White Paper INTELLIGENT INVENTORY MANAGEMENT: A MODERN ROADMAP TO PROFITABILITY An E2open White Paper 2 3 7 10 Contents Introduction Top Challenges Facing Global Supply Chains Inventory Management Roadmap: A Three-Step Approach Conclusion and More Information e2open.com White Paper: Profitable Inventory Management
Introduction In the last ten years manufacturers have ridden the roller coaster of business cycles. During the decade they saw the dot-com crash of 2001, enjoyed a mini-economic boom during the middle of the decade and then bore the brunt of an unprecedented financial crisis in 2008-2009. Even as the economy now recovers, they still face uncertain demand. Proactive inventory management is one of the critical capabilities needed for successful navigation through such turbulent times. However, many industry leaders have been caught flat-footed with inventory management issues, leading to massive asset write offs or revenue shortages. Why? We remember the $2.25 billion inventory write-off by Cisco in May 2001 after the dot-com crash. During the bubble, double and triple orders were being placed in response to high order patterns, which resulted in high build rates and substantial inventory accumulation. When the slowdown started as the bubble was bursting, lack of clear visibility across the supply chain prevented Cisco from applying the brakes quickly and, as a result, they got caught with excess inventory. The reverse is happening now. Customers of OEMs selling switches, routers and servers have recently complained about experiencing delays in their orders. Insiders say that as the demand for their products picked up after the 2009 crisis, OEMs were hit with shortages since their manufacturers and component suppliers had cut back on their capacity through 2009 and had not adequately ramped up. If they had adequate visibility into changing demand patterns, they would have responded sooner with additional capacity and built enough inventory to meet increasing demand. So why is visibility such a challenge? The sprawl and complexity of supply chain networks exacerbated by outsourcing, off-shoring and short product life spans makes it challenging to provide such visibility. A mobile-phone maker, for instance, typically uses more than 20 components from tier-one suppliers alone for products with a life cycle of only nine months. This means that there is a very small window within which to make crucial decisions about a product s design, price, quality, and features on top of choosing the right array of suppliers and ensuring deep collaboration for operational excellence. With multiple products selling at any one time and many more in various stages of the launch, operational complexity is high. To make matters even more complicated, if a new product proves to be successful, additional sources for components and finished products need be secured immediately often creating the need for new suppliers, and further adding to supply chain sprawl. And because everything needs to happen so quickly, the goals of building deeper collaboration and providing clear visibility to partners often fall by the wayside. Page 2
Industry-leading enterprises, however, tackle these challenges at the source investing in processes and technologies that enable greater visibility, collaboration, and control across the extended business network. Incidentally, these are also the key capabilities needed to ensure better inventory management. This paper explains why these capabilities are key to a company s success and identifies the stages in which they should be implemented. Top Challenges Facing Global Supply Chains Getting a True Picture of Demand Today, more than any time in recent history, manufacturers are faced with an uncertain operating environment in which they have limited visibility into true demand. While many companies have transparency across their major tier-one partners, few have visibility to second or third-tier suppliers or to those trading partners with less technical sophistication. Recent research from Aberdeen Group indicated that improving visibility was a top initiative for supply chain executives hoping to improve their multi-enterprise operations (Aberdeen Group, March 2009). In today s global marketplace, that means extending visibility to 100 percent of partners regardless of tier or technical maturity. A major mobile handset provider, for example, missed out on significant revenue opportunity during a holiday season because it lacked real-time visibility across multiple tiers of its supply chain. In Q3, as the holiday season approached, the mobile provider repeatedly forecasted higher demand to its manufacturers, and yet the manufacturers remained unable to fulfill the higher levels of inventory. This lack of responsiveness was not because the manufacturers themselves were unable to increase capacity, but rather because their first and second-tier suppliers had insufficient inventories to do so. Following recessionary months in late 2008, these suppliers had opted to cut costs by significantly reducing capacity. Because the mobile provider s supply chain lacked transparency, the manufacturer was unaware that its suppliers had cut their inventory; likewise, the suppliers lacked visibility into true demand at the end customer. Unfortunately, this lack of real-time visibility meant a large number of stock outs for the company and the loss of potential sales and customers. A sudden drop in customer demand causes supply chain participants to shed/ consume inventory; on the other hand, sudden surges in demand compel participants to stockpile raw and finished goods inventory to ensure there is sufficient supply to meet demand. Similarly, rising commodity prices lead Page 3
