This Week in SCDigest:
What is Inventory Optimization?
Supply Chain Graphic of the Week, plus more Supply Chain News Bites
SCDigest On Target e-Magazine
Expert Insight - Supply Chain InView: Open Book Partnerships between Logistics Service Providers/3PLs and Clients
Expert Insight - Managing SCM Performance: Inventory Metrics Part 1
Expert Insight - Lean Thinking - Supply Chain Perspective: Lean Thinking and Vendor Managed Inventory Programs
From RetailWire - Jones Apparel Group in Item-Level RFID Test
Your Supply Chain Questions Answered! This Week's Question - Should Receiving be Counted as a Product Touch?
Trivia, Supply Chain Stock Index
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August 28, 2008 - Supply Chain Digest Newsletter


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What is Inventory Optimization?

Ok, so just what in the heck is Inventory Optimization?

A mindset, a strategy, a goal, a software category? Yes, yes, yes and yes.

The term obviously means a lot of things to different people. We can probably all agree that “optimizing” inventory levels across the enterprise sounds like a very good thing.

In the end, in fact, the entire construct of “supply-demand balancing," that is at the heart of what supply chain management is, gets down to optimizing inventory levels. The ultimate goal: having the right amount of inventory, in just the right places, to meet customer service and revenue goals - but no more than that.

So that’s the quest, but it’s more of a journey rather than a destination. Or rather, maybe the right way to say it, to borrow from a historic political quote, is to consider that “The price of inventory optimization is eternal vigilance.”

It’s not easy. As we noted on these pages, in 2006 Wal-Mart began its Inventory Deload program, after finding that total inventory levels had been rising at a much higher rate versus the company’s sales growth than its historical performance. In fact, in 2004, inventory levels at Wal-Mart grew at almost 90% of sales growth, and just under 90% in 2005.

About that time, Wal-Mart’s Johnnie Dobbs (now Executive VP of Logistics and Supply Chain) noted that part of the challenge was that even for Wal-Mart “there were so many paths that could lead to inventory in the DC.”

As an update, the Inventory DeLoad program has started to pay big dividends. In 2007, for example, the Wal-Mart Stores division reversed the inventory trend, with inventory growth of just 0.7% versus a sales increase of 5.8%.

Another quote I like on this topic, from a meeting I attended 3-4 years ago with a very large consumer goods company: “Our CEO says if we’d attained the objectives from all these inventory reduction programs and investments we’d made over the past few years, we should have negative inventory by now…” said the VP of Logistics, “… but we have more inventory than ever.”

Gilmore Says:
"The right way to say it, to borrow from a historic political quote, is to consider that “The price of inventory optimization is eternal vigilance.”

What do you say?
Send us your feedback here

And of course, many companies still swing between “eras” of high inventory, when customer service concerns top the priority list, and low inventories, when business slows and suddenly someone looks at the cost of holding all that inventory. Many companies have tamed these inventory cycles to an extent, but many others have not. I saw the inventory rollercoaster play out first hand a few times earlier in my career.

Inventory has also been at the top of Wall Street’s concerns as analysts look at many companies; therefore, it has naturally also become a top concern for CEOs and CFOs. It seems to me the attention really started in 2001, when network giant Cisco announced a staggering $2.1 billion inventory write down, as the tech bubble burst and it was caught holding the inventory bag.

Wall Street analysts tend not to focus so much on the working capital reduction aspects that supply chain thinking often does with regards to the benefits of lower inventory, but rather on the more basic risk of potential write-offs due to obsolescence (e.g., high tech industries) or big mark downs that will hit margins (e.g., retail and apparel).

Given all that, it’s surprising that often companies just can’t find the time for the basics, such as regularly reviewing safety stock levels and policies. There are a number of consultants who make a good living simply serving as a catalyst to help companies update safety stock decisions across their SKU base.

A few other interesting developments in this area:

There is strong anecdotal and quantifiable evidence that the rise in offshoring is adding to overall inventory levels.

  • The rise in transportation costs inevitably leads to decisions that increase inventory to reduce logistics spend in that trade-off equation.
  • The rise we’ve seen in commodity prices can also cause companies to “stock up” to avoid for awhile future price increases.
  • The so-called “Long Tail” phenomenon, under which the power of the Internet ( and/or increasingly narrowcast market segments (e.g., something like Caffeine Free Diet Coke with Lime) are causing a greater percentage of total sales for many companies to come from products with low total sales velocity – a very tough inventory management challenge.

Inventory Optimization is also a comparatively new and fairly hot category of software that has been adopted by a growing number of companies. I learned a lot more about it as we put together our latest Supply Chain Digest Letter on the topic (to download an e-copy, or to access other resources, please visit our Inventory Optimization Resources page.)

