The Art of Inventory Management

[From iSource Business, February 2001] Mark O'Bryan, vice president of procurement for Smurfit-Stone Container Corp., well remembers what life was like in the days before the company began automating its purchasing functions.

Record keeping was largely paper-based, and inventory forecasting was more art than science. "Our suppliers would come in once or twice a week and look at our inventory levels to see what we needed, order necessary supplies and then send us a monthly bill," O'Bryan says.

Now, however, not only is inventory monitored more accurately, it is monitored in-house. And the resulting data flows enable Smurfit-Stone staff to project longer term demand forecasts, which in turn mean lower levels of inventory that need to be maintained. "Now that we are forcing this purchasing data into our system, we are able to examine longer term trends," O'Bryan says.

What happened in the interim was a typical, garden-variety e-procurement initiative an initiative that also helped the company streamline its inbound supply chain operations. And while not as far reaching or as sophisticated as the auto industry's Covisint, the granddaddy of all integrated industry supply chain operations, the Smurfit-Stone supply chain model does offer some interesting insights into the value of e-procurement and how it fits into a company's overall supply line.

"When a company is able to anticipate its needs six or 12 months out, then it can ensure it has the exact or as close to exact as possible inventory in place," says Bill Eisele, an analyst with Hurwitz Group's Electronic Business Strategies group, based in Framingham, Mass.

Inventory management is a business concept at least 20 years old. But as e-procurement is increasingly being viewed as more than just a cost efficient way to procure MRO goods and supplies, this decades-old concept is being given a second and third look by companies that once considered inventory management too complex to be done internally.

Tight Capital Dollars

When Smurfit-Stone began rolling out the flagship Clarus eProcurement product to more than 200 of its facilities in the United States a year ago, the procurement department kept its estimates of projected savings and other such benchmarks deliberately low. As O'Bryan puts it: "Capital dollars are very tight in the paper industry, so we have to have an accurate ROI to get a project approved." The system will be completely deployed sometime this year.

Headquartered in Chicago, Smurfit-Stone is perhaps North America's largest company in the paper-based packaging industry, manufacturing such products as corrugated containers and containerboard, folding cartons and boxboard, and industrial bags. It also produces other industrial and consumer packaging products and collects and processes recovered fiber a key raw material for the company's paperboard mills. At the bottom, it's an old-line company in an old-line industry with old-line profits grappling with issues of globalization, industry consolidation, new product development and ever-reducing margins.

So the folks at Smurfit-Stone pushed for e-procurement with the most basic goals in mind: A need for visibility in their procurement operations, improved work flow processes, better reporting capabilities, and reigning in maverick spending. But most important at the beginning at least was a desire to aggregate MRO expenditures. "We have 28 large mills and more than 200 smaller converting plants. Our issue was to take our purchasing leverage in the 28 mills and spread it to the 200 converting plants as quickly as possible," O'Bryan says. The challenge was the company's infrastructure and decentralized purchasing procedures. "These converting plants all have different maintenance systems," O'Bryan explains. "We needed software that would utilize the Internet to communicate with suppliers quickly, create content and force all of our purchases in these converting plants to go through one platform."

Procurement executives at Smurfit-Stone estimated a conservative ROI of 36 percent on its Clarus investment. "We analyzed $200 million worth of purchases to come up with that figure," O'Bryan says. "Our buy is much larger than that," but the $200 million subset was the most easily quantifiable, he explains.

Using those figures as a base, Smurfit-Stone concluded that an investment in e-procurement was worthwhile if only because purchasing and other related transaction costs would be reduced and their total buy would be leveraged with their suppliers.

But staffers quickly noticed additional benefits of inventory reduction and supply chain process improvement and if there were ever an industry that was ready for such benefits, it was this one. Indeed, conventional industry wisdom says the best way to achieve cost reductions in the packaging industry is to lower inventories of raw materials and finished goods and to have fewer goods in transit.

Prior to the start of the procurement automation process "we had really relied on suppliers to tell us when we needed more inventory," O'Bryan says. But, due to the complexity of Smurfit-Stone's various operations and the fact that it generally purchased the same amount of direct materials every month, it seemed easier to outsource this aspect of its supply chain. "But now inventory management is in our hands, and we can manage it ourselves instead of outsourcing everything to the supplier."

Erika Morphy is a freelancer writer based in Washington, D.C.

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