to inventory buildup along all supply chain points, while falling commodity prices provide an incentive to postpone orders in anticipation of better pricing. Shrinking product life cycles can also lead to inventory buildups, as shortages of successful products can be very costly to the bottom-line (because all profits are made in the first few weeks). Such fluctuations in demand and supply are then amplified by the bullwhip effect, wreaking havoc with lower-tier suppliers. The solution? To counter these challenges, supply chain participants need visibility into actual demand allowing suppliers to sense and respond to real-time activities as opposed to guessing and firefighting. Compounding the visibility challenge is the vast number of partners today s international companies work with in most cases, hundreds or even thousands. After all, more trading partners inevitably mean more complexity and risk, as each trading partner introduces new geographies, protocols, and processes into the extended supply chain. The sheer number of trading partners combined with the ever-increasing amount of demand data flowing through the supply chain can create significant problems for those companies lacking real-time visibility and collaborative capabilities. Without transparency across trading partners, most companies struggle to derive accurate consensus demand forecasts across multiple tiers of partners. Not only does this increase the risk for stock outs or surpluses, it also negatively affects partner relations, as partners lack goal congruency and accountability. Obtaining Clear Visibility into Inventory Positions Shorter product life cycles, coupled with growing product proliferation, require better coordination and collaboration with customers and suppliers to achieve perfect execution. Without real-time visibility across demand and supply and the collaborative capabilities needed to respond intelligently to disruptions risks of revenue loss from stock outs or write offs from excess inventory remain Page 4
high. After all, a supply chain with no multi-enterprise collaboration is effectively a conglomerate of suppliers, manufacturers, logistics providers, and retailers working in isolation at various stages of a common product life cycle with no clear view of how well the network is performing. For example, a global semiconductor manufacturer relied on inventory buffers to fulfill unplanned customer demand across its various channels. While this was a significant impediment to lowering inventory carrying costs, the company could not risk potential stock outs or loss of market share. This costly approach ultimately backfired, however, as a lack of visibility and communication across partners prevented the company from successfully rerouting surplus inventories to distributors that were selling out. The results? Missed revenue upside, with increasing inventory costs and risk of write offs. The bottom line is this: effective inventory management is incumbent upon the ability to see and respond to inventory positions and movements in real time. After all, information about demand changes is only useful if manufacturers have complete transparency to all inventories, and the ability to collaborate with partners to respond to these changes. According to a recent report by Aberdeen Group (see chart below), electronic (automated) collaboration was a key competitive differentiator, separating best-in-class companies from their average and laggard counterparts. Today s best-in-class supply chains are successful because they provide all relevant parties with access to inventory information as it occurs enabling companies to make timesensitive decisions to improve the bottom line. Page 5
Responding Quickly to Changes in Demand While real-time visibility and collaboration are essential to well-executed business processes, it is equally important to be equipped with the tools needed to recognize and respond intelligently to changes in the marketplace. Global competition and economic volatility leave little room for error, making supply chain flexibility, or change agility, a huge competitive differentiator. Unexpected changes in demand not to mention unexpected environmental or economic disasters are the norm in today s marketplace, and the inability to respond quickly can mean huge losses in potential sales. According to a recent survey conducted by Gatepoint Research, the top two strategic initiatives of respondents included optimizing inventory stocking levels and synchronizing supply management with customer demand (Gatepoint Research, 2009). As it turns out, both initiatives rely on the abilities to communicate the true picture of demand down the supply chain, and to streamline a collaborative response with partners. Without these abilities, companies either react too slowly or make uninformed decisions, making it difficult to take advantage of upside or avoid potential revenue losses. A leading consumer products manufacturer demonstrated some of the risks associated with poor supply chain flexibility when it introduced a new product into the ereader market. Although the company was confident in the quality and ingenuity of the new product offering, it was uncertain how well it would be received by consumers in a down economy. Much to the manufacturer s surprise, the product was wildly popular, with demand quickly threatening to outpace available supply. However, because the product s supply chain was rigid and manually-based, it was unable to route new inventory to the locations of highest demand. The problem was not that the company had a shortage of inventory, but rather that its supply chain lacked the flexibility required to accommodate for unexpected changes in consumer behavior. The result was a significant loss in potential sales, and a missed opportunity to acquire new customers. Responsive supply chains enable companies to monitor customer demand and partner performance (e.g., sell through by location and channel), locate areas of poor performance or demand changes, and then take quick, corrective actions. A company s ability to accommodate varying individual partner processes, data types, and service-level expectations is another important aspect of flexibility. For example, a fully automated, flexible supply chain is able to run a just-in-time (JIT) replenishment program for one customer, while simultaneously running a hands-off VMI process across other channels. This is particularly important in today s marketplace, where companies work with hundreds or even thousands of partners to sell into diverse markets. Page 6
