Balancing the inventory equation
How can supply chains use well-calibrated distribution networks, forecasting and technology to achieve the perfect balance with their inventory?
Too much stock can drag your balance sheets down, but not enough can leave you shorthanded in a crisis. This may not be a new supply chain issue, but it has taken on a fresh sense of urgency over the last 18 months, as companies around the globe have been hit with unprecedented supply chain disruption alongside extraordinary spikes in, and changes to, demand.
Professionals in the sector are therefore taking a fresh look at the levels, management, and positioning of inventory. Their aim is to recalibrate their stocks and optimise their working capital, while maintaining resilience to external events, all while maintaining a high delivery tempo in an increasingly omnichannel environment.
Due to the complexity of this task, Reuters Events: Supply Chain in Partnership with CenterPoint Properties gathered together a range of supply chain experts in an online workshop, in order to discuss their concerns and how they are building a future-proof strategy.
The following summarises the thoughts expressed during that conversation while keeping participants’ anonymity safe to protect the open and frank conversations that are part of our roundtable workshops.
A fresh look at inventory management
There can be no doubt that since COVID-19 broke across the globe, supply chains have been challenged from numerous angles, creating a major impetus for a rethink when it comes to how to position and manage inventory in supply chains.
First came disruption and blockages, with widespread impacts across industries. A mid-2020 survey found 97% had experienced a supply chain disruption related to COVID-19, and an Allianz/Euler Hermes survey of 1,181 companies in Europe and the US from later that year found 94% had faced the same experience.
With such high figures there can be no doubt that this is an exceptional period. In 2020 and into 2021, we have seen the most visible product shortages as a result of supply chain breakdowns in recent memory. From the runs on grocery supplies by consumers, to the factory shutdowns in the electronics sector, to the ongoing woes of the automotive industry, effects have been widespread and will continue, for example the bottlenecks developing in the plastics industry and recently in lumber.
The Institute for Supply Management found in its March Manufacturing PMI® that the backlog of orders recorded by its cross-industry panel had reached a record high and customer inventories to a record low for the index components. This indicates difficulties in getting enough supplies to meet demand. Although these eased very slightly in their April index reading, Index analysts noted that supply chain constraints continue to be widespread across the sectors they monitor and won’t disappear any time soon.
The primary challenge illuminated by the crisis, therefore, has been how to keep inventory available where it is needed by the end customer, without unnecessarily burdening the organisation with increased costs and risk.
This challenge also comes against a background of increased consumer demand for home delivery, or alternative pick-up methods. Now, companies are having to apply another level of complexity to their supply chains in order to meet the hunger from the consumer for rapidly delivered products in a wider range of product categories.
Cutting the cost of carrying inventory
The first solution supply chain managers naturally reach for is to increase inventory and build buffer stocks. Members of the panel noted that this is part and parcel of supply chains and stocks have been bumped up post-pandemic outbreak, but is often of limited utility. It was clear from the discussion that there exist severe limits to this approach that mean it should not be the only answer to the current climate.
This is because firstly, demand for warehouse space is already at record highs and shows no signs of abating, making acquiring significant space near to end markets challenging and potentially too costly.
Secondly, holding substantial stock ties up significant working capital, which may already be at a premium due to either disruption or additional costs incurred trying to reposition supply chains. It can therefore be hard to justify an increase in buffer stocks that eat into capital reserves, especially as procurement and inventory carrying costs are already some of the biggest expense lines for many businesses.
Finally, there is instability in demand for many businesses currently, and no one wants to be left carrying excess inventory that is no longer required or to find themselves with extremely valuable warehouse space taken up with the wrong products.
The solution has to be to find ways to maintain leanness in an organisation without significantly compromising resilience, and the way to do this is through smarter techniques and technology.
Building resilient nodes
Resilience was a critical theme in the conversation between the assembled supply chain experts. Achieving it involves a shift in how supply chains are viewed, taking them from just another expense line that must be cut to the bone, to a competitive advantage able to handle changes through any situation.
When undergoing this transition, supply chain executives need to look at improving visibility and planning capability. This can then be followed by rationalisation, and finally by strengthening capacity within facilities and transportation routes.
