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The Role of Inventory Optimization in a Market-Driven Supply Chain

By Jeff Bodenstab19 May 2015

It’s time to rethink inventory. For years it’s been portrayed as a place where working capital goes to die. But in today’s market-driven supply chain, inventory optimization is gaining increased purpose and meaning.  Getting inventory right means thinking of it in a less simplistic, more nuanced manner.

This is exactly what Lora Cecere of Supply Chain Insights has done in an excellent new report entitled “Inventory Optimization in a Market-Driven World”. In it she defines the role of inventory in a sense and respond, or as she calls it, a “market-driven value network” world.

Cecere says that, “As the supply chain becomes more market-driven, the role of inventory shifts and becomes more important.”  Companies executing a market-driven strategy need to design inventory buffers based on factors such as product level, average daily demand, range of demand variation and supply reliability.

Increased supply chain complexity and several global trends are driving this need. Cecere lists several:

  1. The global nature of modern supply chains – “The longer the response time, the greater the need for inventory buffers …. As supply chains become more global, the determination of inventory strategies becomes more complex, requiring technologies and the design of the supply chain to ensure that inventory is the appropriate buffer,” Cecere says. “With the outsourcing of manufacturing, inventory has grown in importance, and is now the primary buffer for supply chain volatility in the extending economy.”
  2. Multi-tier supply chains – “The movement to a multi-tier strategy requires the use of deeper analytics to design the form and function of inventory while optimizing inventory levels across the network,” says Cecere. The trick is figuring out where.
  3. More new product launches also require closer scrutiny of inventory. “New product launch error rates average 80%; and as a result, the introduction of new product launch is fraught with issues of out-of-stocks and inventory write-offs,” Cecere says.
  4. Growth of the business – Inventory is also required to address the complexity inherent in growth. Cecere explains that more item complexity, variations in demand shaping programs around price and promotion, and the intricacy of managing a global matrixed organization all drive the need for a well thought out inventory strategy.
  5. The long tail and latency – As Cecere says, “The longer the tail of the supply chain, the greater the demand latency” (the delay from end consumer purchase to replenishment order). The more items, the more important the design of inventory strategies, she concludes, because the low volume and lumpier order patterns characteristic of long tail items require the use of the new inventory such as multi-tier inventory management.

A more complete list of factors impacting inventory design can be found in the full report.

In a related blog entitled “Seven Misconceptions on Managing Inventory in a Market-Driven World”, Cecere also points out that the extended customer-driven supply chain is too complex to be described using simple inventory management techniques such as a four-box model. She recommends instead employing inventory management solutions with a process, IT and cultural fit.

“While many think that solutions with a common name—technologies purchased from a common vendor—are integrated, often the situation in the market is vastly different. Most of the inventory technologies have been sold and resold multiple times in the market, with many best of breed supply chain inventory optimization solutions having better integration than the ERP providers touting integration.”

For more on this particular issue, see last week’s blog: “Why “Sense and Respond” Requires a “Single Model”.

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