Inventory management optimisation: a must for 2021 & beyond
It is fair to say that inventory optimisation is needed now more than ever in the supply chain world. Following the initial outbreak of COVID-19, it was estimated that US$8trn worth of goods were held for sale as operations came to a halt, with stock management issues estimated to cost manufacturers in the UK alone £66bn because of disruption caused by the pandemic.
Now 18 months on from the initial outbreak, organisations are starting to make the journey back to ‘business as usual’. As they transition into the new “normal”, and in reaction to the supply struggles exposed by the pandemic, many business leaders are wondering whether an investment in inventory optimisation should be a priority or not.
While it’s natural to assume that making a precautionary investment to mitigate future risks just in case the supply chain falters again, the pre-COVID-19 statistics reveal that issues relating to inventory management aren’t new. In fact, the figures suggest that global retailers had known about the problem for a long time and had been making good progress in combatting inventory distortion, reducing it by US$158bn since 2017.
So inventory distortion certainly wasn’t born out of the pandemic, as many suggest. Rather, it is a continuous and now growing challenge, exacerbated by COVID-19, with a worldwide figure totalling US$1.8trn in 2020.
“More than anything else, the COVID-19 pandemic has provided a teaching moment in what can happen when inventory planning, tracking, and management capabilities are not where they need to be. Over the last year, we have learned that ‘rules of thumb’ unit-based policies for safety stock are far too static to respond to sudden and significant demand and supply disruption,” says Ned Glattly, Managing Director and Leader in Deloitte Consulting’s Supply Chain and Network Operations Practice.
“We learned that suboptimal deployment ‘stranded’ inventory where it was not needed and left huge gaps where demand spiked. We learned that visibility – just knowing what we have and where it is – is perhaps more critical than ‘optimised’ inventory levels, and working remotely made us more reliant on data and systems to provide this visibility. We learned the importance of including inventory planning as part of an integrated business planning capability. In short, inventory tends to shine a light on all things both good and bad in a supply chain, and COVID-19 provided a case study in how important it is to get it right.”
Understanding the core elements of inventory management and its importance in the supply chain
With inventory management ranking among the most important elements of a successful and profitable supply chain, leading organisations are leveraging inventory optimisation for a long term and sustainable competitive edge and strategic advantage.
Significant stock management issues reported by the Advanced Supply Chain Group (ASCG) include “poor stock availability leading to lost sales and margin dilution, as well as high levels of stock surpluses resulting in heavy discounting of products and losses incurred through aged and out-dated stock,” supply chain inventory optimisation can help organisations to balance capital investment constraints and goals across a large number of SKUs, while also considering supply and demand fluctuations.
“Inventory policies and processes, working together across the global supply chain, define the overall supply chain posture — and also determine how the business will respond to changes in market and supply conditions,” states Blue Yonder. Therefore it's crucial to understand the core elements that drive success in inventory management.
“At Deloitte, we have proposed six core ‘ingredients’ of inventory excellence – governance, tools, visibility, strategy, analytics, and process”, adds Glattly.
“Collectively, these ingredients contribute to a capability. You can make improvements with just process fixes or tools. You can put in place governance and measurements. You can provide better visibility, and you can use this visibility to enable actionable analytics and insight. However, the reason they are all collectively important is that together they make inventory management both impactful and sustainable.”
Navigating inventory challenges with optimisation practices
“Managing inventory was a big ask when customer demand and supplier lead times were fairly predictable, but with marketplaces and supply chains more dynamic than ever, the job just got much harder. With customer demand and inventory supply continually fluctuating up and down, ‘old-school’ inventory management practices are simply too basic,” comments Eazystock.
By introducing inventory optimisation practices for demand forecasting, stock levels, and supply continuity, supply chains can “take a feed of inventory data, do the forecasting and replenishment calculations, and provide the intel that can be used to make smarter purchasing decisions.”
