VideoBut you can have "too much of a good thing," according to analysts at Forrester Research, who note that up to half of most companies' inventory is safety stock. Part of the problem is that managers don't reassess optimal stock levels frequently enough. In many cases, companies will calculate safety stock levels once — usually during ERP implementation — and stick relatively close to those levels thereafter. (No one wants to face anything like "The Great Inventory Correction" ever again.)
Recalculating safety stock dynamically — taking into account changing demand patterns and lead times — can allow companies to free up cash and reallocate resources. What's more, by maximizing inventory turns, pruning obsolete inventory, and maintaining more efficient stock levels, companies can reap more generous returns on their assets.
Fuller has seen the benefits of a quick-response system first-hand. Managers at Cisco create statistical models of when parts may fail so the company can have replacements available to ship to customers from a specific depot — often within a two-hour timeframe — and hold on to key business.
To help it stay within that narrow window for shipment, Cisco implemented software from MCA Solutions, which can alert inventory managers of potential fluctuations in demand for routers throughout the country. Since the system has been in place, Cisco's inventory investments have decreased between 10 percent and 15 percent, and service orders have risen by the same amount, explains Fuller, who adds, "We're making better decisions now."
4. Your Demand Forecasts Miss the Mark
Traditionally, forecasts assume that demand is relatively fixed. If a thousand units of any given product were sold last year, the assumption is that a similar amount will be sold the following year, perhaps with a small percentage increase based on subjective rules of thumb.
It's also true, traditionally, that demand tends to have a tenuous correlation with historical figures, and that it's often subject to significant and unpredictable fluctuations. What's more, demand forecasts are often made on an aggregated basis. The key to more-accurate forecasts, explains Forrester Research analyst Noha Tohmay, is not just making sure that shelves are full, but gaining a more nuanced understanding of customer segmentations and measuring the profitability of demand for different items.
Demand management software providers such as Evant help managers track demand patterns for individual products at different stores, by helping monitor the flow of goods from warehouses and distribution centers through retail stores and customers. Evant's software reforecasts the demand for every item in each store every week, and recommends inventory levels and other guidelines for individual products to ensure that supply matches demand as closely as possible.
Armed with more detailed point-of-sale data, suppliers can gain a more accurate picture of what retailers will order in the future. Store data can be aggregated if need be — say, to match up retailer and supplier distribution centers. Demand management software can also smooth out forecasts by allowing for irregular events like product promotions and seasonal changes. (Many companies are looking at all sorts of ways to use all the available data.)
Since going public nearly 10 years ago, O'Reilly Automotive has seen nearly a fourfold increase in the number of its auto-parts stores. To help maintain control of its expanding supply chain, O'Reilly turned to Evant. Since doing so, it has been able to increase, and better track, the number of stock keeping units (SKUs) handled by each of its buyers from 40,000 to 100,000.
Evant's software also allows O'Reilly to take in data from outside sources to make its projections more accurate. For example, the auto company now integrates registration data — such as location, model, and age — from R.L. Polk, a provider of consumer marketing intelligence for the automotive industry. O'Reilly has been able free up $66 million in capital over the last few years through inventory reductions and other efficiencies.
5. Your Time-to-Customer Is Too Long
In the 1960s and '70s, manufacturers competed on the basis of cost efficiency. In the 1980s, quality was the rage. Today, much of the focus is on speed. Companies that outsource manufacturing and stretch their supply chains around the globe, however, are finding that time-to-customer is becoming more and more difficult to trim.
There's also a fine balance between getting products out the door more quickly and delivering high quality. And as they face increasing pressure to satisfy customers, managers must also be able to make realistic promises; failure to deliver against expectations can be one of the most deadly blows to customer loyalty.
At Internet systems provider Juniper Networks, determining a delivery date for customers once required four days, while managers tried to understand all the requirements and run calculations manually in a spreadsheet. They've been able to reduce the time in half with software from Valdero, whose products help companies respond more quickly to fluctuations in demand and supply.
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