White Paper: Managing Inventory in Uncertain Timese2open.com

ContentsThe 2009 Inventory Crisis: A Catalyst for Supply Chain TransformationTop Challenges Facing Global Supply ChainsInventory Management Road Map: A Phased ApproachCase StudiesMore Information

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MANAGING INVENTORY IN UNCERTAIN TIMES: A MODERN ROAD MAP TO PROFITABILITY

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An E2open White Paper

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The 2009 Inventory Crisis: A Catalyst for Supply Chain Transformation

The business environment has shifted. Today’s marketplace is more cash-constrained and volatile than ever before. To survive, businesses are often forced to take extreme measures. They are cutting costs wherever possible and reevaluating operational strategies while still doing whatever it takes to maintain their customer base. Faced with unprecedented global competition and rapidly changing consumer behavior, businesses—especially those operating as part of an extended, multi-tier demand-supply network—are struggling more than ever to sense real demand and intelligently manage their inventories. For many—even international industry giants and big brand owners—this has meant sustained economic hardship or, in some cases, bankruptcy.

Figure 1, from the U.S. Department of Commerce, illustrates the severity of the inventory management problem. When demand dropped off suddenly halfway through 2008, few companies were equipped to adjust inventory levels quickly enough. The result was a huge spike in the inventories-to-sales ratio, a key indicator of business health—or in this case, a lack thereof. The inventories-to-sales ratio offers good insight into the relative “health” of U.S. businesses because it is effectively measuring the ability of U.S. companies to consistently match supply with demand. An unusually high inventories-to-sales ratio, as seen at the end of 2008, illustrates not only a change in consumer behavior (lower demand) but, more significantly, the inability of U.S. companies to proactively sense changes in demand and adjust inventories intelligently.

This unexpected spur in the inventories-to-sales ratio was noteworthy because it signaled three economic events that effectively brought manufacturers to their knees. Specifically, consumer demand dropped off, inventory surpluses

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spiked, and commodity prices continued to rise in spite of a struggling economic backdrop. From an operational perspective, the result was rapid, often reckless, cost cutting and reprioritization, creating a bullwhip effect—meaning that even minor changes in consumer demand at the retail level had resulted in exponentially larger variations in orders placed with upstream suppliers (concept introduced by Jay Forrester, and later popularized by Hau Lee).

Thus, the majority of 2009 was characterized by slowed production in order to deplete stagnant inventories. Sales plummeted, resulting in a sudden reduction of free capital. Suppliers were forced to close down facilities, companies scrambled to slash head count, and distributors put fewer products on store shelves. But this last-minute attempt to salvage revenues was effectively too little, too late. According to the August 2009 McKinsey Global Survey, the result was a significant shift in manufacturers’ outlook on both the economy and the relative stability of their own supply chain management operations. While respondents were slightly more optimistic than a few months earlier (at the “depth” of the recession), they remained skeptical about the likelihood of an economic recovery during 2009—and even more skeptical about the specific actions their companies had taken to weather the crisis.

The fourth quarter of 2009, however, seemed to show new signs of life. With the holiday season approaching and inventories finally leveling out, consumer confidence and spending began to pick up in October. Yet again, many of the world’s leading supply chains simply lacked the ability to respond effectively to the change in consumer behavior. Even with below-average holiday spending, many retailers experienced extended stock outs on their most popular products.

In spite of these missed revenue opportunities during the holidays, manufacturers’ outlooks seemed to improve as the quarter finished (McKinsey Global Survey, December 2009). In fact, with only a few months of increased consumer spending, the idea of a 2010 “upturn” seems to be taking hold among manufacturers and analysts alike—but is this newfound optimism premature? Would it not be wiser for manufacturers to continue driving lean programs to reduce costs until economic indicators are more resolute? The bottom line is that the companies positioned for success are those committed to optimizing their inventory management processes—no matter what the economic tide holds. Smart supply chain professionals will use the 2009 inventory crisis to build the business case for new investments in processes and technologies that enable greater visibility, collaboration, and control across the entire demand-supply network. This paper outlines the key capabilities required, so that change—no matter how big, fast, or unexpected—doesn’t have to mean crisis, even in lean economic times.

