Economic Strategies: Inventory Management

May 1, 2003
The best way to manage inventory is to reduce it.

What's the most economical way to manage inventory? It's easy. Have only one commodity to buy, one to sell, with only one person doing the work. Now, back to reality. Controlling inventory is a management decision based as much on your business philosophy as software and hardware. Regardless of the path you choose or the equipment you purchase, success is determined by disciplined enforcement of processes that reduce or eliminate redundancies.

In its survey of Trends to Watch in 2003, Distribution Group, a division of Alexander Communications Group Inc., says, “The growing role in inventory management, along with network consolidation, the need to write off excess inventory, and a questionable labor market, are issues distribution center and warehouse managers will be facing.”

Troy Reynolds, editor of the report, says, “Warehouse mangers and directors [in 2003] will take a greater role in finding ways to improve inventory management. The warehouse manager is in the best position to do this and executive management will be paying attention in ways that they haven’t before.”

The report also observes, as warehouse operators come to appreciate the cost of excess, obsolete and out-of-date inventory, we will see a greater willingness to write off that inventory and get it out of the warehouse in 2003.

Lean inventories

When Allison Transmission (now part of GM Powertrain) in Indianapolis launched its drive toward lean manufacturing in the early 1990s, inventory management was destined to play a key role. “We set out to narrow down to our core products and core parts of products,” says Ann Schneider, manager, industrial engineering. “In the end, with our manufacturing-cell concept, we’ve reduced inventories by 90 percent in the ‘lean’ cells.”

Schneider adds that customer order times for transmissions have been reduced from seven months to three days.

“Reducing inventory is the quickest way to teach people about lean manufacturing,” says Schneider.

The Allison plant has been running on a lean manufacturing philosophy for about four years. A simple, card-based kanban inventory replenishment system is used in favor of a more sophisticated computer controlled program, says Brent Hendrix, production manager, “because it’s hard to imagine a more accurate way of handling inventory.”

TOA USA is a metal stamping, welding and e-coating manufacturing company. It is a Tier-One supplier of parts for Subaru. Shinichi Iizuka, president, says his inventory management strategy is based on the Toyota manufacturing system. “We use a basic pull-system, straight through the [780 feet long] manufacturing space,” Iizuka explains. “We order [inventory] and build to Subaru’s schedule, and hold a minimum of finished-parts inventory for shipment to its plant at their request.”

Iizuka adds, TOA USA keeps its inventory to a minimum by building quality parts. He proudly says that in December 2002 the plant had zero defects in the thousands of stampings it produced.

Management philosophy

The benefits of an inventory reduction philosophy are many says Donna Broome, vice president, national accounts and government, Grainger. “Reducing inventory opens up the way to more Just-In-Time purchasing, frees up warehouse space and capital, increases internal efficiencies, focuses management on the company’s core business and allows you to respond to the changing cost of money.”

Obviously, inventory management is a balancing act. As a manager, you must find the balance point on the continuum between the needs of the customer and how long it takes to build the product. If you feel like you’re caught in the middle, you’re right. There is pressure from the financial officers of your company because you have too much inventory. On the other side, is the pressure from your marketing execs who think you should have a wider selection of products to sell.

Finding the most economical strategy for managing inventory requires help. Determining at what point to add, or increase automation is one of the first challenges. Or do you start with a software program that is touted to be the end all? Maybe it’s best to just leave the work to someone else. What’s it cost to bring in a third-party logistics provider?

Jim Lawton, vice president of project management, Optiant, says analyzing the cross-entity decisions of inventory management is the most challenging aspect to finding that balance point.

“Can you reduce inventory levels and maintain customer service?” asks Lawton. “Anyone can reduce inventory. Service levels have to remain or increase for a program to be successful.”

Studies have shown that companies that made investments focusing specifically on inventory improvement, see results such as better on-time delivery, forecast accuracy, etc., says Lawton. However, those companies usually only average a 25 percent improvement in inventory reduction, the target of the investment.

For greater improvements, there are four major things you need to have in place when you’re trying to effect changes in inventory:

• The ability to execute an inventory plan and all the support systems such as MRP;

• Inventory tracking and costing programs;

• Supply chain strategy at the highest decision-making levels;

• Supply chain design and inventory policy optimization plans.

