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Inventory Management: We Can Do Better

Each day through the COVID-19 pandemic, I tune into Anthony Cuomo’s (governor of New York) daily briefings. It is my break in the day. As a multi-tasker, when Governor Cuomo broadcasts, I use the time to work out on my rowing machine.
His opening line is, “Let’s start with facts. While we all have opinions, let’s start by reviewing the facts.” When he says this, I smile and row harder. I wish that all discussions could start with the facts.


In my day-to-day work in supply chain management, I find more encounter more opinions than facts.  …most discussions are fueled by over-zealous and self-serving marketing programs. Strong opinions and egos (mostly male) abound… For over two decades, I obediently tapped my foot to technology leaders’ glibly spouting opinions. I seek facts, but I find that they are few and far between.
The lack of fact-based discovery makes me itch…

A Story

Last week on my Network of Networks call, a proud technology salesperson, let’s call him Jim, announced, “I am speaking at Logimed next week on the impact of Just-in-Time (JIT) on the COVID-19 response. Downsizing inventories over the past decade crippled the response.” As I heard Jim speak, I twisted in my seat unsure what to say.
I struggle when I hear opinions that don’t align with facts. So, let’s start with the data. (Yes, am that geeky kind-of-gal that likes to ground discussions in data.) In Table 1, I share research collected for the Supply Chains to Admire analysis on the average days of inventory by industry across the period of 2004 to 2019 by increments to match economic shifts. The period of 2007-2008 was the downturn of the recession while the period of 2009-2013 marked the recovery. (The source of this data is a syndicated data provider of public reporting termed “Y-Charts.”)
Table 1. Days of Inventory Peer Group Across Time Periods

So when we start with the facts, it is clear that every industry peer group increased the days of inventory. In addition, each peer group is markedly different. So, why have we not reduced inventory?
Now I will share my opinion.

  1. Complexity. Supply chain leaders in the beverage and household products industries struggled to manage complexity. Each company managed marketing programs that were not tethered to market-drivers. Platforms and product portfolios grew without rationalization. In an organization, there is good complexity (products with a differentiated value proposition that grow revenue without sacrificing costs) and bad complexity (products and services without a differentiated value proposition that drain costs.) Most companies do not know the difference.
  2. Supply Chain Leadership. With average operating margins of 20-22%, medical device and pharmaceutical companies are supply chain laggards. The companies in these two industries just have not made honing supply chain capabilities a priority. One of the issues in the current COVID-19 recovery response is the lack of leadership in these industries.
  3. Supply Management. Industries like automotive pushed cost and waste backward in the supply chain. As a result, second and third-tier inventories grew disproportionately. With a focus on cash-to-cash, payables increased, but brand owners failed to take responsibility for inventory in their supply base.
  4. Network Design. Only 9% of companies actively design the supply chain with a focus on buffer design. As demand variability increased, companies myopically focused on safety stock without a focus on burgeoning in-transit inventories or the need to better manage cycle stock. In addition, with the acceleration of M&A, companies have multiple supply chains each with distinct rhythms and cycles requiring design. 
  5. Factory Scheduling. With the evolution of the advanced planning market and the growth of the market share of ERP expansionist companies, solution capabilities in factory scheduling weakened. With the increase in demand variability and platform complexity, factory scheduling and the management of cycle stock should have increased, but it did not. (I constantly shake my head on why companies are not more active in this area.) We were better at factory scheduling in 2002 that we are currently.
  6. Executive Understanding. Many executives do not understand the form and function of inventory and the need for inventory buffers. Inventory is both waste, or MUDA, and the most important buffer in the supply chain. There is constant tension. However, without analyzing the inventory that is actively working as a buffer and stock that is drawing the P&L companies operate in a blind spot. Only 18% of companies in the last decade deployed more advanced inventory management solutions (often termed MEIO) and actively use them. Without this level of visibility, executives mistakenly see inventory as a big blob, or a wasteland, that can be cavalierly reduced to make a quarter.
  7. Balance in S&OP. While 82% of companies have an S&OP process, less than 50% of company processes are balanced and only 1/3 of companies actively run “what-if” scenarios. In a mature S&OP process, inventory is managed as a well-designed set of buffers managing risk trade-offs. As shown in Figure 2, this is not today’s reality.

Figure 2. S&OP Balance
As a reminder, form and function of inventory is the process of analyzing what form inventory should be held and fine-tuning the function. The greater the demand variability, the more inventory should be held as raw materials or work-in-process. Postponement techniques and platform rationalization help to improve agility. The function of inventory is a methodology to analyze inventory effectiveness. While most companies only analyze safety stock, leaders evaluate each segment–in-transit, cycle, seasonal and demand shaping support– inventory, and to reduce waste. Evaluating the form and function of inventory is the foundation of inventory management.
In short, as we look at the data, and think through all of the deployments of technologies and processes to improve inventory, I conclude that we can do better. Supply chain teams need to up the ante and face facts.
Let’s face it. Traditional supply chain practices are not equal to today’s challenges.
Your thoughts? I look forward to hearing from you.

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