Three Common Pitfalls in Inventory Optimization

How to use a service provider to create a competitive advantage out of working capital


The second pitfall is a gap in skills. The employees needed to implement and run the new optimization process and system may lack the necessary skills. An organization may have planners who lack the ability to change or to operate the new software. Investment in training may be enough to address the gaps for some personnel. In other cases, the existing staff may simply be the wrong people to operate the future process. Skill gaps can also occur in the IT organization, since implementing a new software solution requires IT staff to have specific knowledge and training in order to install, maintain and upgrade the software. The knowledge required to maintain another software solution can overburden the IT staff already responsible for maintaining multiple ERP, supply chain and other enterprise solutions. Whether it is business or IT personnel, a gap in skills can cause significant delay or even failure.

Whereas the first two pitfalls deal with concerns before and during implementation, the third pitfall comes into play after implementation. Companies that succeed in making the upfront investment and that address skill gaps either through training or obtaining the right people can still encounter issues with sustaining business value in the long term. Future promotions or attrition can expose holes in succession planning that lead to degradation in the use of processes and systems. Without adequate time for handover, job transitions to even qualified successors will suffer. The successor might even have a skill gap that can be easily addressed with training but may lack the support and funds for training because the implementation has been complete for some time. In summary, employee turnover can cause a successfully operating process to degrade in performance and, over time, stop producing the business value it was designed to create.

Use of a Service Provider

How do companies cognizant of the three common pitfalls avoid or overcome these obstacles when pursuing inventory optimization? One approach that mitigates all three pitfalls is to engage an experienced service provider that can bring inventory optimization capabilities in an outsourced arrangement. The software is owned, hosted and maintained by the service provider. This one-stop shop service eliminates the time and costs associated with the in-house approach, where a company must engage multiple partners to assemble all of the pieces required to own, integrate and implement the system.

After implementation, the inventory professionals that operate the software and run the optimization processes also reside at the service provider. The service provider performs the optimization on the relevant demand and inventory data and returns the optimized inventory parameters and replenishment orders. The company's planners review the optimized orders and execute inventory management just as they would on the currently derived parameters.

To avoid the pitfall of upfront investment, the partnership can be structured on a "pay as you go" basis, with payments commencing only after the solution is up and running. The time from cash outlay to value creation is immediate, and the payment is in proportion to the quantity of value creation. In this subscription approach, the company continues to pay for the service as long as business value is being created. The company can decide to stop and shut down the service with little notice and no large sunk costs. The service approach allows for a shorter time to implement by leveraging the installed base and experienced resources at the service provider.

In addition, a service provider brings the skilled functional resources required to operate and host the software and run the daily business process. Utilizing the professionals at the service provider mitigates both the pitfalls of skill gaps and employee turnover. The provider's inventory professionals are typically operating optimization processes for other companies as well, so their market skills are fresh. The company's planners review the optimized output from the service provider and accept parameters to execute upon just as they have in the past. The only difference is the parameters are now improved and optimized. Utilizing the resources of the service provider also means the chance of employee turnover leading to performance degradation is reduced as the service provider's personnel continue to operate the business process and system no matter how many times planners turn over and switch jobs.

In Summary

Inventory optimization provides companies with a scientific approach to dynamically plan inventory to meet desired service levels. Overall, the ability to create and sustain an inventory optimization capability is not a simple task. Common pitfalls include upfront investment, gaps in skills, and employee turnover. Engaging a qualified service provider to provide the inventory optimization resources can be an effective means to avoid these pitfalls. A service provider hosting the software under a "pay as you go" model removes the upfront investment. The fact the service provider's professionals are performing the daily process and using the software alleviates the risks from skill gaps and employee turnover. By using a service provider to overcome these pitfalls, a company increases its ability to create a competitive advantage out of inventory optimization. ¦

About the Author: Mike Valentine is director, supply chain design & innovation at UTi Worldwide, a global logistics provider also specializing in inventory optimization services for its clients' supply chains. He can be reached at mvalentine@go2uti.com.

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