“Excess inventory will kill a business. It doesn’t just cost money; it hides real problems that are lurking in the shadows of the business.”
I remember it like yesterday; it was the early 1990’s and I was in an operations management lecture at university. The lecturer had just used the overhead projector to show a diagram similar to what you see here. The focus was very much on manufacturing - where inventory could well be tied up in finished goods, work in progress or even in raw materials.
This particular module of my undergraduate studies had a profound impact on my career. Since leaving university, much of my life’s work has been focused on helping companies reduce their inventory. This has been not just in retail but across consumer package goods, aerospace & defense, telecommunications and the chemical industry.
So, what can retailers do if they are adrift in a sea of inventory? The boat analogy is a good one; it represents the overall production system of the business. The water it is sailing on represents inventory levels – reduce it and you expose the real problems within the system.
For there are rocks everywhere – representing the problems that could appear along the process. They could be machine change-overs taking too long, late supplier deliveries, quality issues – who knows what else?
The retail supply chain used to be simple - supplier to distribution center, distribution center to store, store to customer. It barely changed in 150 years. Today, consumer expectations continue to change and the need to fulfill across multiple new channels is driving up inventory.
This is not just anecdotal – Gartner research suggests that 54% of retailers said fulfilling online orders from stores increases store inventory by 10%. Analysis by Bloomberg shows that even the best run retailers are having issues with ballooning inventory as they expand across channels.
It is highly likely that in many of these cases the inventory is covering up issues – not with the production system but issues with the overall omni-channel fulfillment system. Issues include poor sales forecasts, problematic inventory placement decisions, supplier delivery delays, missing process orchestration, data silos and inefficient manual processes.
All of these can be improved with the help of the right technology to facilitate the necessary data flows – inside and outside the organization, but to see where the issues are, the inventory must first be controlled. After all, you cannot manage what you cannot measure (this saying is attributed to both W. Edwards Deming and Peter Drucker).
When it comes to inventory and visibility, I have long been a proponent of real-time inventory visibility as a great starting point. I am not alone – research from RSR has shown that 55% of winning retailers state inventory visibility as being a key way to overcome supply chain issues.
In the same way that by lowering the water level you can see the rocks, if you lower inventory it highlights the real problems in your omni-channel fulfillment system. But before you can lower your inventory you must be able to understand where it is. Only then can you reduce it to find out where your real issues lie.
See how Software AG is helping the world’s most progressive retailers address the challenges of inventory visibility.