In a nutshell, Inventory Optimization software seeks to do three primary things:

  • Look at inventory levels holistically across the entire supply chain, considering the impact inventories at any given level or “echelon” have on other upstream or downstream levels. This includes raw materials and component inventories through internal channels and nodes and, in some cases, all the way down to the retail shelf. Most companies and traditional software solutions look at this problem more discretely, in effect “optimizing” inventories at each level without well considering the big picture.
  • Optimize and continually update safety stock levels across these echelons.
  • Take into better account the impact of variability in demand or supply plans in recommending inventory levels. As with many things in the supply chain, use of “averages” in planning inventories can lead to problems.

Given the market dynamics cited above, and the increasingly brutal level of global competition, gaining even a small edge in inventory management efficiency can pay huge customer and financial dividends.

Many companies are now also embracing an extension of S&OP called Sales, Inventory and Operations Planning (SIOP). While at one level inventory always should have been a part of S&OP, it was hard enough just to develop a consensus demand plan, let alone targeting the right inventory levels to meet that forecast. But as companies evolve, this is the next level of S&OP (see our upcoming videocast The Role of Inventory Optimization in Sales and Operations Planning.)

This is the first in a series of pieces SCDigest is doing on inventory management, including an updated look at how different sectors and companies did last year coming soon.

I am not sure if inventories can ever truly be optimized for more than a nanosecond, but supply chain leaders are getting closer all the time.

What’s your perspective on “Inventory Optimization?”  Do you have experience with this software category? Why don’t more companies do a better job with safety stock policy management? Is it time for SIOP? Let us know your thoughts at the Feedback button below.

Let us know your thoughts.

Upcoming Videocasts

Service Parts Optimization at Volvo Construction Equipment

September 10, 2008


Strategic Supplier Management in the Supply Chain

September 16, 2008


Leading Edge Logistics, Part 2
From Strategy to Execution

September 17, 2008


The Role of Inventory Optimization in Sales
and Operations Planning

September 23, 2008


This Week's Supply Chain News Bites Only from SCDigest

Supply Chain Graphic of the Week - Inventory Optimization versus Traditional Supply Chain Planning

Supply Chain by the Numbers: August 28, 2008


Wall Street responded negatively last week to gloomy economic news from the financial sector.  Aside from the rail industry, our Supply Chain and Logistics stock index responded negatively as well.

In the software group, Ariba fell 8%, followed by Descartes (down 6.8%).  In the hardware group, both Intermec and Zebra were down (4.8% and 3.2%, respectively).  In the logistics and transportation group, Yellow Roadway slipped 9.7%, followed by J.B. Hunt and Prologis (both down 6.6%). 

See stock report.

Each Week:

-Global Supply Chain
-Distribution/Material Handling
-Trends and Issues

Weekly On-Target Newsletter
August 26, 2008 Edition

Supply Chain InView by Ann Drake

Open Book Partnerships between Logistics Service Providers/3PLs and Clients

Sharing Information is Hard for Some Companies, but Key to Continuous Improvement

Managing SCM Performance
by Kate Vitasek

Inventory Metrics Part 1

You Can Count on It - The Impact of Throughput on Inventory Meaures


Lean Thinking by Mike Loughrin

Supply Chain Perspective: Lean Thinking and Vendor Managed Inventory Programs

BrainTrust Panel Discussion Question: Is the Time Right for RFID at the Item Level?

Jones Apparel Group in Item-Level RFID Test


What do Wal-Mart CEO Lee Scott, University of Tennessee Professor Tom Mentzer, former Procter & Gamble Chief Logistics Officer Ralph Drayer, and Georgia Tech professor John Langley have in common?

A. Click to find the answer below

Have supply chain or logistics-related questions you need answered?
Ask our panel of experts.
Share your insight!

Featured Question and Answer:

Should Receiving be Counted as a Product Touch?

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Catching up as always this week on a variety of letters. Remember, feedback now is also available at the bottom of each article.

We received many letters on our original piece on “The Supply Chain Complexity Crisis.”

That includes our Feedback of the Week, from David Armstrong of Flextronics, who cites a very interesting study from the 1980’s on the impact of complexity on the shop floor.

You’ll find other good letters on this topic as well below, and still more on the article page itself.

Also, we will be announcing next week our “Fuel for Thought” program – your chance to win a $20 gas card if your letter is selected as our Feedback of the Week. E-mail us your thoughts on SCDigest articles and columns. The better they are, the better your chance to win.

Give us your thoughts on this week's Supply Chain topics As always, we’ll keep your name anonymous if required.

Feedback of the Week - On the Complexity Crisis:

There is no question that complexity adds to supply chain issues. However, there is another important factor - confusion. In the mid-1980s, Professors Robert Hayes and Kim Clark at Harvard conducted a major study on the sources of factory productivity.