While traditional forecasting methods are effective when demand is stable, volatile disruptions such as COVID-19 require more sophisticated methods. Adopting an inventory optimisation tool that uses statistical forecasting formulas can help supply chains account for variations in demand. “This method recognises that every inventory item has a different demand pattern because it is affected, to some degree, by its position in its product lifecycle, or by seasonality, trends or promotions. All of these are taken into account when forecasts are automatically generated and updated to inform purchasing parameters and stocking rules,” says Eazystock.
Carrying the right stock
When trying to navigate the challenging task of carrying the right inventory items to meet demand while ensuring that a sensible investment is made in stock, supply chain management (SCM) teams need to track item stock levels that are business-critical and react accordingly to potential influencing factors to alleviate risks.
“Inventory optimisation helps by classifying items and focusing on the availability of those most important to the business. A simple form of inventory classification can be done manually using ABC analysis, but with inventory optimisation software, the categorisation can be much more sophisticated [...] The big advantage of inventory optimisation software is that stocking rules and reordering parameters are automatically adjusted to ensure service levels are met. This means that reorder points, reorder quantities and safety stock levels are all dynamically calculated, based on market dynamics”, adds Eazystock.
Finally, when it comes to mitigating variation in supplier lead time, the replacement of traditional inventory management with probabilistic inventory is something that supply chains should consider.
“Securing supply has been extremely difficult for many SCM teams in 2020, and supply issues could re-emerge at any time. Formulas used to calculate replenishment, e.g. reorder points or safety stock levels etc., need the ability to be adjusted when supplier lead times change to avoid stockout situations. This can be done manually on a regular basis or using inventory optimisation software that will track lead times and update purchasing requirements automatically,” says Eazystock.
How digitalisation is transforming inventory management and optimising operations
Being one of the ‘foundational use cases for the digital supply chain’, “real-time sensor data and tracking capabilities are being leveraged to optimise placement, avoid obsolescence, and help enable proactive planning and responsive replenishment [in inventory management],” says Glattly.
“The digitisation of inventory has also enabled game-changing analytics. By harnessing the data that captures how inventory moves through a supply chain, we are able to build a “digital twin”– a model that illuminates what is actually happening versus what we planned to happen. From this, we gain insight into what is needed, what is excess, and more importantly, how inventory requirements are being impacted by the underlying drivers such as lead time, production and shipping frequency, demand volatility, quality, and supply variability,” continues Glattly.
The benefits of an increasingly digital inventory management strategy for the supply chain
“The value of digital in inventory management is significant and impacts all aspects of the enterprise value equation,” says Glattly, who lists some of the core benefits for organisations that are looking to digitise their inventory management:
- Top-line revenue benefits from mitigating stockouts and lost sales and redeploying products to respond to demand changes with agility
- Cost benefits are enabled by avoiding expediting and firefighting, as well as reducing obsolescence and write-offs
- The impact on working capital is perhaps the most significant. The digital capability isolates excess and provides actionable insight into how to draw it down
“Technology is foundational to Inventory optimisation. Most advanced planning solutions provide for multi-echelon inventory optimisation (MEIO) that provide inventory levels across a network and not just at individual locations. Keep in mind that having good inventory visibility as well as core planning fundamentals in place is critical before targeting optimisation, as you really can’t optimise inventory without knowing what is currently in the network and having a planning process to execute against the recommendations”, adds Glattly.
The next decade of inventory management optimisation
“Inventory management has come a long way in the last five years,” says Glattly. “We are seeing a greater recognition that inventory is the critical ‘link’ in optimising the end-to-end supply chain, as manifesting in several key areas.”
Such key areas include:
- A big focus is on improving inventory visibility: “You can’t manage what you can’t see. Tools that provide real-time tracking and visibility to inventory are a big focus, and visibility is a very popular ‘control tower’ use case.”
