Optimize Inventory for Bottom-line Improvements

Companies that fail to grasp the necessity of proactive inventory management will be left with few options


With improvements in customer service, as well as collaborative decision support, inventory optimization and balance sheet benefits, there is much to gain and nothing to lose by assessing and correcting supply chain issues. In four to six weeks, a complete system can be up and running and improving both operations and finances.

Case Study: Coni-Seal

Coni-Seal, an after-market automotive supplier, recognized early on how big an impact improper inventory management can have on revenues and overall market share. With inventory levels growing faster than management could track, company leadership could not forecast accurately and could not tie raw material procurement to customer demand. Mazhar's team followed a series of carefully mapped steps to apply a proactive inventory management practice:

  • Right-size inventory;
  • Optimize slow and excess inventory;
  • Reduce holding costs;
  • Optimize and synchronize supply chain management and increase visibility;
  • Improve forecast accuracy;
  • Make the right investment in inventory; and
  • Monitor key performance indicators.

Mazhar is quick to point out that right-sizing inventory does not simply mean reducing inventory; it means "buying the right inventory" and taking the time to identify precisely where inventory is out of balance and bringing it under control to minimize uncertainty in purchasing cycles. This also means analyzing buying behaviors, vendor performance and identifying improvement areas, identifying slow and excess inventory, and then establishing a baseline, developing monthly procurement goals which are aligned with the company's financial objectives, developing a report card for measurement, and then committing to a go-forward strategy.

The team implemented a system that automatically downloads inventory, returns and procurement data on a nightly basis. Forecasting methodology then reviews month-to-month history of SKU velocity, aggregate demand and frequency, along with currency of the demand for each SKU. Executive leadership access the system via secure Internet connection to manage inventory, view results, consider system recommendations for product management and make critical planning decisions. To complete the picture, leadership must then measure the effectiveness of the application by viewing key performance indicators, such as gross margins, revenue changes, turns, GMROI, service level and inventory investment level.

"Simply making changes is not enough," advises Mazhar. "Leadership must monitor the results and measure them against hard, financial benchmarks in order to assess the real value of the program."

Coni-Seal implemented a focused inventory management program that achieved the following results in 12 months' time:

  • Sales increased 31.5 percent;
  • On-hand inventory decreased 26.4 percent;
  • Available supply chain inventory (on-hand plus on-order) decreased 21.2 percent; and
  • Service levels were maintained at 93 — 95 percent.

Measuring Success

A focused inventory management program is a major commitment for any organization. Properly implemented, it can serve as an effective and powerful business tool for operations and forecasting that can achieve real financial benefits in a relatively short period of time.

Implementing this solution requires attention to details that may have been overlooked or simply assumed in the past. Daily assessment of inventory, returns and procurement data are crucial to measuring success. So is monthly assessment of SKU velocity, aggregate demand and frequency, as well as currency of demand data at the SKU level. Finally, executive commitment and action on product management and financial planning are required. Without buy-in at the top level, the process is incomplete and destined for failure.

Once the key pieces are in place and the process has been adopted, inventory managers must faithfully measure those key performance indicators described above, as well as gross margins, revenue changes, turns, GMROI, service level and inventory investment level.

"It sounds like a great deal to manage, and it is," says Mazhar. "But if set up properly, the system can function largely on its own and provide knowledge-based information to the support decision-making process."

And with benefits reaching far and wide into the entire organization, the investment in both time and effort surely proves financially worthwhile in the short and long term.

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