In today's age of outsourcing, this challenge is only exacerbated by the fact that more and more companies have extended supply chains with plants and partners located across the globe, where demand planning may be performed by the OEM in one location while supply planning is being managed by the contract manufacturer in another. This makes the synchronization of demand and supply (an already difficult problem), even more challenging, with the additional dimension that information concerning supply and demand decisions must be clearly understood by both the contract manufacturer and the OEM. In order to provide a cost effective supply, the contract manufacturer needs to be able to make supply orders based on a forecast, particularly for long-lead time components; however the need to respond to frequent forecast changes can quickly result in excess inventory, which might be either the consequence of poor supply planning (e.g. failure to promptly cancel supply orders) or inaccurate forecasts. As a result, it's increasingly difficult to calculate ownership of inventory, which is the heart of the inventory liability problem.
Achieving a fair allocation of inventory liability creates a considerable strain on the relationship between OEMs and contract manufacturers. The OEM is looking for maximum demand flexibility at the lowest possible cost while the contract manufacturer must profitably manage the cost while still providing the flexibility to rapidly respond to the inevitable demand or product changes. According to AMR Research, "Companies must manage their inventory risk in a more innovative way. They need visibility and assessment tools that can measure and report the risk."
Managing Inventory Liability
A new approach to managing inventory liability that both enable manufacturers to reduce inventory liability and also alleviate the stress in an outsourced relationship is currently emerging. Response management technologies are providing the ability to respond to the impact of changes in demand, supply and product configuration on inventory liability across the extended OEM/contract manufacturer supply chain.
A response management system extracts enterprise resource planning (ERP), supply chain and manufacturing service agreement data from both the contract manufacturer and the OEM. It then enters it into an integrated system to provide real-time insight to anticipate potential problems, review multiple action alternatives and respond to the constant changes in their supply and demand chains. As a result, OEMs and contract manufacturers can respond to any changes in the supply chain and communicate the impact of changes to their outsourcing partners immediately, thus reducing their inventory liability. Providing the ability to determine the "what-if" impact on inventory liability resulting from forecast changes, changes in supply policies (e.g. lot sizes, safety stock levels) and product changes not only can avoid costly changes but can also ensure that the OEM and contract manufacturer mutually understand the impact of a business decision.
Case In Point
In the high-tech consumer electronics industry where products tend to have a short lifecycle and demand is volatile, a response management system can be used to manage new product introductions and align them with the end-of-life of older products. This is particularly challenging given the predominance of outsource OEM/contract manufacturing relationships in consumer high-tech electronics. However, a response management system can be used by high-tech electronic companies to simulate what would happen if they were to introduce a new product before actually doing so in order to evaluate the inventory liability associated with different effectivity dates and determine the best time to introduce new products and make old products obsolete. As a result, they are able to lower their labor costs, reduce inventory liability and ultimately improve the bottom line.
As exemplified by demand-driven pioneers such as Dell and Wal-Mart, which have mastered real-time information flow, the success of an organization is heavily dependent upon the amount of inventory liability it has. Companies that reduce their inventory liability by becoming a demand-driven organization are in a good position to come out on top in the rapidly evolving global economy.
About the Author: David Haskins first joined Kinaxis, formerly Webplan, as vice president, Research and Development, in 1997. He is currently the executive vice president, Development, at Kinaxis. Haskins brings more than 20 years of experience in senior research and development positions, including the last 11 in executive roles. His primary area of focus has been on information management solutions. Before joining Kinaxis, Haskins held several executive research and development positions at Fulcrum Technologies, an information retrieval and knowledge management company. Haskins holds a Bachelor of Science and a Masters of Science in Computer Science from Queens University in Kingston, Canada.