It is no surprise that obtaining sign-off for technology investments has been a challenge for the past few business cycles. With the focus on reducing spending, many supply chain investments were placed on the back burner. However, the last 4 – 6 months has begun to show a positive shift, with an increased focus on how supply chain software can improve efficiency, reduce operating costs, boost customer service, and better leverage valuable human resources. One of the top three areas of interest we have seen is in multi-echelon inventory optimization.
CFOs strongly believe that good supply chain performance is vital to financial success. Studies show that a majority of CFOs believe the supply chain is directly linked to their ability to meet corporate financial objectives. While the need for true multi-echelon inventory optimization is clearly felt, CFOs need to understand how inventory optimization works, how it uniquely fits with existing enterprise systems, and the impact it produces on business performance.
We estimate that today 40% or more of CFOs play an important role in supply chain decisions or lead the effort themselves. It’s not a radical departure for a CFO drive supply chain improvements: a tight bond between financial leadership and supply chain operations produces valuable analytical advice, support and validation of improvements.
The CFO’s combination of company-wide perspective and highly developed analytical skills are unique qualifications to help drive change. But, the CFO must be armed with the right information.
- Many CFOs already understand that ERP and APS systems do not optimize inventory and are inadequate for setting inventory policies in today’s complex supply chain networks. Operational, transactional systems can’t “think for themselves” when it comes to setting inventory policies and targets.
- Best-in-class IO solutions create a comprehensive supply chain model that can be shared by all stakeholders, regardless of function, department or geography.
- Inventory optimization tools recommend modifications to buffers of various types of inventory (safety stock, cycle stock, pipeline stock, etc.), as well as improved polices, inventory targets, and location of inventory. By implementing these changes as a part of the normal supply chain management process, service levels can be met with less overall inventory, waste and obsolescence rates are reduced, and flexibility is improved by postponing certain work-in-progress value-add steps. Ultimately, an entirely new, more cost-effective trade-off curve can be achieved between inventory cost and service level. And, the benefits are financially tangible. Businesses typically realize a 10%-30% decrease in inventory from these initiatives.
- Make sure your CFO understands that there is indeed a gap in business perspective, KPIs and even communication styles between supply chain practitioners and members of the senior staff. Supply chain and operations managers should be encouraged to evaluate the ultimate business value of their inventory optimization program and become adept at demonstrating that value to the senior staff.
Inventory optimization is like having two powerful “performance levers.” One lever reduces inventory and frees up working capital, while the other raises service levels with minimum investment. To manipulate these levers for ultimate competitive advantage, a technology investment is required, and that investment must be described by the supply chain team in terms that the CFO will understand and support. When that is done successfully, the way is paved for inventory optimization to transform the organization’s supply chain performance and improve the bottom line almost immediately.
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