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Top Challenges Facing Global Supply Chains

Getting a True Picture of Demand

Today, more than any time in recent history, manufacturers are faced with an uncertain operating environment in which they have limited visibility into true demand. While many companies have transparency across their major tier-one partners, few have visibility to second or third-tier suppliers—or to those trading partners with less technical sophistication. 2009 research from Aberdeen Group indicated that improving visibility was a top initiative for supply chain executives hoping to improve their multi-enterprise operations (Aberdeen Group, March 2009). In today’s global marketplace, that means extending visibility to 100 percent of partners—regardless of tier or technical maturity.

A major mobile handset provider missed out on a significant revenue opportunity during the 2009 holiday season because it lacked real-time visibility across multiple tiers of its supply chain. As the holiday season approached, the mobile provider repeatedly forecasted higher demand to its manufacturers, and yet the manufacturers remained unable to fulfill the higher levels of inventory. This lack of responsiveness was not because the manufacturers themselves were unable to increase capacity, but rather because their first- and second-tier suppliers had insufficient inventories. Because the mobile provider’s supply chain lacked transparency, the manufacturer was unaware that its suppliers had cut their inventories; likewise, the suppliers lacked visibility into true demand at the end customer.

Compounding the visibility challenge is the vast number of partners today’s international companies work with—in most cases, hundreds or even thousands. For example, 2009 industry research shows that companies are managing an increasingly large number of partners, making it even more challenging to obtain an accurate picture of customer demand (see Figure 2). After all, more trading partners inevitably mean more complexity and risk, as each trading partner introduces potentially new geographies, protocols, and processes into the extended supply chain. The sheer quantity of trading partners—combined with the ever-increasing amount of demand data flowing through the supply chain—can create significant problems for those companies lacking real-time visibility and collaborative capabilities. Without transparency across trading partners, most companies struggle to derive accurate consensus forecasts across multiple tiers of partners. Not only does this increase the risk for stock outs or surpluses, it also negatively affects partner relations, as partners lack goal congruency and accountability.

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Minimizing Supply Surpluses and Stock Outs

Shorter product life cycles, coupled with growing product proliferation, require better coordination and collaboration with customers and suppliers to achieve perfect execution. Without real-time collaboration, risks of revenue loss from stock outs or write offs from excess inventory remain high. After all, a supply chain with no multi-enterprise collaboration is effectively a conglomerate of suppliers, manufacturers, logistics providers, and retailers working in isolation at various stages of a common product life cycle—with no clear view of how well the network is performing.

A global semiconductor manufacturer spent the majority of 2009 relying on inventory buffers to fulfill customer demand across its various channels. While this was a significant impediment to lowering inventory carrying costs, the company could not risk potential stock outs or loss of market share. This costly approach ultimately backfired, however, as a lack of visibility and communication across partners prevented the company from successfully rerouting surplus inventories to distributors that were selling out. The result? Missed revenue upside in an environment where mistakes like these simply cannot be afforded.

What this means for manufacturers is that effective inventory management is incumbent upon the ability to see—and respond to—inventory positions and movements in real time. After all, information about changes in demand is only useful if manufacturers have complete transparency to all inventories, and the

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ability to collaborate with partners to respond to changes in demand. According to a recent report by Aberdeen Group, electronic (automated) collaboration was a key competitive differentiator, separating best-in-class companies from their average and laggard counterparts (Aberdeen Group, August 2008). Today’s best-in-class supply chains are successful because they provide all relevant parties with access to inventory information as it occurs—enabling companies to make time-sensitive decisions to improve the bottom line.

Responding Quickly to Changes in Demand

While real-time visibility and collaboration are essential to well-executed business processes, it is equally important to be equipped with the tools needed to recognize and respond intelligently to changes in the marketplace. Global competition and economic volatility leave little room for error, making supply chain flexibility, or “change agility,” a huge competitive differentiator. Unexpected changes in demand—not to mention unexpected environmental or economic disasters—are the norm in today’s marketplace, and the inability to respond quickly can mean huge losses in potential sales. According to a recent survey conducted by Gatepoint Research, the top two strategic initiatives of respondents included optimizing inventory stocking levels and synchronizing supply management with customer demand (Gatepoint Research, 2009). As it turns out, both initiatives rely on the abilities to communicate the true picture of demand down the supply chain, and to streamline a collaborative response with partners. Without these abilities companies are left to a slow and inadequate reaction, making it difficult to take advantage of upside or avoid potential revenue losses.

