The Inventory Balancing Act: What’s Tipping the Scales?

Inventory optimization has always focused on two intersecting balancing acts—balancing supply and demand, and balancing inventory costs with customer service levels. But today there are two key disruptors upsetting this delicate balance—omni-channel fulfillment and volatility. These issues stand out in the recently released JDA Vision 2015 Supply Chain Market Study. The study is based on a global executive survey with over 250 responses coming from 17 countries across many industries.

The Impact of Omni-Channel

The consumer is clearly in control of the selling process in today’s omni-channel marketplace and they are placing much greater demands on retailers and suppliers for faster and better service. Demands for cross-channel fulfillment options such as buy online / pickup from store and for same-day or next-day deliveries are putting tremendous pressure on the supply chain to tip the balance toward service factors from the recession-induced focus on cost.

When asked to rank their top reasons for optimizing inventory management, respondents overwhelmingly selected: Moving Inventory Closer to Demand and Improving Service Levels. The former of these is critical for omni-channel fulfillment and faster deliveries while the latter factor reflects the increased focus on service.

To survive and thrive in the long run, retailers and suppliers cannot ignore costs and profitability while they pursue their service goals, however. Thus, almost 60 percent of respondents say their top initiative for distribution and logistics is automation. This is an important transformation for many companies whose DCs were designed for traditional pallet and case replenishment operations, but who now must deal with an increasing number of item (each) picks to support direct-to-consumer shipments.

The impact of omni-channel on warehouse and DC operations is also reflected in the respondents’ top priorities for this area. First, they want to Improve Inventory Control and Accuracy. This is critical for omni-channel fulfillment and direct-to-consumer shipments. Second was the need to improve Labor Productivity, which is significantly affected by the higher levels of ‘each’ picking. Third, they listed Improving Customer Service, an ongoing theme throughout the report.

The report thus shows that companies are aware of the challenges omni-channel fulfillment is causing them and they are taking steps this year to deal with those challenges.

The Impact of Volatility

With consumers in control of the selling process, demand has become much more volatile than when manufacturers and mega-retailers could more readily influence demand through their promotions and “push-based” supply chain processes. This greatly increases the importance of demand planning, based on accurate forecasts at the point of demand, driving production decisions.

At the same time, the increasing volatility in input costs for commodities and fuel heightens the need for better alignment between sales forecasts and production planning, as the costs for excess inventory can be prohibitively high. This need for better forecasting, planning and alignment with production is typically the driving force behind adoption of sales and operations planning (S&OP) processes.

But according to the survey responses, companies are experiencing a disconnect between the S&OP process and how they manage their inventory. In fact, this disconnect between S&OP and the inventory planning process was the number one inventory planning challenge for responding companies. Not surprisingly, Integration of a Best-in-Class S&OP Process with the Inventory Planning Process was also the number one initiative for the next 12 months listed by respondents in the survey.

Breaking the initiatives down by company size, large companies (> $5 billion) listed the integration of S&OP to planning as second to Rationalizing the Product Offering Portfolio as their key initiative. The proliferation of SKUs is expensive to maintain during market volatility as there are many more chances to guess wrong on demand. Rationalizing product portfolios will help reduce the impact of volatility.

Smaller companies (<$1.5 billion) listed Improving Planner Productivity as their top initiative, likely reflecting that these companies are less likely to have the advanced planning systems that their larger brethren have to automate this process. They also listed integration of S&OP and Inventory Planning as the second-most prevalent initiative, while medium-sized companies listed both initiatives as equally important.

The Road Ahead

The executives in the survey understand that a lot needs to be done going forward to meet the demands of omni-channel shoppers and market volatility. That may be why they generally rated their supply chain practices as below average compared to their peers. This inferiority complex was directly related to size of company, with the largest firms rating themselves barely above average while medium and smaller companies rated themselves below average.

The good news is that the executives in our survey understand the challenges ahead and are taking steps now to address them. This starts with integrating the planning and execution processes, whether directly or through an S&OP process. Only when the silo walls between processes and between systems are removed will companies be able to successfully deliver on their omni-channel promises and profitably deal with volatility in the marketplace.

To learn more about the supply chain planning and execution issues addressed in the report, access the full report.

To hear my comments on key planning and execution issues and how JDA can help, watch this brief video.

For a look at the key charts and graphs outlining the findings of the report, access the infographic.

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