“The questions you need to ask,” says Lawton, “are: what is the appropriate inventory mix? Where should I put it? When should I put it there? Who owns the inventory?”

What gets lost in all the questions and answers, he adds, is visibility of the end-to-end supply chain. “There needs to be simultaneous comprehension of relationships and inter-dependencies of each of the roles and functions within an enterprise.”

Achieving this cross-entity analysis and making the right decisions, says Lawton, requires software that can view the supply chain from end to end, quickly put it into an application that can optimize that supply chain, while acknowledging real-world constraints that exist.

“It’s like getting into the heads of people running supply chains,” explains Lawton, “versus doing elaborate spreadsheets and constructing mathematical formulas that are out of date by the time they are finished.”

The reality is that most companies cannot afford the talent required to create the hypothetical supply chains.

What we’ve found,” says Lawton, “is that many of the companies we work with have supply chains in place. If they’d optimize the placement of inventory within that current supply chain, they’d get tremendous benefits.”

The problem seems to be too many companies are searching for a better supply chain before they’ve optimized what they have in place. The supply chain and much of its action appears to be linear. Inventory and safety stocks, however, are not linear problems. The best economic strategy is to tune your supply chain to the business conditions of today. “A company might have implemented its five-year plan two years ago,” says Lawton, “then the world changed. As a result, they get poor results because the supply chain is not matched to current conditions.”

Lawton recommends you evaluate your inventory policy more frequently than you did in the past. Changing your inventory policy is relatively inexpensive when compared with changing your supply chain network.

Where to get help

More companies are turning to third-party logistics providers (3PLs) for inventory management. Ron Shamlaty, a vice president with APL Logistics, says the reason companies seek help is threefold: Physical structure and presence, sophisticated technology and intellectual capital.

“Managing inventory is not a core competency for most companies,” says Shamlaty. “However, it is for us [3PLs]. It’s our business to stay current with the most up-to-date data collection technologies, hire the people with expertise, and position ourselves to be in the most logical places for our customers.”

With the breadth of services and improved technologies offered by 3PLs, you can minimize inventory within your warehouse and save money in other ways. As an example, Shamlatey cites the multi-country consolidation projects in Asia that his company does. Using sophisticated software, it captures all of the information for products manufactured in multiple locations, headed to a single location. It reworks the less-than-full container loads in a warehouse and consolidates inventory into full-container loads for shipping.

“There is an immediate cost impact,” says Shamlatey, “as well as an improvement in customer service. In the shipping industry, a full container takes precedence over a partially filled container, thus getting the product to the customer days sooner.”

An added benefit, says Shamlatey, is that now the 3PL customer has full “visibility” to its order. If economic conditions change from when the order was shipped and when (or where) it is needed, it’s a less-expensive matter to have the 3PL deconsolidate the load and ship the goods to different locations than originally planned.

Services such as those described by Shamlatey are functions a company might not want, or have money, to invest in on its own. Working together, however, the customer and the 3PL benefit from the economies of scale created.

Another growing inventory management strategy offered by 3PLs is the campus environment. On these multi-building campuses, the 3PL consolidates orders from numerous manufacturers destined for the same customer. The combined benefit to all manufacturers is that products can be shipped at full-truckload rates versus more expensive less-than-truckload rates.

Know what you have

Knowing what you’ve got, and where it is, goes a long way in the battle to manage inventory. Adopting a program of auto-ID (a combination of electronic product codes and radio frequency identification) can decrease inventory 10 percent to 30 percent. It does so by reducing the amount of safety stock needed to satisfy immediate demand, says Lyle Ginsburg, managing partner for technology innovation at Accucenture.

“Our research indicates that pallet- and case-level tagging will be widespread within a year or two,” says Ginsburg. “Among the drivers of this adoption are data standards, lower-cost tags and support at the retailers’ end of the supply chain.

“Manufacturers should prepare to meet the demands of their biggest customers who are already requiring auto-ID technology.”

The value of auto-ID is seen as a way for companies to move product to and from distribution centers at record speed, says Ginsburg, at nearly 100 percent accuracy. Knowing that inventory counts are accurate means you’re able to reduce safety stock, labor costs and shrinkage, while increasing product visibility throughout the supply chain process.