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In the middle of 2009, a leading consumer products manufacturer demonstrated some of the risks associated with poor supply chain flexibility, as it introduced a new product into the eReader market. Although the company was confident in the quality and ingenuity of the new product offering, it was uncertain how well it would be received by consumers in a down economy. Much to the manufacturer’s surprise, the product was wildly popular, with demand quickly threatening to outpace available supply. However, because the product’s supply chain was rigid and manually-based, it was unable to route new inventory to the locations of highest demand. The problem was not that the company had a shortage of inventory, but rather that its supply chain lacked the flexibility required to accommodate for unexpected changes in consumer behavior.

Responsive supply chains enable companies to monitor customer demand and partner performance (e.g., sell through by location and channel), locate areas of poor performance or demand changes, and then take quick, corrective actions. A company’s ability to accommodate varying individual partner processes, data types, and service-level expectations is another important aspect of flexibility. For example, a fully automated, flexible supply chain is able to run a JIT (just-in-time) replenishment program for one customer, while simultaneously running a hands-off VMI process across other channels. This is particularly important in today’s marketplace, where companies work with hundreds or even thousands of partners to sell into diverse markets.

Inventory Management Road Map: A Phased Approach

Best-in-class companies pay close attention to inventory, not only as a key indicator of business health, but also as a way to derive competitive advantage. Specifically, these companies take a proactive approach to breaking down the inefficient processes and information silos brought on by a lack of visibility, collaboration, and intelligent process automation. Best-in-class companies are able to improve their responsiveness to demand changes and lower costs by implementing real-time, fully automated inventory management operations. They also outperform their peers in inventory turns and sell through, while eliminating stock outs and surpluses to establish superior customer service.

And while no company has weathered the recession unscathed, best-in-class organizations distinguished themselves by continuing to make sound investments to maintain profitability and market share. For many, this meant investing in third-party technologies designed to improve inventory management operations while offering a rapid return on investment (ROI). Of course, these companies did not obtain “best-in-class” status overnight.

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Instead, they committed to a phased approach by implementing key capabilities gradually across processes and systems. The following section outlines a pragmatic, three-stage approach to establishing best-in-class inventory management capabilities, including real-time visibility, end-to-end collaboration, and intelligent process automation.

Phase One—Real-Time Inventory Visibility: Connecting to All Partners in the Network

In order to effectively manage a particular inventory process (or any business process more generally), data must be shared across partners of all types. The initial step, then, is to establish real-time visibility by electronically connecting to trading partners across the extended supply chain. Consolidating partner connections to a centralized platform provides a “control tower” for organizations. Visibility enabled by the hub allows companies to react to changes in the market by communicating with partners on demand and inventory information in real time. But with hundreds or thousands of trading partners spread across the globe, complete supply chain visibility is certainly no small feat for today’s manufacturers. By implementing sophisticated B2B integration solutions, however, companies can gain visibility into channel, supplier, and even in-transit inventories—enabling them to accurately monitor inventory levels and quickly respond to potential disruptions or upside.

Benefits of Real-Time Visibility:• Visibility to inventory stocking

locations• Improved sense of shifts in the

demand picture• Reduced costs due to expediting and

warehousing

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The best connectivity solutions offer flexible integration options, ensuring that all supplier and channel partner systems are supported, regardless of technical maturity or size of partner. This enables partners working with different processes, systems, and protocols to connect with minimal overhead. After all, as many manufacturers learned the hard way in 2009, focusing on specific channels or groups of suppliers is not enough; today’s volatile, fast-paced marketplace demands end-to-end supply chain connectivity to all partners in the extended network. On the buy side, real-time inventory visibility through a common platform provides virtual access to supplier, internal, and VMI hub inventories, enabling companies to reduce inventory liabilities and improve supplier responsiveness. Real-time visibility on the sell side provides transparency across customers, partners, and internal sites, ensuring that supply is consistently flowing to the areas of greatest demand.

The bottom line is this: real-time visibility is the foundation for any sound inventory management program because it provides all supply chain parties with a true, dynamic picture of demand. Companies are able to more intelligently utilize working capital and eliminate stock outs, surpluses, and the need for “just-in-case” inventory. A shared view of demand also ensures improved risk mitigation and superior customer service.

Phase Two—End-to-End Partner Collaboration: Driving Inventory Efficiency and Responsiveness

Enabling real-time collaboration across trading partners is the second phase of the multi-enterprise inventory management road map. The ability to not only see inventory, but also communicate and interact in response to movements or disruptions, is crucial to maintaining a lean, cost-efficient supply chain. Real-time collaboration enables a spectrum of business-critical capabilities—including collaboration on min/max inventory levels; mitigation of surpluses and stock outs; and automation of supplier replenishment programs, such as VMI or SMI.