Inventory Management Roadmap: A Three-Step Approach Best-in-class companies pay close attention to inventory, not only as a key indicator of business health, but also as a way to derive competitive advantage. Specifically, these companies take a proactive approach to breaking down the inefficient processes and information silos brought on by a lack of visibility, collaboration, and process automation. Best-in-class companies are able to improve their responsiveness to demand changes and lower costs by implementing real-time, fully automated inventory management operations. They also outperform their peers in inventory turns and sell through, while eliminating stock outs and surpluses to establish superior customer service. Moreover, best-in-class organizations distinguish themselves by continuing to make sound investments in technologies designed to improve inventory management operations in order to boost profitability, increase market share, and raise customer satisfaction levels. However, these organizations don t take a big-bang approach to implement these capabilities, but instead implement them gradually across processes and systems. The following section outlines a pragmatic, three-step approach to establishing best-in-class inventory management capabilities, including real-time visibility, end-to-end collaboration, and intelligent inventory control across the network. Step 1. Real-Time Inventory Visibility: Connecting to All Partners in the Network Benefits of Real-Time Visibility: Visibility to inventory stocking locations Improved sense of shifts in the demand picture Reduced costs due to expediting and warehousing In order to effectively manage a particular inventory process, data must be shared across partners of all types. The initial step, then, is to establish real-time visibility by electronically connecting to trading partners across the extended supply chain. But with hundreds or thousands of trading partners spread across the globe, complete supply chain visibility is certainly no small feat for today s manufacturers. By implementing sophisticated B2B integration solutions, however, companies can gain visibility into channel, supplier, and even in-transit inventories enabling them to accurately monitor inventory levels and quickly respond to potential disruptions or upside. The best connectivity solutions offer flexible integration options, ensuring that all supplier and channel partner systems are supported, regardless of technical maturity or size of partner. This enables partners working with different processes, systems, and protocols to connect with minimal overhead. Focusing on integration with specific channels or groups of suppliers is not enough; today s volatile, fast-paced marketplace demands end-to-end supply chain connectivity to all partners in the extended network. On the buy side, real-time inventory visibility provides virtual access to supplier, internal, and VMI hub inventories, enabling companies to reduce inventory liabilities and Page 7
improve supplier responsiveness. Real-time visibility on the sell side provides transparency across customers, partners, and internal sites, ensuring that supply is consistently flowing to the areas of greatest demand. The bottom line is this: real-time visibility is the foundation for any sound inventory management program because it provides all supply chain parties with a true, dynamic picture of demand. Companies are able to more intelligently utilize working capital and eliminate stock outs, surpluses, and the need for just-in-case inventory. A shared view of demand also ensures improved risk mitigation and superior customer service. Step 2. End-to-End Partner Collaboration: Driving Inventory Efficiency and Responsiveness Benefits of End-to-End Partner Collaboration: Increased supply assurance Reduced operational costs, with fewer stock outs and buffer inventories Reduced overall inventory liability Improved customer service levels Enabling real-time collaboration across trading partners is the second step in the multi-enterprise inventory management roadmap. Once visibility is established, real-time collaboration allows supply chain participants to work together to solve potential disruptions and improve operational efficiencies. Suppliers and buyers are able to collaborate on min/max inventory levels, exchange data to mitigate surpluses and stock outs, and leverage supply chain applications to easily automate supplier replenishment programs, such as VMI or SMI. We provide innovative and flexible solutions to our customers to accelerate their success. By connecting and collaborating with our partners, we have been able to better fulfill short supplier lead times, reduce inventory levels, and dramatically improve inventory turns all while lowering the total cost of ownership to our customers. CPO and EVP, leading electronic manufacturing services provider In addition, real-time collaboration is also pivotal to flexible supply chain execution. The ability to resolve issues in real time with the appropriate partners can be the difference in meeting on-time delivery or fulfillment requirements that dictate customer satisfaction. To be responsive, then, companies must maintain and extend collaborative capabilities to partners. To accomplish this, companies need access to technologies designed to both communicate with partners and integrate with their internal operational systems. These technologies should be flexible to partner or customer process requirements, particularly when companies are assuming the supplier role. Real-time collaboration provides all partners with access to a single version of the truth as well as the ability to proactively address issues as they arise. With this capability, companies are able to reduce their supply chain risk and respond quickly and intelligently when supply chain disruptions do occur. Customer service levels simultaneously improve because companies have real-time visibility into actual demand as well as the responsiveness to adapt to changing demand patterns. Page 8
