Pierre Liguori, Managing Partner of Tokema Supply Chain Consulting, explains in a series of articles the main supply chain and logistics problems encountered by manufacturers and retailers and how we help solving these issues.
The usual headache of supply chain managers: inventory management. Headache, because it is a daily challenge to supply the right material or finished good on time and meet demand. Because the supply chain performance is also driven by cost reduction, cash spend and risk management, the key challenge is to be also able to align supply and demand while decreasing costs & inventory levels thus speeding up inventory turns.
In theory, reducing inventory is an opportunity to free up working capital and prevent inventory obsolescence which always mean additional financial risks.
A traditional approach from many supply chain consulting firms is to advise manufacturers and retailers to reduce demand variability. This is a more and more difficult target to achieve in an uncertain world where permanent change is a key feature especially with e-commerce thrive. And most of the businesses driven by high-seasonality demand fluctuations (textile, sporting goods, …) are more focused on properly forecasting the first fulfilment order to deliver on time their customers’ stores and boost sales at the beginning of the season.
However, improving forecast accuracy and implementing an efficient Sales & Operations Planning process (S&OP) sounds to be a more achievable goal: rather than trying to change the course of demand variability, proper planning – linked to relevant procurement processes – is an opportunity to better align supply with demand and to reduce costs and risks. It is well known a S&OP approach is in fact a transformation project that is not easy to implement due to organisations reluctance to change. In addition, who is ready to go for an 18-month project when the world is changing so quickly and uncertainty is the only steady factor? At Tokema Consulting, we took this new landscape into account and changed the way we manage this kind of project by implementing more agile project management methodologies. We also not only consider systems and processes but put more emphasis on the most important component of such a transformation project: people. We monitor change with our customers by explaining the goals the company want to achieve but also what each individual shall get from such a project in their daily job.
A good forecasting system, an efficient S&OP process is however dependent on other factors.
Back to basics: inventory accuracy. It is critical to implement proper inventory management methods to ensure inventories are accurate. Otherwise forecasting would be jeopardised: sometimes by generating overstock (and increasing “frozen cash” which means a lack of working capital optimisation), sometimes by creating shortages that could damage production performance, create production stoppage and customer delays. Scheduled inventory counts, discrepancy management but also aged-inventory continuous management are key to success and to avoid “bad surprises” at the end of the year. But discipline from the operations is critical: staff strict adherence to operation processes and how each SKU movement is recorded in the system are key components of inventory accuracy. That means operations have to be audited on a regular basis to identify corrective actions immediately and implement continuous improvement initiatives.
With a reliable inventory management system and a S&OP processes, other components that have an impact on inventory reduction and working capital optimisation shall be also improved: suppliers lead times reduction, average order size reduction and order frequency change (MODs negotiation), obsolete inventory elimination…
But key improvements will be achieved through improving supply chain management: by streamlining the end to end supply chain, it is possible to reduce inventories, reduce cycle times, increase customer satisfaction (improved time to market) and improve profitability (less “frozen” cash). This is where manufacturers need to further work in collaborative environments not only with business partners (suppliers, customers) but also internally. Connected supply chains ensure inventory buffers reduction, cycle time optimisation and inventory & operating costs reductions. More agile supply chains allow plants to produce more to order and less to stock. It requires systems to be connected to allow changes within the actual day or even the actual shift and redefine priorities immediately taking production and logistics constraints into account.
Reducing inventory is key to maintain smooth cash flow and optimise working capital. But it helps also to drive operating costs down (less space, less product movements, higher staff productivity) and increase supply chain performance.
Tokema Consulting can help you to achieve this goal. If you are interested in learning more how we can support your business, let’s discuss your next project. Contact us!
