Warehouse/DC Management
Inventory management
end-to-end approach
BY JIM MORTON, RODRIGO CAMBIAGHI, AND NICOLE RADCLIFFE, ERNST & YOUNG, LLP
I
ssues stemming from inventory management, or, more short to medium horizon of two weeks to 18 months, while
broadly, supply chain planning, can have a profound the operational level has an immediate horizon of typically
effect on logistics operations. Consider the following less than two weeks.
examples: Companies need to approach the supply chain and inven-
A consumer products manufacturer has difficulty tory management first at the strategic level, where funda-
allocating inventory across its regional mixing centers, mental decisions are made with respect to the companys
resulting in additional transportation cost from inventory business objectives. Once decisions are made at the strate-
rebalancing and the use of costly outside storage when gic level, business decisions at the tactical level and, finally,
inventory levels exceed mixing center capacity. the operational level can be addressed, with each level
When demand planning goes awry for an automotive informing the objectives and decisions of the next level.
manufacturer, the company must then ship heavy axles via Moreover, decisions and objectives made at each level
international airfreight from another plants inventory to must be aligned; otherwise, the companys strategy will not
keep its production lines humming. be realized, and conflicting policies will create sub-optimi-
A retail company is developing an omni-channel zation. Now, lets elaborate on the decisions and cross-func-
strategy. The company struggles to manage the complex tional collaboration required at each level of the framework
trade-offs between inventory positioning, channel alloca- for effective inventory management.
tion, and logistics costs and capacities as it tries to respond
to customer demand anywhere, anytime, anyplace.
These examples underscore the need for logistics pro-
fessionals to have an active and informed voice in deci-
sions regarding inventory management. However, for most
industries, theres a significant gap in inventory perfor-
mance between bottom- and top-quartile performers.
This gap cannot be bridged solely by the efforts of the sup-
ply chain planning team. It requires effective collaboration
between logistics and planning. Put another way, in order to
be successful, companies need to take an end-to-end view of
the supply chain, managing the relevant trade-offs and syn-
chronizing planning and logistics to drive value.
The end-to-end planning and fulfillment framework
Two key concepts underpin effective inventory manage-
ment: 1) clearly defined decision-making responsibilities
and processes at strategic, tactical, and operational levels,
and 2) coordination across enterprise supply chain func-
tions, particularly between planning and logistics.
The end-to-end planning and fulfillment framework shown
on page 44 illustrates the different levels of capabilities and
decision-making required for inventory management. Although
time horizons can vary by industry, the strategic level generally
has a horizon of more than one year and may be associated
with significant capital investment. The tactical level has a
40 LOGISTICS MANA G EM ENT | MARCH 2015 WWW.LOGISTICSMGMT.COM
requires an
Our consulting team defines the key concepts of inventory
management and elaborate on the decisions and cross-functional
collaboration required to be more effective.
Strategic level business customers may prioritize speed and reliability over
The primary objective of the strategic level is to establish cost and asset efficiency, so its supply chain will be struc-
an end-to-end performance strategy that will guide supply tured such that parts are readily available despite increased
chain network design and inventory deployment strategy inventory costs and the cost of expedited orders.
and will inform objectives and decisions at the tactical and By contrast, a consumer packaged goods (CPG) com-
operational levels. pany may focus on cost and reliability, seeking to balance a
The performance strategy should align with the com- low cost to serve with sufficient inventory to fulfill customer
panys relative prioritization of the key end-to-end supply orders on time in full.
chain attributes: responsiveness, agility, reliability, asset effi- The companies in these examples each have a single strat-
ciency, and cost. These attributes must be prioritized due egy; however, its common for companies to define distinct per-
to the implicit trade-offs caused by intrinsic supply chain formance strategies for different customer segments. Whatever
dynamics. the strategy may be, a companys priorities will influence vari-
Different industries and companies will emphasize differ- ous trade-offs between inventory management and logistics.
