Five Strategies for Improving Inventory Management Across

Chief Supply Chain Officer Insights insinin ightsightightCSCO The knowledge source for Supply Chain and Logistics executives

Five Strategies for Improving Inventory Management Across Complex Supply Chain Networks

How Companies Think about Growing Network Pressures -

and Ways they can Effectively Respond

Introduction

Effective inventory management is at the core of supply chain management excellence.

in-process, partner inventories and more, truly sits at the intersection of demand and supply.

Yet our understanding of inventory management practices in many respects still has a long way to

go. In fact, it is really only in the last decade or so that the direct link between inventory management

Consultant Gerry Marsh, who works with some of the world’s largest companies, has

than competitors will usually have higher stock price multiples even if earnings

per share and growth rates are similar between the companies.

Yet, leading up to the recession, inventory levels in most industries had

chains, SKU proliferation and other factors that have been putting upward

pressure on inventory levels actually meant companies were making solid

progress on the basics.

That may very well be true, but in the end leaves companies with little to

show in terms of bottom line improvement.

Most companies did cut inventories sharply in the deep recession year of

2009, but primarily through “slash and burn” type approaches, sometimes with

the goal of corporate survival, using techniques that may not be sustainable as the

economy continues to recover.

Supply Chain Executive Brief

ings

with

as the

“...it is only

in the last decade...

that the direct link between

inventory management

effectiveness and corporate

well understood, (and) has

level interest.”

Chief Supply Chain Officer Insights June 2011 insinin ightsightightCSCO The knowledge source for Supply Chain and Logistics executives

2

Five Strategies for Improving Inventory Management...

Now, coming out of the recession, companies are again facing a number of issues that are adding to their

supply chain network complexity, which serve as headwinds to inventory reduction. Today, many if not

most supply chains are feeling at least several of these sorts of network pressures:

• Increased global scope and reach that must be managed

•

• Increasing virtualization and resulting loss of visibility and control

• Challenges resulting from multi-channel go-to-market strategies

• Shrinking product lifecycles not only in well-recognized areas such as high tech and electronics but

in virtually every manufacturing sector.

As a result, companies realize that effectively managing inventories a node or level at a time is no longer

good enough. The problems and challenges must be tackled more holistically, considering strategies and

tools that can tame the growing network inventory beast in a way that brings those inventory levels down

while maintaining or even improving customer service levels.

CSCO Insights survey on network inventory

management practices.

Survey Results

In late Spring, conducted a survey on supply chain network

inventory management.

First, we will review some of the basic demographics of the respondent population, which we think

represents a very balanced mix of companies and industries.

Enterprise: 57.8%

Business Unit/Division: 42.2%

Scope of Respondent’s Answers


3

decentralized).

As can be seen on the previous page, about 58% or respondents were answering for the whole company,

versus 42% for a

In terms of overall size, there was a good mix across all sales levels, with 23% coming from companies

greater than $10 billion in annual revenue, down to 37.5% with revenues under $500 million per year.

However, related to the previous question, about half of the under $500 million respondents are actually

part of larger companies. In general, therefore, we would say the respondents are somewhat skewed

towards larger companies, though today companies in the $1-5 billion range are generally viewed as

“mid-sized” - quite a change from not many years ago.

Size of Company/Division

$1-$10 Billion:28.9%

Over $10 Billion: 23.4%

Under $500 Million:37.5%

$500-$999 Million:10.1%

We also asked companies to rate themselves in terms of their supply chain network complexity (see chart

on page 4).

Respondents provided an answer simply based on their own perceptions.

various levels, as it seemed an almost impossible task.

As can be seen, 24% view their networks as “very complex,” and another 42% see them as “somewhat

complex,” meaning that nearly 66% believe that they have complex networks - a strong preponderance

of respondents.

This is probably not surprising for two reasons: regardless of size, we think most companies do believe

their supply chain network operations are complex today, if nothing else compared to what they might

have had just a few years ago; second, the promotion for the survey probably tended to connect with

companies that saw themselves as having supply chain network/inventory management challenges

versus those that did not.

In fact, only 12% of respondents saw their networks as “simple” or “fairly simple.”



4

One dimension of supply chain network complexity is the number of inventory stocking points or

“nodes” the network contains.

Here, we had a very broad mix, with a combined 39% of respondents having 10 or fewer nodes, while an

almost equal number (38%) reported having more than 50 stocking locations.

Of course, these numbers do not represent trading partner inventories (suppliers, contract manufacturers,

co-packers, channels), areas where many companies are also looking to better manage inventory levels

when doing network inventory planning even if they do not “own” the inventory there.