In addition to mitigating risk and building partner relationships, real-time collaboration is also pivotal to flexible supply chain execution. The ability to resolve issues in real time with the appropriate partners can be the difference in meeting on-time delivery or fulfillment requirements that dictate customer satisfaction. To be responsive, then, companies must maintain and extend collaborative capabilities to partners. Towards this end, access to centralized technology that is designed to maintain process integrity across multiple company systems is a fundamental requirement. These technologies should be flexible to partner or customer process requirements, particularly when companies are assuming the supplier role.

Benefits of End-to-End Partner

Collaboration:• Increased supply assurance• Reduced operational costs, with fewer

stock outs and buffer inventories• Reduced overall inventory liability• Improved customer service levels

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Inventory collaboration enables more than just any-to-any partner communication on inventory levels—it enables full automation of the forecast-collaboration process, providing all members of the supply chain with dynamic consensus forecasts. By providing all partners with a “single version of the truth,” companies are able to reduce supply chain risk and respond quickly and intelligently when supply chain disruptions do occur. Customer service levels simultaneously improve because companies have real-time visibility into consumer behavior as well as the responsiveness to adapt to changing customer needs. Finally, collaborative strategies enable proactive issue resolution, allowing companies to manage by exception, as opposed to waiting for changes to flow all the way through the supply chain. In today’s increasingly volatile, competitive marketplace, efficient management-by-exception capabilities can mean the difference between dramatic revenue cuts and recoverable supply chain hiccups.

Phase Three—Intelligent Inventory Network: Making Better Decisions Based on Real Performance

The last stage of the inventory road map is establishing an intelligent inventory network, which requires complete automation of inventory processes flowing through the supply chain. Companies with this level of automation are capable of end-to-end, rule-based inventory tracking and KPI monitoring, leading to actionable strategies for continuous supply chain improvement. For example, automated channel and supplier inventory monitoring provides alerts on impending shortfalls or obsolescence in real time—enabling companies to respond to actual supplier and consumer behavior instead of relying on forecasts and predictions. Companies with a common platform, used for visibility and collaboration on inventory processes, are able to set policies and continuously improve inventory programs to drive performance. In this way, the supply chain becomes simultaneously more intelligent and hands-off—resulting in efficient process automation and ensuring demand-supply synchronization.

Intelligent process automation is only achieved by best-in-class supply chains, and requires a significant senior management commitment. The benefits, however, are well worth the investment. Best-in-class supply chains are equipped with visibility, collaboration, and process automation that extend not only to major first-tier suppliers, but to partners of all tiers—including the smallest and least sophisticated. These supply chains also experience markedly lower operational and inventory costs, as all business processes are wholly transparent, collaborative, and flexible. Too good to be true? The next section explores the ways in which two industry-leading manufacturers made the transformation to best-in-class supply chain status.

Benefits of an Intelligent Inventory

Network:• End-to-end visibility and control• Reduced inventory costs

(warehousing, stock, in-transit, expedite)

• Reduced operational costs

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Case Studies

Leading Global Telecom Service Provider Reduces Days in Inventory by 30 Percent

This leading telecom service provider grew rapidly through a series of mergers and acquisitions, resulting in the familiar challenges associated with swift expansion. The company suddenly found itself with a highly complex operating environment, compounded by varying levels of organizational and process maturity. With more than 20 operating companies around the globe—each with different processes across different lines of business—the telecom provider struggled to manage hundreds of disjointed, one-to-one supplier relationships. Unable to collaborate or exchange time-sensitive information across trading partners, the company’s multiple business enterprises suffered from high inventory levels, high operating costs, and poor customer service levels.

Taking a phased approach to transforming its inventory management program, the telecom provider first invested in the technology needed to scale partner connectivity and enable visibility. Once real-time visibility was established, the company was able to share demand information with customers and suppliers in order to more closely match supply with demand. Next, the company focused on establishing strong relationships with its trading partners, encouraging system adoption in order to scale collaborative inventory programs. By leveraging these collaborative tools, the company was able to implement flexible consignment programs, and to drive inventory management automation. Finally, the company’s executives recognized the need to gain more control over their planning and execution processes, investing in automated monitoring and advanced analytics to promote continuous process improvement. By arming its executives with performance-based metrics, the company was able to improve overall supply chain efficiency and reduce inventory and operational costs.