Another area affected by auto-ID is security. With better information on the whereabouts of containers and packages, transportation companies can maintain closer control of assets and can more easily provide regulatory agencies with accurate information about packages in the pipeline.

Think in reverse

Most companies focus on supply chain inventory at the front end of the process because that end involves building and shipping new products into new markets. A new business model is emerging in some industries to manage inventory by postponing various steps of the manufacturing process. To do this requires dumping the former model idea of building and shipping to a forecast predicted months in advance. In the old model, “reality” was the forecast. When reality metamorphosed into orders, however, results were not as predicted. The implications for inventory were that either you had too much or too little. More often the former than the latter.

In the old business model you needed safety stock, time to send the product out for packaging or you had to account for damaged and defective goods. With the new postponement model, you live with a core inventory and build products only when you know what you need. And you do it close to the point of distribution. This approach is looking good to many manufacturers.

Now, reverse logistics adds another dimension to the postponement model’s inventory management strategy, says Buzzy Wyland, president Genco Distribution System. “We [3PLs] can do the mass customization and postponement on the front end,” says Wyland, “and we integrate reverse logistics on the back end.”

Reverse logistics companies cull reusable products from the mass of merchandise coming back, then repackage the goods so inventory can be put back into the supply chain.

“Part of the reverse logistics process is giving the customer knowledge about what is coming back,” says Wyland. “Knowing what can be reused lowers the level of up-front inventory needed.” In the past, manufacturers did not know what was coming back, nor did they know the condition of the returns.

“Companies are learning that implementing a reverse logistics strategy is like finding money,” says Wyland. “Returns are a part of the business that’s always there, and it’s a part of the business where people focus the least amount of attention.”

He adds, when people do learn the true cost of manufacturing — including what it costs to get something back — they’re often surprised. “It’s an area of the supply chain where everyone is involved,” says Wyland, “yet no one is in charge.”

The art of any good reverse logistics program, says Wyland, is to know the disposition of the items before they get to the distribution center. Reverse logistics is now an inventory disposition management strategy. “The manufacturer wants to know how to maximize recovery of inventory and re-market the product,” says Wyland.

Whether you are planning to move from batch manufacturing to lean manufacturing; building to order or vendor-managed inventory, the management strategy you employ can make the difference between success and failure. As Ann Schneider at Allison Transmission says, “inventory management is only one part of the three-legged stool of lean manufacturing. Without it, you’re sitting on the floor.” MHM

Big Brown Gets Around

As the geographic boundaries of business diminish, it’s important to streamline your supply chain. UPS Supply Chain Solutions is a special section within the company that offers economic strategies for inventory management.

From multi-modal transport and freight forwarding, to customs clearance and international trade and logistics consulting, UPS Supply Chain Solutions designs facilities, handles distribution, manages inventory and returns, insures your cargo and reduces mailing costs. Here’s what it did for DaimlerChrysler.

DaimlerChrysler provides original equipment service parts to approximately 4,000 dealerships in North America through a network of 23 regional distribution centers. The company uses an aftermarket parts distribution system operated by its MOPAR Division. When a particular part is needed for service, the dealership orders through MOPAR ‘s system, and the part is packed and shipped from a regional distribution center using DaimlerChrysler‘s dedicated delivery service.

Requested parts not in stock at the closest regional distribution center are defined as referral parts. To better meet the specialized requirements of referral parts, DaimlerChrysler began searching for ways to drive greater efficiencies and improve the delivery service of these parts to its dealerships.

DaimlerChrysler selected UPS Supply Chain Solutions to design a referral parts distribution system in line with the high performance standard of its MOPAR Division.

In the previous DaimlerChrysler system, when a referral part was not in stock at the closest regional distribution center, the dealership was referred to the next closest distribution center. The referral chain continued until the part was located, which resulted in a time-consuming, often labor-intensive exercise. Once located, referral parts were shipped individually.

Oversized referral parts — too large for parcel shipments — presented another challenge. The oversized parts were shipped through an air cargo carrier, resulting in an expensive shipping process that required extensive handling of the parts.

