "Some send us special EDI information, such as the specific rack and bin number in their warehouse. We print this information on the boxes before we ship their order from Mexico."
Plantronics uses Oracle's web-based supplier management tool, which allows suppliers to go online and check inventory levels for all the items they supply to the headset manufacturer. Suppliers also can see what's in transit to Plantronics from them, and what's on hold in the quality department waiting to get through inspection.
"The system calculates their next pull—the quantity they need to deliver to us each week based on sales," explains Walters. "Suppliers can see our forecast for the entire four-month horizon. All that information is available 24/7."
Plantronics shifted to demand-driven production about six years ago. "It was a big leap of faith to move from building to forecast, to building to demand," Walters acknowledges.
"We used to push product based on a weekly manufacturing floor schedule," Walters recalls. "We'd push out a week's worth of material and start building to schedule. We'd end up with last week's leftover production plus the current week's. This meant that, at any given time, there were two weeks' work in process (WIP). Today, we run less than one day's WIP. The savings are tremendous."
As Plantronics, John Deere, and IBM illustrate, doing a better job managing inventory—quantity, location, and velocity—can significantly improve a company's bottom line. The savings add up quickly and, in a large company, can easily reach into the hundreds of millions of dollars.