"Overly Simplistic" Inventory Management Seen Yielding "Flabby" Supply Chains

New technologies help companies manage inventory holistically across multiple stages of supply chain, AberdeenGroup reports

New technologies help companies manage inventory holistically across multiple stages of supply chain, AberdeenGroup reports

Boston — January 14, 2005 — More than 60 percent of companies use overly simplistic inventory management methods, such as ABCD inventory policies or simple weeks-of-supply rules for products, and that these companies frequently have 15-30 percent more inventory than they need and lower service levels, according to a recent AberdeenGroup report.

According to "The Supply Chain Inventory Strategies Benchmark Report," only 5 percent of manufacturers and distributors surveyed use the current state-of-the-art approach to inventory management — multi-echelon inventory optimization that takes into account multiple types of demand and supply variability.

"Simplistic inventory methods lead to flabby supply chains," says Beth Enslow, Aberdeen vice president and author of the report. "Our benchmark study found that most companies still operate with old-fashioned inventory policies that are managed at a local level."

Benefits of a Holistic Approach

Companies that reported using new optimization methods that manage inventory holistically across multiple stages in the supply chain, including suppliers and downstream partners, commonly drove 20-30 percent reductions in on-hand inventory and 10-20 percent improvements in time to market, Enslow said.

The Aberdeen study also found that nearly half of respondents have shifted away from purchase orders or release notices for some of their suppliers. Instead, these companies are setting a minimum and maximum inventory target level for an item at a plant or other company location, and then asking the supplier to take responsibility for ensuring that inventory is maintained within that range.

These enterprises have seen dramatic inventory reductions, sometimes over 30 percent, while drastically reducing stockouts. New supplier collaboration technology is helping companies execute these "min/max" replenishment strategies in a way that enables suppliers to also reduce their own inventories.

In total, Aberdeen finds that companies need to be much more aggressive in using the new generation of multi-echelon inventory optimization technology and inventory collaboration technology.

The report, available at http://aberdeen.com/summary/report/benchmark/SCInventory122704_BE.asp, includes case studies from high-tech, medical equipment and consumer goods companies that have driven performance improvements by applying new technologies.