ent supply chain attributes, depending on market demands In particular, the supply chain performance strategy
and how the company chooses to compete. A high-tech directly informs supply chain network design and inventory
manufacturer providing aftermarket parts and services to deployment strategy. Network design considers the number,
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Warehouse/DC Management: Improving Inventory Management
location, size, and mission of distribu-
tion centers, as well as product flow Inventory turns benchmark by industry
paths associated with alternative routes 20
to market. And inventory deployment 18
is concerned with how inventory is 16
deployed across the network to address 14
performance objectives. 12
In general, having more DC loca- 10
tions places inventory closer to market 8
locations, which reduces lead time to 6
fulfill customer orders and may also 4
reduce transportation cost, but typi- 2
cally increases safety stock. This sce- 0
ive
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Conversely, for a given fill rate,
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inventory can be reduced by consoli-
ed
ifie
75th percentile
M
rs
dating DC locations, with the use of
ive
Median
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premium freight mitigating the impact
on customer lead times. There are 25th percentile
many approaches to network design
and inventory deployment that depend Source: APQC OSB data
on the company and its performance
strategy. term layer, which usually looks two to instead of forward-looking.
Analytical tools can help a com- eight weeks in advance. A formal, cross-functional organi-
pany identify the preferred network The mid-term tactical layer zational structure for these decisions
structure and inventory deployment includes medium-term inventory enables a holistic approach to adjust-
strategy. Network modeling and opti- buildup strategies and logistics capac- ing demand plans, production plans,
mization tools help define the net- ity planning. From a planning per- and inventory levels, and supports
work footprint, while multi-echelon spective, the demand forecast drives alignment to the supply chain perfor-
inventory optimization tools help to production planning and inventory mance strategy.
optimize inventory deployment across deployment so that finished goods This short-term adjustment pro-
the network. inventory will be at the right place, at cess provides an opportunity for logis-
The right metrics and goals must the right time, and in the right quanti- tics to not only collaborate with other
also be established to enable the end- ties to satisfy demand. functions to analyze changes, but also
to-end supply chain to deliver the Sales and operations planning pro- adapt short-term logistics capacity
strategy. In the example of the high- vides coordination between the com- planning as demand becomes more
tech parts manufacturing company, mercial and operational parts of the certain. Optimization at this layer
the key metrics might be order ful- enterprise to drive balance between includes opportunities for logistics
fillment cycle time and perfect order supply and demand. Logistics must be to further manage costs for activities
fulfillment to drive speed and reliabil- involved in this process to evaluate the such as rebalancing inventory across
ity, respectivelywhereas the CPG feasibility of demands on the logistics DC locations.
manufacturer might use perfect order network and to communicate the cost Tools employed at the tactical level
fulfillment and cost of goods sold to required to maintain desired customer of the framework support supply and
drive reliability and cost management, service levels. Importantly, the logistics demand planning and may incorporate
respectively. team can proactively leverage plans scenario analysis capabilities. Tech-
to secure transportation capacity with nology includes forecasting models,
Tactical level carriers and manage staffing levels production and distribution resource
The tactical level also requires tight within the DCs. planning modules, and network and
coordination between the planning and Predictably, the plans generated inventory modeling tools incorporating
logistics functions to achieve effective for a medium-term horizon frequently multiple periods of demand.
