Achieving High Performance in the Supply Chain: Inventory Optimization

In this report, Accenture outlines the benefits of a more sophisticated approach to inventory optimization and details the elements of such an approach.

Accenture High Performance Business research confirms that a positive relationship exists between supply chain mastery and superior financial performance. In fact, companies with strong supply chain performance are rewarded with a premium of 7 to 26 percent in the compound annual growth of their market capitalization.

Nonetheless, a surprising number of companies continue to use the most basic inventory policy—one of maintaining the same level of inventory across all stock-keeping units. This approach naturally means that faster-moving items are likely to be out of stock quickly, with a consequent negative effect on customer service, while slower-moving items tend to be overstocked, thus tying up working capital.

This situation is exacerbated by the emergence of the multi-polar world, one defined by Accenture as having multiple centers of economic power and activity. The resulting interdependencies can significantly and unexpectedly affect resource availability, delivery times and product demand.

Accenture has identified several conditions that indicate opportunities to raise service levels and control inventory costs across the supply chain:

• High stock-outs with high inventory levels.
• A complex supply chain network.
• Long supply chains.
• Large number of products.
  
  

The benefits of inventory optimization can be considerable:

• Reduced inventory.
• Reduced carrying cost.
• Improved asset utilization.
• Improved customer service levels at lower total supply chain cost.
• Reduced operating costs.
• Increased revenue and gross margin.
• Improved workforce effectiveness and efficiency.

Some companies are adopting a more sophisticated approach to segmenting products and setting policies according to product demand. Manufacturing resource planning and distribution resource planning systems are being deployed and may lead toward just-in-time inventory. However, today’s long supply chains, which are vulnerable to fluctuations in the cost of raw materials, product availability and transit times, make some level of safety stock essential.

Leading companies are focusing on inventory optimization, using sophisticated planning tools to set safety stock levels and replenishment parameters.

Inventory optimization can be conducted at any stage in the life cycle of a planning and scheduling project. It may be restricted to a single group of stock-keeping units or rolled out across the entire supply chain.

Elements of the inventory optimization process are:

• A pilot study that focuses on setting targets for a small group of stock-keeping units.
  
  
• An optimization study that includes setting targets for a broader range of stock-keeping units, as well as identifying process improvements.
  
  
• A value assessment study that identifies opportunities to capture value across the supply chain.
  
  
• A supply chain planning system implementation that uses inventory optimization to determine the correct settings for the software—and to update the settings into the future.
  
  

Inventory optimization that spans the entire supply chain can minimize inventory holding costs and ensure that service-level targets for end customers are met. Inventory optimization is continuous and services delivered by experienced supply chain management consultants using sophisticated tools can help to maintain inventory at optimal levels.