Supply Chain Network Complexity

Supply Chain Network Complexity

0.0% 10.0% 20.0% 30.0% 40.0% 50.0%

1 - 5

6 - 10

11 - 20

21 - 50

More than 50

18.7%

20.3%

15.6%

7.0%

38.2%

Very Complex

Somewhat Complex

Average

Fairly Simple

Very Simple

Not Sure

0.0% 10.0% 20.0% 30.0% 40.0% 50.0%

24.1%

41.7%

20.4%

9.9%

1.9%

1.9%


Chief Supply Chain Officer Insights June 2011 insightsCSCO The knowledge source for Supply Chain and Logistics executives

5

Practices and Priorities

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Process Maturity for ManagingInventory Across Full Network

Excellent

Good

Average

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0.0% 10.0% 20.0% 30.0% 40.0%

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7

We also asked respondents on their opinion as to what was more important in terms of effectively

managing network inventories, process or technology.

As shown in the chart below, a majority of 52.6% of respondents said that each area was equally

important. 31% said process was more important, while 16% said that technology was more important.

But the answer to that question really depends on where you sit, as one respondent noted.

“Most companies have a number of people and process issues that they need to address to get better at

network inventory management,” one consumer durables manager said. “But after you reach a certain

level of process excellence, the only path left to get much better is new technology.”

Technology Maturity for Managing Inventory Across Full Network

Excellent

Good

Average

Not Very Good

Poor

Not Sure

0.0% 10.0% 20.0% 30.0% 40.0%

6.1%

24.1%

34.8%

20.8%

8.0%

19.0%

Process Versus Technology Importance

Process

Technology

Both Equally Important

0% 10% 20% 30% 40% 50% 60%

31.3%

52.6%

16.1%



8

We also wanted to understand what levels of inventory improvement respondents thought were possible

in their supply chain networks - and the results were eye opening.

More than a quarter of respondents (26.5%) thought they could reduce inventory by 15 days or more -

presenting a compelling opportunity.

All told, some 79% thought their inventory improvement capability was at least 5 days - representing

More than 15 Days

11 - 15 Days

5 - 10 Days

Less Than 5 Days

Little/ No Improvement Possible

0.0% 10.0% 20.0% 30.0% 40.0%

26.5%

17.5%

34.6%

17.0%

4.3%

Potential Inventory Reduction ThroughProcess/Technology Improvement

We also took another look at this question from a percentage standpoint, with similar results.

As can be seen on the next page, about 29% thought their total opportunities to reduce network inventory

was at least15% - meaning a company that carries a billion dollars worth of inventory could reduce

increased sales.

Again here, only a small percentage saw little opportunity for improvement.


that amount by


9

What are the Barriers to Improved Network Inventory Management?

Companies obviously understand the potential opportunity to reduce network inventories, as illustrated

in the last couple of charts above taken from the survey data.

Given that the prize is large, what is preventing companies from making those improvements?

We asked respondents to rate a number of potential barriers as being low, medium or high, as shown in

the chart below.

Some things stand out. For example, senior management vision/focus is not perceived to be an issue

for most companies; nearly 42% rated it as a low barrier, and 66% combined rated it as either low or

medium.

The annual planning process and supplier collaboration challenges also rated fairly low as barriers.

On the other hand, 56% of respondents cited their inability to optimize the network holistically as a high

barrier.

More than 15%

11 - 15%

5 - 10%

Less Than 5%

Little/ No Improvement Possible

0.0% 10.0% 20.0% 30.0% 40.0%

28.9%

24.6%

34.6%

9.5%

2.3%

Potential Inventory Reduction ThroughProcess/Technology Improvement



10

Other areas receiving high scores included lack of technology integration, having internal functional

silos, misaligned metrics (related, no doubt, to functional silos) and demand volatility (as always seems

to be the case).

We were most surprised that a low percent of respondents planned to make investments in improving

multi-channel management - perhaps that area was viewed as a people/process issue that did not require

much investment to improve. However, a look at the respondent companies planning to make investments

in multi-channel management showed the vast majority were in either the consumer goods or retail

sectors. The challenge of multi-channel management does not seem high yet in most other industries.

Perceived Barriers to More EffectiveCross Network Inventory Management

Organization Alignment

Sr. Mng’t Vision/Focus

Technology Integration

Level of Expertise

Annual Planning Process

Lack of Visibility

Can’t Optimize Network Holistically

Functional Silos

Misaligned Metrics

Technology Capabilities

Supply Variability

Multi-Channel Issues

Demand Volatility

Level of Trading Partner Collab.