inventory management aligned with must be adjusted in the short term Performance metrics used at the stra-
supply chain performance objectives. based on unforeseen changes in tegic level should not only be cascaded
This level is complex because there are demand or capacity. While most com- to the tactical level to measure perfor-
two time horizons involved: a mid-term panies currently make these adjust- mance against targets for the given time
layer, which usually looks six months ments, the decision-making process period, but also be broken into com-
to 18 months in advance, and a short- can be siloed and is often reactionary ponent metrics for each function. For
42 LOGISTICS MANA G EM ENT | MARCH 2015 WWW.LOGISTICSMGMT.COM
Warehouse/DC Management: Improving Inventory Management
example, perfect order fulfillment, a End-to-end (E2E) planning and fulfillment framework
strategic-level metric associated with
reliability, can be cascaded into fill
rate for logistics, forecast accuracy for Pull quote box here
planning, and schedule adherence for E2E
production. supply chain
performance
Operational level strategy
Strategic
At the operational level, key logistics
Network Multi-
capabilities, including order manage- design and echelon
ment, inventory visibility and inventory fulfillment inventory
allocation, play an important role in strategies strategies
the effective use of inventory. Assum-
ing a simple, make-to-stock scenario, Tactical Medium-term Flow path Logistics
inventory buildup optimization capacity
customer orders are received, inven- (IBP/S&OP) planning
tory is allocated, and orders are ful-
filled to arrive in full at the customer Short-term demand,
Short-term logistics
by the promised date. inventory and supply
plan adjustments
synchronization
However, in spite of diligent plan-
ning at the tactical level, inventory may E2E order Transportation Inventory
Operational
still not be available at the right time, management management analytics
place, and quantity to achieve perfect
order fulfillment. Having real-time vis- Visibility and event Warehouse Customs and
Reporting
ibility to inventory, whether in-transit management management global trade
or at stocking locations, helps to man-
age potential issues. Source: EY
For example, knowing the posi-
tion and estimated arrival time of an to fulfill orders from multiple nodes plans to secure transportation and
inventory replenishment shipment in the extended supply chain can help distribution capacity.
can enable expedited fulfillment of the to reduce safety stock requirements At the operational level, lever-
customer order once inventory arrives. across the network. age technologies, including visibility
Alternatively, a replenishment order and distributed order management, to
could be diverted while in transit from Keep in mind increase flexibility and drive perfect
its original destination to a higher-pri- Effective inventory management is orders in a cost-effective manner.
ority location. vital for a company to achieve its per- Finally, advances in informa-
In the case of distributed order man- formance objectives, and there is an tion technologies and the increasing
agement (DOM), orders can be fulfilled important role for logistics at each level availability of data in real time will
from alternative stocking locations, of the framework described above. allow companies to continuously
which could include a different distri- Although inventory management innovate their operating models in
bution center, a vendor, or even a retail can be a complex topic, there are a few the search of solid differentiation in
store location, depending on the situa- key points to keep in mind: the marketplace.
tion. A sophisticated technology, DOM Understand the strategic perfor- In this scenario, logistics profession-
leverages visibility across the extended mance attributes for your company als need to take an end-to-end supply
supply chain network and business and how they influence your objec- chain perspective to help their compa-
rules to determine how best to fulfill tives, decisions, processes and metrics nies achieve their inventory manage-
customer orders across multiple chan- at each level. ment and supply chain performance
nels from multiple inventory sources. At the strategic level, seek to objectives.
Its embedded business rules con- understand and balance the trade-offs
sider inventory availability across between inventory and logistics rela- Jim Morton is a principal with Ernst
stocking locations, fulfillment costs, tive to your supply chain network and & Young, LLP; Rodrigo Cambiaghi is
and capacity constraints to make the inventory deployment strategy. a principal with Ernst & Young, LLP;
appropriate fulfillment decisions. These At a tactical level, be part of the and Nicole Radcliffe, is a senior con-
business rules also help manage deci- process to assess the feasibility of sultant with Ernst & Young, LLP.
sions regarding inventory allocation by short- to medium-term plans that
customer segment, so the decisions are affect inventory and logistics. The authors wish to acknowledge the
aligned with strategic priorities. Assess and communicate the contributions of Can Dogan, Claudio
Ultimately, having real-time impact of plansor changes to Menegusso, Alex Bajorinas, and Mark
visibility to inventory and the means planson logistics costs and utilize Johnson.
44 LOGISTICS MANA G EM ENT | MARCH 2015 WWW.LOGISTICSMGMT.COM
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