Visibility, planning and forecasting are the bedrock to the process, allowing organisations to really understand what goods are truly needed and in what places. The technological underpinning to these key fields has made leaps and bounds over the last few years, with participants noting that tracking and visibility software is one of the areas where they are seeing the most dramatic improvements in their capabilities.
Our panel found that by running a full analysis on their ongoing operations, introducing visibility to in-transit goods, and understanding forward indicators of demand they were able to introduce significant improvements to their supply chain resilience and reduce their need to hold buffer stocks.
For example, several of the experts discovere that by reviewing their plans they found additional, and much needed, transport capacity when looking beyond the most congested US ports, particularly on the West Coast. This has allowed them to continue moving goods, despite the port capacity crunch.
Once a position of knowledge has been achieved around what is required, and where and when, rationalisation of a supply chain can take place. The discussion delved into its importance, with panel members explaining that they had found significant value when really understanding the demand for their critical Stock Keeping Units (SKUs), categorising which ones were particularly time-sensitive, and then streamlining their route to market.
By reducing the overall number of SKUs, increasing transport utilisation rates, improving density of pallets or containers, and evaluating their mix of distribution centres, the panel said that they were finding both resilience and efficiency savings. Through this they could place the most time-sensitive and in-demand SKUs as close to the customer as possible and prioritise them for transportation at higher volumes if required.
Finally, participants noted that creating resilient nodes requires facilities within the network to be strengthened, so that there is always some spare capacity in a system, thus ensuring a robust supply chain that is not just defined by how lean it is.
Strategies discussed included:
- Increasing workforce stability and moving part-time employees to full time.
- Maintaining a coordinated network of critical stock to prevent a single location stock-out causing a failure to fulfil demand.
- Designing facilities so that they are peak-ready and using the additional capacity in non-peak times, for example to process returns.
- Increasing and improving cross-docking facilities to reduce long-term storage requirements and speed up the latter stages of the supply chain.
Shrinking the footprint and getting close to the customer
Alongside resilience, agility was seen to be key, particularly in the last mile.
A significant portion of participants in the workshop are now focusing hard on this vital stage and looking to condense the last mile by creating smaller facilities that are as close to the customer as possible and putting in the hard yards to make those distribution centres as cost efficient as possible.
Several members noted that with the foundation outlined above, they are finding that there is considerable potential with micro- or smaller than usual fulfilment centres, which they can move up into environments where the traditional, large scale distribution centre cannot.
Through understanding where the pressures lie in supply chain, these more localised, smaller facilities can find niche roles serving areas at times and points of concentrated demand.
Panellists gave examples of using localised fulfilment centres to deliver sought-after electronics to major urban markets, to pre-position critical inventory for peak moments, or even purely to handle returns where the density makes it possible.
However, they did note that it is vital to do the background homework in order to really understand the market conditions, and where the speed-to-market is truly necessary. Given the complexities and often higher cost per square metre of setting up these facilities, it is important to be certain of the benefits and make sure that acquiring the floor space can truly pay off.
Furthermore, automation will be critical to making this work and was the source of considerable optimism and excitement among workshop members.
Smaller footprints in more expensive locations mean that automation is needed to make these facilities feasible and effective. It will be essential in pushing forward the new hub-and-spoke model of distribution that was being considered by panellists, especially for companies already operating in an expensive last mile environment and in tight labour markets.
Participants said that they were making significant investments into their facilities and had found that automated systems within those centres had helped them to shrink their footprint, reduce labour costs, improve sortation, and make the work environment safer.
Achieving the right mix from first to last mile
The sentiment throughout the workshop was that this is the right time to reassess your supply chain. Technologies, systems and structures were ripe for revolution and moving to more efficient models of distribution was long overdue.
It is clear that companies cannot react to the events that have come from the pandemic just by increasing their footprint and adding in more buffer stock.
Instead, organisations need to be smarter than that, taking advantage of the growing suite of technologies that can aid supply chain management, as well as look at their model of distribution and ask how can it be enhanced?
The future supply chains will need to be agile, moving product closer to the consumer. It will need to be capable of matching demand as it shifts, rather than being purely reactive and consistently behind-the-curve.
Supply chain executives need to be implementing change right now in their facilities, making them more efficient, resilient, streamlined and always focused on delivering to meet customer expectations.
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