Over the last 2 weeks two good things in my life came together
- My Phd in Multi-Echelon Inventory Optimization, which I started 10 years ago and finished in 2009
- My more recent work on balancing Service, Cost and Cash using the concept of the ‘Supply Chain Triangle’
Together they define the (role of) Supply Chain in 2030.
The Supply Chain Triangle, shown in Figure 1, captures the struggle in companies to balance service to customers, supply chain costs, and cash.
Figure 1: The Supply Chain Triangle
First, the company needs to deliver service to customers, the quality of which is affected by the lead time between order and receipt, the reliability of that lead time, the breadth of our product portfolio, and the flexibility of the ordering process.
Second, it tries to deliver that service at minimal cost. There’s the cost of purchasing, of manufacturing and distribution, and of after-sales services.
Third, since the financial crisis, companies are increasingly concerned with their inventory position, which forms the major element of their working capital.
Figure 2: The Order of Importance in Strategy Formulation
As shown in Figure 2, many companies are still top-line driven. Our so-called ‘company strategy’ is pre-dominantly a ‘sales’ or ‘business development’ strategy like ‘we want to extend our product range to include more of the mid-market’, ‘we want to regionally expand our business’, or like ‘we plan to extend our online offering’. Many of these are top-line driven. If all goes well that ‘sales strategy’ is discussed with supply chain and operations who will try to save margin by setting up the most cost-effective supply chain. Examples can be ‘setting up a regional DC in Russia and Brasil to get access to the local markets’, or ‘open a new DC for the online business allowing cost-effective parcel picking’. In most companies we even don’t consider the effect on the inventory. We rather ‘find out’ 6 months in the process that ‘our inventory went up with 20%’. In many cases, inventory is still the result, not a part of the strategic equation.
Over the last 2 weeks I had 2 discussions on multi-echelon. 1 with a major food retailer, a second with a global supplier to the tire industry. 2 times I indicated that multi-echelon inventory optimization probably allows a reduction of 50% in the supply chain inventory. Retailers are still reluctant to collaborate with their suppliers. They fear losing buying power. As a result, retailers still order at their convenience, demand a swift response and high service level from their suppliers, which results in significant safety stocks at the supplier side. The same happens at our second example. The common assumption in retail is still that the central warehouse should be full to allow a swift response to the shops. I tend to answer with the following anecdote: ‘I don’t want to be in your shop in Brussels, finding out there’s no private label milk on the shelf, knowing how much inventory you carry in your central DC, and knowing how much inventory is left at the supplier because of your lack of trust’. The assumption is failed. A comparable thing happens at our second example. About half of their business goes to the 5 major tire manufacturers. Guess what type of service they demand from their supplier. Guess their current willingness to share information on global tire stocks and sell out. The result is another duplication of inventory at both the supplier and the tire manufacturers.
So here is where the two come together. I believe that in 90% of the extended supply chains, the inventory can be cut by half by applying multi-echelon inventory optimization. With extended I mean you should include your key suppliers and your key customers or distributors. Instead of seeing this as an ‘inventory optimization’ exercise, you should see it as a ‘supply chain exercise’ and even a ‘strategic enabler.
Let’s start at the service side of our supply chain triangle. The 50% creates ‘room to maneuver’. Instead of actually cutting the inventory with 50%, we can use some of that space to expand our current portfolio and support both top-line and margins, or duplicate SKUs into a separate warehouse for the ‘online business’.
Second, imagine the potential cost savings when applying multi-echelon. Instead of the retailer ordering at his convenience, when we start with a VMI concept, the supplier can ship immediately after production. It will avoid both cycle and safety stock but it will for sure allow an optimization of production and logistics costs. We don’t need to break the production sequence because of unexpected orders. We can more easily combine and ship in full trucks. When the product arrives in the central DC, there’s no use in putting it away, and getting it back later for picking. We can cross dock the fast moving items. This may require a change in the warehouse layout. Instead of a stock holding point, the central DC becomes 1 big cross docking platform. Not only should this reduce the cost, it will also significantly increase the shelf life in the shops. Imagine that you are the first retailer who can announce that in the market. Comparable opportunities exist in our B2B manufacturing supply chain.
Figure 3: Let’s claim the inventory corner and the strategy process as a result
The inventory corner of the supply chain triangle is unclaimed territory. Though the supply chain manager may feel helpless he should grasp the opportunity and plant his flag. Instead of being ‘the result’ of the strategy, he should convince his CEO that multi-echelon is the single biggest opportunity to sharpen the competitive edge. Instead of reducing the inventory by 50%, the supply chain manager should take control of the strategic debate and see which piece of that to reinvest in the market, and which piece to invest in improving the cost position. Instead of inventory being the result and supply chain being the victim, we will make it the starting point and get in the driving seat of the strategy process. Once we’re in that driving seat, we will only leave it for 1 reason: to become the next CEO of our company! So let’s claim the inventory corner, the strategy process as a next to finally become the next CEO by 2030!
Prof.dr. Bram Desmet is the Managing Director of Solventure, a Europe based expert in designing and implementing SiOP processes using the Arkieva software. Bram is also an adjunct professor in Operations and Supply Chain at the Vlerick Business School. He obtained his Phd at Gent University on the topic of “Safety stock optimization in multi-echelon production-distribution networks”. He is working on a book on the “Supply Chain Traingle”. Look out for more at http://www.slideshare.net/Solventure. Bram welcomes your feedback at email@example.com.