They found that complexity had an impact and found that a factory's task became more complex as it grew, added products and processes and experienced a wider variety of production orders. However, they found that confusion, categorized as managerial actions that disrupted the stability of the operation, had a negative impact on productivity.

Managerial actions that created confusion included varying production rates, changing schedules once they had been established, expediting orders, changing work assignments, processes and ECOs, all of which contributed to confusion in the plant that led to lower performance.

So, an important question to consider when looking for performance improvement opportunities is what is complexity and what is confusion and is it possible to manage both, but with different approaches.

For example, the author of the article uses the example of small volume customers and order costs. Too often, we use the accounting system with totals and averages to try to get our arms around these questions, but the data is not suited for that type of analysis, so we use totals and averages, which gives an incorrect picture of results.

In one organization I worked with, we used exactly these methods for our supply chain planning until we did an order size distribution analysis and learned that our most popular order size was 1 unit, and orders of 3 units or less accounted for half of the orders, but from a unit standpoint, the majority of the volume was in truckloads. Even though we did not have exact costs to process an order, we had enough knowledge to know that small orders had high fixed costs and low unit costs and that the volume component was the driving cost component for the large orders.

The result: instead of a one size fits all process based on the mythical average order, we designed one process for the small orders and another for the large. This resulted in lower costs and much less confusion. At the same time, we were able to better associate our pricing with order costs and as a result, improved our margins.

David Armstrong
Sr. Manager - WW Inventory, Worldwide Materials

More On the Complexity Crisis:

Good article. I do not think that accounting systems lack the ability to capture the impact on profits.

Organizations fail to do a root cause analysis on the actual problem and only address the symptoms. Today's software is so complex it can track anything and everything. This then becomes an exercise in data aggregation, and assigning the correct cost structures to the correct business process. As stated: What is the cost to fulfill an order?

Software now will have to look at the business process as whole and relate each event (which is now tracked) to figure out a cost. Only when costs are calculated can appropriate decisions be made pertaining to profitability of that process or product. BI, Performance management becomes key and understanding the data completely is where organizations will have to focus.

Dylan Persaud
Sr. ERP/SCM Analyst

An excellent piece as usual. Kind of makes you wonder what happened to all of the Value Stream/Value Chain thinking. Wouldn’t it not seem to follow that leaning out of all those non-value activities and eliminating waste out of the supply chain would lead to less confusion and complexity?

I think that the outsourcing movement may be a big part of the problem, at least it facilitated it to some degree. When most of the operations necessary to build a product were conducted in house, there was an understanding that you could only do so much. As soon as we decided to outsource all but the core competency, we found that there is almost unlimited capability. Why not utilize it to “Imagineer” products which can capture market share, even if only for a short period?

If supplier X can't build it, then have that one built by supplier Y. Need new materials and processes? No Problem. Don't get me wrong, I think outsourcing has its place. I just do not think most companies think it through well, particularly when they are planning new products. Henry Ford may have been wrong when he thought his company should own all of the processes, but at least he kept things fairly simple: one model in one color -- black.

Steve Murray
Principal and Chief Researcher
Supply Chain Visions

Complexity indeed. We are in an environment which requires a single system to process multi-stage T/L, LTL, and parcel shipments, for orders which contain mixtures of 3PL, DC, and Store shipments, which include products which are priced at bulk, style and SKU levels, in euros, yen, and dollars.

What is a supply chain professional to do?? I agree with the article: the frustration factor is greatly underestimated in most companies. Thinking over some of our recent irritants, three pointers come to mind:

1. Adopting standards is a big help in reducing complexity. How many times have we seen modifications to process the same information differently for different parties?

2. We do not need the whole potato. Take a bite at a time - we do not have to install a complete system all at once. Implementing systems a small step at a time is not always possible, but whenever it can be done, do it.

3. 80+20=100. Some developers (including myself) love to design multi-layered systems which will accommodate far more situations than are reasonably expected, or necessary. Frequently (not always) we can reduce this complexity by adhering to the 80-20 Rule (get the system to handle 80% of the workload and let the humans tackle the remaining 20%).

It is a start.

Russ Moore
Sr EDI Analyst

Not sure the source of the quote (“Complexity is like a cancer that destroys supply chain efficiency.”). It does, however, bring to mind another quote that is in the same spirit. Again, not sure of the source, but here ya go: "Better is the mortal enemy of good."

Ken Finkel
VP Sales & Business Development
ScheduleSoft Corporation


Q.What do Wal-Mart CEO Lee Scott, University of Tennessee Professor Tom Mentzer, former Procter & Gamble Chief Logistics Officer Ralph Drayer, and Georgia Tech professor John Langley have in common?

They are all among the 43 recipients of CLM/CSCMP's Distinguished Service Award.


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