With trade barriers building, leading to more tariffs and restrictions, global supply chains are being impacted and having the right inventory levels can be key to weathering the storm.
In the past, overstock might have been considered the result of poor planning, but at a time of significant global trade disruption, erratic demand and rising costs are causing many OEMs and Tier One manufacturers to react by stocking more of everything. These buffer stocks are going to be key levers to mitigating disruption risks, but it is critical not to overreact. Wherever possible, businesses should aim to right-size inventory to release working capital to fund the mitigation buffers and minimise cash impacts. This is particularly important when the cost of cash is expected to increase and capital expenditure requirements set to grow in reaction to external market pressures. Key to making balanced, informed decisions is the availability of trustworthy data and analytics.
The Challenge of Forecast Accuracy in Inventory Management
Having recently conducted research to establish the root causes of most inventory management issues, Vendigital found that the most common challenge driving inventory is forecast accuracy, and improving it is typically a complex, business-wide challenge. Supply chain teams can put in place steps to mitigate the impact forecast accuracy by leveraging technology, sales, inventory and operations planning (SIOP) and organisational knowledge.
Key Metrics: Inventory Turn Rate (ITR) and Days Inventory Outstanding (DIO)
Inventory is a symptom of upstream processes and decision making, so putting in place robust KPIs such as Inventory Turn Rates (ITR) and Days Inventory Outstanding (DIO) to provide both leading and lagging indicators can help identify root causes that are driving inventory levels. This could range from master data management issues, where lead times are incorrect resulting in stock-outs because buffers have been created on misinformation, through to overstocking due to poor Engineering Change Notice (ECN) processes.
Industry-Specific Inventory Metrics
It’s important not to assume that an industry-specific ITR, as recommended by an industry body for example, will be appropriate to every manufacturer in that sector. Selecting the right target ITR for a specific business will depend on its operating model and the needs of its addressed market and customer base. For example, a make-to-order model may be acceptable to customers in some sectors and can reduce inventory holdings and therefore increase ITR. By contrast, a manufacturer supplying a market where lead time is a competitive differentiator is more likely to adopt a make-to-stock strategy. Where same- or next-day deliveries are expected, inventory will be necessary to meet this service level agreement and drive lower ITRs.
Ensuring Effective Governance for Inventory Optimisation
Navigating at a time when volatile demand signals are affecting many markets, it is even more important for decision makers to focus on enterprise-wide SIOP governance. Driving cross-functional collaboration will help to ensure the business can react and put in place measured plans. In order to do this efficiently, supporting tools and data integrity are key to ensure businesses can trust their forward projections and build not only reactive measures but long-term interventions such as capital expenditure outlays.
The Long-Term Value of Inventory Optimisation
Focusing on inventory optimisation will improve efficiency and increase operational resilience, but it could also be a differentiator for manufacturers at a time of significant cost volatility and disruption by enabling them to continue to supply their customers. Taking a whole supply chain view and making sure the right stock is available in the right places and at the right time will improve resilience and boost value in the long term by freeing up working capital where excess inventory still exists.
By Jon Pacheco, director and specialist in high-value manufacturing at Vendigital.
