Inventory Reduction: Supply Chain’s Holy Grail

In the United States, businesses invested some $1.63 trillion in inventories during 2004, a new record high according to the 16th Annual State of Logistics Report sponsored by the Council of Supply Chain Management Professionals.

Companies constantly search for ways to reduce their inventory exposure. We see this every day with our clients who all want to reduce days outstanding of inventory. At the same time, they’re under equally intense pressure to shorten cycle time and increase availability to promise – to serve customers better. These dynamics often conflict, creating sometimes monumental struggles within a corporation.

As a third-party logistics service provider, our job is to help our customers tap opportunities to cut inventory. We can do this in a number of ways:

1. Second-generation vendor managed inventory (VMI).

Initial attempts at VMI mostly just pushed inventory back up the channel, leaving the supplier holding the financial bag, so to speak. Today, however, real-time visibility tools let the vendor see its customer’s demand and plan inventories to satisfy that demand sufficiently without excessive build-up.

The ideal place to hold inventory in a VMI system is closest to its point of manufacture. Why? At this point in the channel, inventory is in its most generic state, meaning that because it has not yet been uniquely configured, it has far more uses. Think about it. Say a company makes telephone accessories, and custom packages its product for four different retailers as it came off the production line. The company could be stuck with four sets of potential inventory problems if its forecasts were wrong. And given the fact that all forecasts are wrong, the probability of these types of problems occurring would be very high.

Instead, under a VMI system with good visibility, the manufacturer could hold off final package configuration until it receives an order, and thus have exactly the right inventory at the right time. The savings can amount to millions.

2. Synchronized order merge.

Synchronized order merge – also called in-transit-merge – cuts down on or eliminates the need for intermediate buffer stocks and handling, thereby also reducing product cycle time.

When one of our customers decided to remodel and re-image thousands of service stations around the country, we set up an in-transit-merge distribution system in which material from dozens of vendors converged at a regional distribution facility. We consolidated the material into a single shipment and delivered it to the specific service station at a scheduled time. The single delivery was far easier to manage than 15 or 20 small deliveries from individual suppliers. It reduced damage and loss, and made the re-imaging process much more predictable and cost effective.

The key to success in this in-transit-merge setup is real-time visibility. Without it, there’s no way to pull off this kind of an orchestrated delivery flow.

3. Reverse logistics.

Optimizing the reverse flow of product or material – whether to recapture value or dispose of properly – continues to be an underutilized opportunity for inventory savings. One major computer maker, for instance, used to return all its end-of-lease mainframes from around the world via air freight to a central warehouse in Texas. There, the computers were stored for several months until such time as they were destroyed. The computer company essentially was airfreighting and storing trash from around the globe – at a cost of millions.

With today’s systems and processes, returned goods can be brought only as far as a regional specialized facility where they are inspected and their disposition determined based on their condition, value, further usage and so on. Utilizing this assessment, companies can make disposition decisions proactively. The material is handled efficiently and cost effectively allowing any residual value to be captured quickly.

These three inventory reduction strategies all require state-of-the-art and often specialized skills, processes and information systems capabilities. Many companies – manufacturers or retailers – find they don’t have or want to develop these capabilities in house. Instead, they turn to third party logistics service providers like NAL Worldwide to fill their needs – to develop and execute the kinds of creative solutions that save real money.

NAL Worldwide is an industry leader focused on customized managed supply chain solutions for complex programs.