- Significant focus on inventory strategy: “We are seeing more companies exploring opportunities to operationalise proven capabilities like pooling, postponement, and multi-echelon optimisation. There is also a greater focus on becoming more demand-driven, targeting smarter replenishment of inventory buffers based on ‘sensing’ demand signals.”
- Greater emphasis on making inventory management a key part of the supply chain operating model and Enterprise Business Planning (EBP) process: “Inventory centres of excellence are becoming more commonplace, bringing strategy, planning, and analytics together to operationalise leading inventory management capabilities across the enterprise.”
“The days of inventory being viewed as ‘free’ are long gone,” says Glattly. “Scrutiny over inventory and its role in improving cash flow is a priority in most industries, even where margins have been historically high and stockout-driven losses significant. This trend will continue. Priorities for inventory management will be to enhance the capabilities discussed today. Data and analytics will become core competencies of inventory managers.”
“Companies will better align individual performance objectives with inventory goals – and these objectives will be shared to foster collaboration. Inventory stocking policies will become more dynamic and will ‘scale-up and down’ based on days-of-coverage, not static unit targets. Optimisation capabilities will evolve to become simulation and machine-learning-based. Finally, planning and fulfilment will become more synchronised and will fully embrace intelligently positioned inventory as a key objective to becoming a more demand-driven and responsive supply chain,” concluded Glattly.
NTT DATA Services, Remodelling Supply Chains for Resilience
Joey Dean, the man with the coolest name ever and Managing Director in the healthcare consulting practice for NTT DATA and is focused on delivering workplace transformation and enabling the future workforce for healthcare providers. Dean also leads client innovation programs to enhance service delivery and business outcomes for clients.
The pandemic has shifted priorities and created opportunities to do things differently, and companies are now looking to build more resilient supply chains, none needed more urgently than those within the healthcare system. Dean shares with us how he feels they can get there.
A Multi-Vendor Sourcing Approach
“Healthcare systems cannot afford delays in the supply chain when there are lives at stake. Healthcare procurement teams are looking at multi-vendor sourcing strategies, stockpiling more inventory, and ways to use data and AI to have a predictive view into the future and drive greater efficiency.
“The priority should be to shore up procurement channels and re-evaluate inventory management norms, i.e. stockpiling for assurance. Health systems should take the opportunity to renegotiate with their current vendors and broaden the supplier channel. Through those efforts, work with suppliers that have greater geographic diversity and transparency around manufacturing data, process, and continuity plans,” says Dean.
But here ensues the never-ending battle of domestic vs global supply chains. As I see it, domestic sourcing limits the high-risk exposure related to offshore sourcing— Canada’s issue with importing the vaccine is a good example of that. So, of course, I had to ask, for lifesaving products, is building domestic capabilities an option that is being considered?
“Domestic supply chains are sparse or have a high dependence on overseas centres for parts and raw materials. There are measures being discussed from a legislative perspective to drive more domestic sourcing, and there will need to be a concerted effort by Western countries through a mix of investments and financial incentives,” Dean explains.
Wielding Big Tech for Better Outcomes
So, that’s a long way off. In the meantime, leveraging technology is another way to mitigate the risks that lie within global supply chains while decreasing costs and improving quality. Dean expands on the potential of blockchain and AI in the industry.
“Blockchain is particularly interesting in creating more transparency and visibility across all supply chain activities. Organisations can create a decentralised record of all transactions to track assets from production to delivery or use by end-user. This increased supply chain transparency provides more visibility to both buyers and suppliers to resolve disputes and build more trusting relationships. Another benefit is that the validation of data is more efficient to prioritise time on the delivery of goods and services to reduce cost and improve quality.
“Artificial Intelligence and Machine Learning (AI/ML) is another area where there’s incredible value in processing massive amounts of data to aggregate and normalise the data to produce proactive recommendations on actions to improve the speed and cost-efficiency of the supply chain.”