0% 100%

High Barrier

Medium Barrier

Low Barrier

27.1% 33.0% 38.3%

41.8% 24.2% 33.9%

21.5% 33.3% 45.2%

33.9% 28.2% 37.9%

41.8% 29.4% 28.8%

23.71% 34.5% 41.8%

16.9% 27.1% 55.9%

20.9% 33.3% 45.8%

28.8% 26.6% 44.6%

30.0% 32.8% 37.3%

30.5% 37.9% 31.6%

26.6% 42.4% 31.0%

25.4% 27.6% 45.9%

25.0% 30.5% 34.5%


Where do companies plan to invest to improve network inventory management? As shown on the

chart on page 11 technology scored high, with improving supply chain visibility (41.7%) and general

enhanced inventory management/planning technology (also 41.7%) listed as areas many respondents

in over the next 2-3 years. said they were quite sure to make investments


11

Summing up the Data

The survey results support our belief that growing supply chain network complexity is making it

number of challenges to getting it done.

While there are many process improvements that can be deployed, the sheer scope and scale of managing

network inventories “holistically” is a challenge that many believe will require a new level of technology

support.

improving network inventory levels we will summarize in the next section.

Where Companies Plan to Investfor Cross Network Inventory Management

27.1% 33.0% 38.3%

41.8% 24.2% 33.9%

33.9% 28.2% 37.9%

23.71% 34.5% 41.8%

16.9% 27.1% 55.9%

20.9% 33.3% 45.8%

30.0% 32.8% 37.3%

30.5% 37.9% 31.6%

26.6% 42.4% 31.0%

0% 100%

Lack of Visibility

Can’t Optimize Network Holistically

Functional Silos

Misaligned Metrics

Technology Capabilities

Supply Variability

Multi-Channel Issues

Demand Volatility

Level of Trading Partner Collab.

High Likelihood

Medium Likelihood

Low Likelihood



12

Five Strategies for Improving Inventory Management Across Complex Networks

There obviously is no single bullet for improving inventory management in the face of these network

challenges, and many companies continue to chase increasing forecast accuracy as a key weapon - and

one often especially resistant to improvement.

inventory management challenge.

1. Get Much More Granular with Safety Stock Management

Many companies today continue to use rather simplistic means to determine safety stock levels at

different echelons of the supply chain.

The most common is a simple SKU segmentation approach in which products are put into three or

policies are then set the same across each of these categories.

companies have taken their safety stock policies much further in terms of both

granularity and cycle times.

The most common of the process improvements is to use many more

attributes associated with each SKU to in effect create a much larger

number of item classes to which different policies are assigned - well

beyond the standard three or four levels most companies still use.

These attributes can include lead times, supply and demand variability,

consumption patterns, criticality, velocity, and several others. The more

dimensions a company uses, the greater the precision a company will have

in managing inventories. It is not uncommon to see 10-12 dimensions being

used in best-in-class companies.

This obviously requires a lot more work, both in terms of upfront analysis and

tweaking of the policy settings over time, but can pay rich dividends in terms of both

reducing inventories for the SKUs for which excessive safety stocks are held, and in some cases actually

increasing safety stock levels for SKUs that are regularly experiencing out-of-stock conditions.

This more granular segmentation also clearly requires some level of skill in terms of identifying the

appropriate attributes to use for the groupings, and in understanding how to best apply differentiated

inventory policies. Here outside expertise may be required if a company is looking to make the move to

higher level of safety stock management, as this is a relatively uncommon skill set.

of both

“There

is no single

bullet for improving

inventory management...

companies continue to

chase increasing forecast

accuracy as a key

weapon...”



13

Leading companies are also increasing the frequency in which they review and tweak safety stock

policies. Still today, some companies can go multiple years without a comprehensive review, other than

.

Leading companies both review products and policies more frequently, and have a formal schedule for

monthly Sales and Operations Planning (S&OP cycle), as we discuss in the next section, but then also

look at higher level demand and variability data quarterly and may tweak certain inventory parameters

on a weekly basis.

This safety stock and inventory policy management challenge becomes even greater when a company

considers the multi-echelon aspect. Many companies in effect hold redundant safety stocks at each level

of this report. Many companies also lack insight into where in a complex supply chain inventory buffers

should optimally be held.

Meeting that challenge well is almost impossible to do manually today and really requires a new level of

technology support, an area where the category of inventory optimization software comes in to play, as

we discuss in the last section.

2. Add Inventory Planning to the S&OP Process

While Sales and Operations Planning has been successfully employed as a process discipline by some

through their S&OP evolution.

inventory decisions were often left out of the S&OP process. While S&OP delivered a “one number

forecast” that the company could act on, supported by a high level supply plan that is capable of meeting

decision process. That usually meant middle managers were responsible for inventory decisions that

could have impact on sales or cost in the millions of dollars.