“We talked to the people at UPS Supply Chain Solutions about improving our service for referral parts,” says Jerry Quell, senior manager of inventory for DaimlerChrysler ‘s MOPAR Division. “We needed a solution that provided consistency, quicker delivery, order tracking data, and a reduction of damages in transit. UPS Supply Chain Solutions developed a comprehensive solution that met all of our requirements.”

UPS Supply Chain Solutions and DaimlerChrysler worked together to redesign the company ‘s entire referral parts process, beginning with the network flow pattern.

Rather than moving geographically through regional distribution centers, all referrals now go directly to one of five DaimlerChrysler national parts distribution centers in the Detroit metropolitan area.

Now, when a national distribution center receives an order, it sends the referral part to an order consolidation center operated by UPS Supply Chain Solutions. An advanced IT system sorts the arriving parts by dealership. Multiple parts ordered throughout the day by a single dealership are consolidated into one package.

Specialized logistics technology rapidly processes the continuous flow of orders, expands the daily window for ordering capability, and identifies the most cost-effective method for delivery.

“We control costs while increasing satisfaction at our dealerships — they have fewer shipments to process and are much more confident about their referral orders,” Quell explains.

Each order’s tracking number is scanned at key stages of the supply chain, and the data are uploaded into the system‘s main database. Dealerships can log onto a secure Web site or call a dedicated 800-number to access the status of their orders. The tracking data also validate key performance metrics for DaimlerChrysler, such as consolidation rates, order cycle times, and costs.

UPS Supply Chain Solutions also helped redesign the referral parts network for oversized parts. Today, fragile oversized parts undergo specialized packing services at the order consolidation centers. They are consolidated into full truckloads or air cargo loads for overnight delivery to a dealership ‘s regional distribution center. The regional center then sends the oversized parts to the dealership.

This re-engineered network dramatically decreases the rate of damages in transit.

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Gillette Tests RFID Tags

Gillette, in partnership with selected retail customers, is set to begin placing RFID tags in products for the U.S. market. Up to half a billion tags could be placed on Gillette products over the next few years.

This is the first large-scale testing of breakthrough RFID tag technology developed by researchers at the Auto-ID Center, headquartered at the Massachusetts Institute of Technology.

The tags make it possible to track products through their production life cycle, from manufacturing to retail point of sale.

It is hoped that this technology will enable businesses not only to reduce losses resulting from out-of-stock, stolen or lost products, but also improve efficiencies across their operations by monitoring the status and location of products. The tags will be used with the ‘smart shelf’ technology. The shelf utilizes Auto-ID technology to monitor the status of products on display. It will alert retail staff when stocks become low or are being stolen and will enable automatic re-ordering of products.

Core Inventory Management

TNT Express’ returns management authorization (RMA) fulfillment system, recently deployed V3 Systems across Asia, bringing 78 facilities in nine countries “live” within 90 days, all from a central Singapore location.

TNT is launching its Web-based returns management authorization fulfillment system to manage after-market service parts. By collaborating with supply chain logistics implementation and software provider V3 Systems, and supply chain integration partner Holon Corporation, TNT Express has created a reverse logistics, service parts logistics and fulfillment solution for manufacturers and suppliers of telecommunications, computer, medical, industrial and high-tech, high-value equipment across Asia.

The TNT network implementation is the largest single installation using V3 Systems’ Toolkit solution to provide configure-to-order WMS and inventory visibility capabilities. The system enables TNT to automate the process of matching demand and supply across a multiple-country network in the Asia-Pacific region. This innovative solution allows real-time visibility of inventory disposition for TNT, its customers, and its customers’ customers, as it provides the ability to collaborate in real-time with the entire networked supply chain.

“This solution is unique because it addresses both automation at a network level, and delivers Tier-One execution capabilities over large geographic areas,” says Pieter Verwey, managing director of Holon Corporation. “In many ways, these areas are technologically underdeveloped.”

He adds that these combined capabilities create substantial value for customers by managing their service-level network inventory in an optimal manner.

“We have long recognized that reverse and service logistics is an emerging and critical aspect of supply chain management,” says Ashley Campbell, president and CEO of V3 Systems. “As a result, the speed at which we were able to rapidly deploy this system has allowed TNT Express to establish its presence quickly in this growing market.”