Evolving Procurement Models
From asking more of suppliers to beefing up stocks, Dean believes procurement models should be remodelled to favour resilience, mitigate risk and ensure the needs of the customer are kept in view.
“The bottom line is that healthcare systems are expecting more from their suppliers. While transactional approaches focused solely on price and transactions have been the norm, collaborative relationships, where the buyer and supplier establish mutual objectives and outcomes, drives a trusting and transparent relationship. Healthcare systems are also looking to multi-vendor strategies to mitigate risk, so it is imperative for suppliers to stand out and embrace evolving procurement models.
“Healthcare systems are looking at partners that can establish domestic centres for supplies to mitigate the risks of having ‘all of their eggs’ in overseas locations. Suppliers should look to perform a strategic evaluation review that includes a distribution network analysis and distribution footprint review to understand cost, service, flexibility, and risks. Included in that strategy should be a “voice of the customer” assessment to understand current pain points and needs of customers.”
“Healthcare supply chain leaders are re-evaluating the Just In Time (JIT) model with supplies delivered on a regular basis. The approach does not require an investment in infrastructure but leaves organisations open to risk of disruption. Having domestic centres and warehousing from suppliers gives healthcare systems the ability to have inventory on hand without having to invest in their own infrastructure. Also, in the spirit of transparency, having predictive views into inventory levels can help enable better decision making from both sides.”
But, again, I had to ask, what about the risks and associated costs that come with higher inventory levels, such as expired product if there isn’t fast enough turnover, tying up cash flow, warehousing and inventory management costs?
“In the current supply chain environment, it is advisable for buyers to carry an in-house inventory on a just-in-time basis, while suppliers take a just-in-case approach, preserving capacity for surges, retaining safety stock, and building rapid replenishment channels for restock. But the risk of expired product is very real. This could be curbed with better data intelligence and improved technology that could forecast surges and predictively automate future supply needs. In this way, ordering would be more data-driven and rationalised to align with anticipated surges. Further adoption of data and intelligence and will be crucial for modernised buying in the new normal.
These are tough tasks, so I asked Dean to speak to some of the challenges. Luckily, he’s a patient guy with a lot to say.
On managing stakeholders and ensuring alignment on priorities and objectives, Dean says, “In order for managing stakeholders to stay aligned on priorities, they’ll need more transparency and collaborative win-win business relationships in which both healthcare systems and medical device manufacturers are equally committed to each other’s success. On the healthcare side, they need to understand where parts and products are manufactured to perform more predictive data and analytics for forecasting and planning efforts. And the manufacturers should offer more data transparency which will result in better planning and forecasting to navigate the ebbs and flows and enable better decision-making by healthcare systems.
Due to the sensitive nature of the information being requested, the effort to increase visibility is typically met with a lot of reluctance and push back. Dean essentially puts the onus back on suppliers to get with the times. “Traditionally, the relationships between buyers and suppliers are transactional, based only on the transaction between the two parties: what is the supplier providing, at what cost, and for what length of time. The relationship begins and ends there. The tide is shifting, and buyers expect more from their suppliers, especially given what the pandemic exposed around the fragility of the supply chain. The suppliers that get ahead of this will not only reap the benefits of improved relationships, but they will be able to take action on insights derived from greater visibility to manage risks more effectively.”
He offers a final tip. “A first step in enabling a supply chain data exchange is to make sure partners and buyers are aware of the conditions throughout the supply chain based on real-time data to enable predictive views into delays and disruptions. With well understand data sets, both parties can respond more effectively and work together when disruptions occur.”
As for where supply chain is heading, Dean says, “Moving forward, we’ll continue to see a shift toward Robotic Process Automation (RPA), Artificial Intelligence (AI), and advanced analytics to optimise the supply chain. The pandemic, as it has done in many other industries, will accelerate the move to digital, with the benefits of improving efficiency, visibility, and error rate. AI can consume enormous amounts of data to drive real-time pattern detection and mitigate risk from global disruptive events.”