Inventory Still Weakest Link

Technology won't cure inventory woes without process improvements, consultants assert

Alexandria, VA  February 27, 2002  Efforts by U.S. manufacturers and retailers to reduce their inventory levels are not keeping pace with the significant advances being made in other supply chain-related activities.

That is the conclusion of Capital Consulting & Management Inc. (CCMI), a supply chain-focused consulting firm that believes new strategies are needed to significantly reduce inventory levels and related costs.

"Through the adoption of technology, increased information was supposed to replace physical inventory in 21st Century supply chains, but it's not happening as quickly as anticipated," said Scott Elliff, president of CCMI. "By all measures  quantity of information flow, speed of data transmission and sophistication of technology tools  the availability of information is continuing to grow exponentially. At the same time, overall business inventories of raw materials, work-in-process and finished goods as a share of the gross domestic product are virtually the same as they were five years ago, and are now at an all time high level of about $1.5 trillion."

Reducing inventory frees up capital for better uses, such as reinvestment in new plants and equipment, marketing and sales initiatives to grow market share and increased dividend payouts to shareholders. For a company with one billion dollars in sales, reducing inventory from "average" levels to those achieved by leaders within that company's industry can generate anywhere from $20 million to $100 million in added annual cash flow, according to CCMI.

To achieve these benefits, CCMI recommends that companies rebalance the roles of information systems and operational improvement programs. "Technology is a terrific enabler for providing better visibility of inventories and efficiently performing complex inventory optimization and replenishment calculations, but it's the people within the companies who need to set the business policies and procedures, make the day-to-day decisions about what to order, make, stock and ship, and diligently address ongoing problems," said Elliff.

CCMI promotes the idea that the best results can be achieved by coupling new technology with focused strategies to improve underlying business processes. Such strategies, CCMI says, typically include five key program elements:

  • Updating lead times and order quantities to reflect improvements in transit times and delivery reliability.

  • Analyzing and sharing data on production and sales levels with suppliers and customers, so that more timely adjustments can be made to future forecasts.

  • Building additional flexibility into manufacturing processes, through just-in-time programs, last-minute customization capabilities and fast lane make-to-order replenishment methods, especially for volatile seasonal merchandise.

  • Redesigning warehouse networks, layouts and procedures to speed up the flow of goods from suppliers to customers.

  • And aggressively disposing of obsolete or "dead" inventory that clogs the supply chain.

"Companies that are coupling these supply chain process improvements with the latest in real-time supply chain information technology are achieving the most dramatic improvements in costs and service levels, and are making inventory management a much stronger link in their supply chains," asserts Elliff.