By implementing visibility, collaboration, and business process automation across its global supply chain, this telecom provider experienced the following business benefits:• 30 percent reduction in days of inventory• Improved supplier performance, increasing supply assurance• Greater than 20 percent decrease in expediting costs• Continued savings through volume pricing

Leading PC Manufacturer Decreases Logistics Costs by 15 Percent

As one of the largest PC manufacturers in the world, this company’s growth ultimately outpaced its ability to scale global inventory processes. With no

“A key objective of our supply chain strategy has been to take advantage of our scale and scope through a collaborative eSupply Chain.” VP and CPO, leading global telecom

service provider

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central manufacturing facility, it relied on hundreds of disconnected parties across the globe for production and fulfillment activities. Additionally, the company operated through multiple distribution models (e.g., retail, online, direct), putting a premium on partner visibility and process automation in order to keep costs down. The hyper-competitive, fast-paced nature of the industry also made supply chain operations difficult, as product life cycles were short and consumer preferences always changing.

In order to address its new business objectives—driving revenue and market share growth through new markets and products—the company recognized the need for real-time visibility to inventory, in-transits, and customer demand. Accordingly, the company invested in an electronic connectivity solution that provided all partners with visibility to forecasts, site and in-transit inventories, and demand information. Second, the company shifted focus to reducing COGS and improving customer service levels. The PC manufacturer recognized that these performance indicators relied heavily on their partners’ abilities to execute. Towards this end, the company implemented collaborative systems across all fulfillment activities using pull-based replenishment programs. Because pure automation and scalability were not sufficient competitive differentiators for this company, it then turned its resources towards process innovation, hoping to improve the overall “intelligence” of its supply chain operations. The company set up continuous monitoring capabilities—from an exception-management framework to real-time performance monitoring—in order to refine business processes, driving down cycle times and minimizing inventory obsolescence and excess.

The business benefits experienced by this best-in-class PC manufacturer include:• Decreased logistics costs by 15 percent• Reduced days of supply by five days • Reduced fulfillment cycle time by two days• 17 percent reduction in inventory aging and obsolescence

Leading Electronic Manufacturing Services Provider Achieves $400 Million in Inventory Reduction

This manufacturing services provider hoped to take advantage of opportunities for sourcing and operations in low-cost regions but lacked the necessary capabilities to scale quickly. The company also lacked visibility into in-house and partner operations needed to make intelligent decisions about inventory levels and supplier viability. Additionally, as market competition increased for this manufacturer, it struggled to reduce cycle times in order to improve customer satisfaction.

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The company’s initial objective was to gain visibility across the supply chain in order to eliminate latencies and improve decision making. The company executed on this initiative by establishing connectivity to all major partners, providing transparency into in-transit, on-hand, and sell-through inventories on a global scale. Next, the company shifted focus to collaboration—setting up a flexible, automated VMI program that allowed 100 percent trading partner participation. In this way, the company ensured that all supply chain participants had access to a “single version of the truth,” improving supply assurance and inventory performance. The third phase of the company’s supply chain transformation involved monitoring performance across various inventory processes. This enabled the company to track performance across its supply base and measure its ability to meet customer fulfillment expectations. The company’s executives were therefore able to continually refine and implement inventory strategies to drive competitive advantage.

By equipping its inventory management program with real-time visibility, collaboration, and business process automation, this high-tech manufacturer realized the following benefits:• $400 million in inventory reduction• 33 percent reduction in supplier response times• 50 percent improvement in compliance to PO/demand changes

More Information

This white paper is part of a series of quarterly installments designed to keep supply chain executives abreast of the latest inventory management trends and best practices. Please visit e2open.com for the next installment. Additional information on the ways in which you can improve your company’s inventory management strategy can also be found at e2open.com, or by calling (650) 645-6500.

About E2openE2open is the leading provider of software and services to manage inter-company processes such as inventory management, order management, demand/supply forecast synchronization, outsourced manufacturing visibility and multi-tier visibility—integrating trading partners across multiple tiers of distributed global supply and demand networks.

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“We provide innovative and flexible solutions to our customers to accelerate their success. By connecting and collaborating with our partners, we have been able to better fulfill short supplier lead times, reduce inventory levels, and dramatically improve inventory turns—all while lowering the total cost of ownership to our customers.” CPO and EVP, leading electronic

manufacturing services provider