Step 3. Intelligent Inventory Control across the Network Benefits of an Intelligent Inventory Network: End-to-end visibility and control Reduced inventory costs (warehousing, stock, in-transit, expedite) Reduced operational costs The last step in the inventory roadmap is establishing intelligent inventory control, which requires complete automation of inventory processes across the extended supply chain. Companies with this level of automation can define endto-end, rule-based inventory tracking and KPI monitoring, leading to actionable strategies for continuous supply chain improvement. For example, automated channel and supplier inventory monitoring provides alerts on impending shortfalls or obsolescence in real time enabling companies to respond to actual supplier and consumer behavior instead of relying on forecasts and predictions. Companies with visibility into inventory process performance across the multi-tier supply chain are also able to set inventory policies and continuously improve inventory programs. In this way, the supply chain becomes simultaneously more intelligent and hands-off resulting in efficient process automation and ensuring demand-supply synchronization. To achieve this capability, they should have already achieved end-to-end collaboration as defined in step two. A key objective of our supply chain strategy has been to take advantage of our scale and scope through a collaborative esupply Chain. VP and CPO, leading global telecom service provider Intelligent inventory control is only achieved by best-in-class supply chains, and requires a significant senior management commitment. The benefits, however, are well worth the investment. Best-in-class supply chains are equipped with visibility, collaboration, and process automation that extend not only to major first-tier suppliers, but to partners of all tiers including the smallest and least sophisticated. These supply chains also experience markedly lower operational and inventory costs, as all business processes are wholly transparent, collaborative, and flexible. A leading manufacturing services provider hoped to take advantage of opportunities for sourcing and operations in low-cost regions but lacked the necessary capabilities to scale quickly. The company also lacked visibility into in-house and partner operations needed to make intelligent decisions about inventory levels and supplier viability. Additionally, as market competition increased for this manufacturer, it struggled to reduce cycle times in order to improve customer satisfaction. The company s initial objective was to gain visibility across the supply chain in order to eliminate latencies and improve decision making. The company executed on this initiative by establishing connectivity to all major partners, providing transparency into in-transit, on-hand, and sell-through inventories on a global scale. Next, the company shifted focus to collaboration setting up a flexible, automated VMI program that allowed 100 percent trading partner participation. In this way, the company ensured that all supply chain participants had access to a single version of the truth, improving supply assurance and inventory performance. The third phase of the Page 9
company s supply chain transformation involved monitoring performance across various inventory processes. This enabled the company to track performance across its supply base and measure its ability to meet customer fulfillment expectations. The company s executives were therefore able to continually refine and implement inventory strategies to drive competitive advantage. By equipping its inventory management program with real-time visibility, collaboration, and business process automation, this high-tech manufacturer realized the following benefits: $400 million in inventory reduction 33 percent reduction in supplier response times 50 percent improvement in compliance to PO/demand changes Conclusion and More Information The proven three-step approach outlined in this paper including real-time visibility, end-to-end collaboration with suppliers, and intelligent inventory control enables organizations to reduce operational costs and establish best-in-class inventory management capabilities. These capabilities separate industry leaders from their peers and allow them to increase profitability, introduce new products, and respond to changing demand patterns more quickly. Successful implementation of these capabilities requires a focus on process innovation, and also executive commitment to the latest B2B integration technologies and supply chain applications. Additional information on the ways in which you can improve your company s inventory management strategy can also be found at e2open.com, or by calling (650) 645-6500. About E2open E2open is a leading provider of cloud-based supply chain management solutions. The company provides software and services that enable visibility, collaboration, and control across large trading partner networks. Brand owners and global manufacturers with complex supply chains use the company s B2B integration services and supply chain business process management solutions to maintain optimal alignment of supply and demand for lower costs and better service. E2open customers include The Boeing Company, Celestica, Cisco, Dell, Hitachi, IBM, LSI Corporation, Motorola, Panasonic, Seagate Technology, and Vodafone. Headquartered in Foster City, California with operations worldwide. For more information, visit www.e2open.com. Offices Published: 2010 E2open, Inc. E2open and the E2open logo are registered trademarks of E2open, Inc. Customer legal disclaimer goes here. All other marks are trademarks, service marks or registered trademarks of their respective owners. All rights reserved. E2open U.S.A. Corporate Headquarters Foster City, CA Dallas, TX Austin, TX E2open Europe Reading, UK E2open Malaysia Kuala Lumpur, Malaysia E2open Taiwan Taipei, Taiwan Page 10