“...many have pushed use of the new term Sales, Inventory &

Operations Planning (SIOP) to more forcefully drive home the

need for the process to make policy decisions on target inventory

levels needed to support the demand and supply plans.”OPSI



14

Recognizing that gap, many have pushed use of the new term Sales, Inventory & Operations Planning

(SIOP) to more forcefully drive home the need for the process to make policy decisions on target

inventory levels needed to support the demand and supply plans. In effect, this means senior company

executives need to set the direction based on a given plan as to what the trade-offs are going to be

meet demand. This is especially critical for new product introductions, and for companies that have a lot

of complexity in their product “mix.”

Some have argued that these inventory-related decisions were always inherent

to the S&OP process. That may be true from a theoretical perspective, but was

clearly often not the case in the actual monthly practice of S&OP. There are

many case studies of companies which have transformed their processes

from a traditional S&OP basis to an SIOP one with added steps related to

inventory targets and which have achieved impressive results.

Moving to SIOP in practice if not in name is a process improvement that

at one level is fairly easy to accomplish, with the right level of expertise

in terms of how the new elements to the S&OP cycle will be added (See

Sidebar on page 15).

support becomes necessary for robust S&OP performance, especially as decisions

about inventory levels are added to the mix. This technology is usually in the form of

“workbenches” and exception-based decision-making that provide supporting data for the

supply and demand plans, and importantly, allow managers and executives to conduct a series of scenario

SIOP is not a cure all for the challenges of inventory management across complex networks, but it is a

necessary change to take some steps forward and to set a platform for other initiatives, in part by getting

senior company executives more engaged in the inventory planning process.

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15

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16

3. Make Regular Use of Supply Chain Network Optimization Tools for Tactical Planning

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17

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4. Consider Distributed Order Management Tools to Manage Multi-Channel Complexity and Reduce Inventories

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18

Some, for example, have the capability to support inventory rules and policies by channel within

common inventory pool, allowing companies to more quickly or aggressively pursue combined cross

channel inventory strategies.

In addition, many solutions provide the ability to dynamically identify the optimal sourcing location,

whether it be in the company’s own supply chain network, or a possible drop ship directly from a

drop ship items, a company may also be able to take a good bite out of current inventory levels.

Distributed order management has been the province of mostly best-of-breed vendors, and normally

sat over top of existing order management systems. It is an ideal solution for companies with complex

channel issues, or where a company is running multiple order management systems and looking for a

single front to customers across channels. Now, even large ERP providers themselves have released their

own DOM solutions.

DOM software varies considerably in capabilities and focus, and so an evaluation of different

s current needs - and just

as importantly with its future direction.

5. Step Up to Inventory Optimization Software

Probably the most aggressive step a company can take to manage multi-echelon inventory challenges is

to adopt a relatively new category of software solution called inventory optimization, or IO.

Traditional supply chain planning software really only optimizes inventory levels one node or echelon at

a time - it really is not concerned with the impact on up and downstream inventories. It focuses primarily

on “local” optimization.

Inventory optimization software, which has been around for about a decade, looks at the inventory

even distribution channels simultaneously, so that network inventory levels themselves are optimized,

not just an individual node or channel.

Inventory optimization software... looks at the inventory problem

holistically, considering optimal inventory levels from raw

simultaneously, so that network inventory levels themselves are

optimized, not just an individual node or channel.



19

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Summing It Up

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20

not formally including inventory targets as part of an SIOP program, clearly have a major process

opportunity in front of them.

But the size and complexity of the network inventory management challenge today means that newer

technology tools, such as distributed order management or inventory optimization software, may need to

be a large part of the answer.

Of course, that new technology will bring its own process (and people) challenges, but we believe for

hands will often need to be part of the team to ensure success.

For many companies, the “low hanging fruit” is nearly gone. Step changes in inventory management

effectiveness will mean use of relatively new tools and techniques.

It is time to start looking at the opportunities now to see which might have the greatest impact on your

supply chain success.

This research was made possible by support from:


www.cognizant.com

CSCO (Chief Supply Chain Officer) Insights offers research and analysis focused on providing

actionable information and intelligence to senior supply chain executives and those aspiring to

reach executives levels. The research arm of Supply Chain Digest, the industry’s leading on-line

publication and web site, CSCO Insights is becoming the preferred source of insight for supply chain leaders.

Cognizant is a leading provider of information technology, consulting, and business process outsourcing

services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered

in Teaneck, New Jersey, Cognizant combines a passion for client satisfaction, technology innovation,

deep industry and business process expertise, and a global, collaborative workforce that embodies the

future of work. A member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune

500, Cognizant is ranked among the top performing and fastest growing companies in the world.

About Cognizant

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Documents

Five Strategies for Improving Inventory Management Across