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Expert Insight: Guest Contribution
     
  By Robert Byrne, CEO, Terra Technology  
     
  August 4, 2008  
 

Inventory Optimization: Creating a Green Supply Chain

 
     
 

Reducing Network Inventory Levels Saves Hard Dollars While Making a Big Impact on Sustainability

 
     
 
Byrne Says:
To achieve true inventory optimization manufacturers must model the entire supply chain, end-to-end, to ensure that inventory strategies simultaneously optimize inventory at all echelons of the supply chain. Modeling only your own facilities ignores the valuable information about demand variability and inventory policy at your customers and suppliers, and delivers sub-optimal results.

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When going “green," companies frequently focus on easy initiatives like recycling or reducing packaging material. Despite its popularity, recycling has proven very difficult and the results of studies looking at its environmental impact are conflicting. Although it reduces landfill and raw materials consumption, energy consumption can be as high or higher than using virgin raw materials.

Companies who focus on peripheral approaches are missing the real opportunity, which is to look for more efficient ways to operate. Efficiency is the key to maintaining the current quality of life while reducing environmental impact and product cost. Avoiding consuming resources up front is far better for the environment and the company than figuring out the most efficient way to dispose of the products afterwards.

In the United States in 2006 there was $1.9 trillion of business inventory, or about $6,000 for every person in the U.S. More than half of this inventory was safety stock, inventory that is held because companies do not know what their customers will want on any given day. A second major component was goods that were supposed to sell but did not because sales were not as high as anticipated. Using the advanced mathematical modeling in inventory optimization software to determine inventory requirements ensures that only those goods that will be purchased are actually produced.

To achieve true inventory optimization, manufacturers must model the entire supply chain, end-to-end, to ensure that inventory strategies simultaneously optimize inventory at all echelons of the supply chain. Modeling only your own facilities ignores the valuable information about demand variability and inventory policy at your customers and suppliers, and delivers sub-optimal results. Having visibility to downstream variability minimizes inventory held because of the bullwhip effect, and allows you to understand the costs of your customers’ inventory policies.

Optimizing the entire supply chain enables manufacturers to create an inventory strategy that reduces safety stock requirements, decreases unnecessary production of goods, lowers inventory targets and reduces inventory in every echelon of the supply chain. Inventory is produced as needed, without excess, so inventory lost to spoilage, shrinkage and obsolescence decreases and unnecessary products are not produced. Materials no longer need to be recycled; they are not consumed at all.

The financial benefits to inventory optimization are significant. Employing multi-enterprise inventory optimization generally reduces safety stock by more than 10%, decreasing manufacturing costs, transportation costs and carrying costs. Profits increase as less inventory is lost to spoilage, shrinkage and obsolescence. If safety stock was reduced by 10% in 2006, $95 billion in inventory would not have been produced and the energy, raw materials, and emissions required to produce that inventory would have been saved.

Agree or disgree with our guest expert's perspective? What would you add? Let us know your thoughts for publication in the SCDigest newsletter Feedback section, and on the web site. Upon request, comments will be posted with the respondent's name or company withheld.

 
 
 
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