Now is the time to get back to basics. If the dot-com bust taught high-tech companies anything, it was that inventory management matters. Taking rosy forecasts at face value and stockpiling shelves do not amount to inventory management.
Burned by massive inventory write-downs and pummeled by Wall Street, many managers have come to terms with the notion that they must follow predictable, practical rules when managing the flow of raw materials and finished goods in the supply chain. Indeed, OEMs and electronics manufacturing services providers are taking a solemn vow to adhere to the rigors of inventory management.
Steve McGill, chief operations officer at SMT Dynamics LLC (Anaheim, Calif.), for one, has found religion. "We are a contract manufacturer, and as such, we were right in the middle of what happened a few years ago," McGill said. "We were badly hit by the inventory situation, [and] we have sworn not to allow that to happen again."
The monumental task now before the electronics industry goes beyond acknowledging that inventory needs to be managed better. It's about creating discipline: figuring out how much inventory to stockpile, where and for whom; shedding old practices that never really worked; and adopting advanced strategies and IT tools that optimize the supply chain from beginning to end.
That discipline is slowly taking hold, along with the idea that inventory management is not a problem to be handled within an organization's four walls alone. Rather, it involves cooperation from multiple trading partners.
"Inventory management from a tactical standpoint has been around for quite some time," said Vinay Asgekar, an analyst at AMR Research Inc. (Boston). "Opti-mization is not necessarily new either, but the idea is becoming much more mainstream."
"In the last few years, there has been a move to align inventory practices with broader corporate objectives," added Asgekar.
For far too long, inventory management has been treated like a footnote, serving as a tactical buffering mechanism to protect companies from unexpected swings in demand. Instead of trying to get their arms around the industry's complex inventory problems, businesses pursued low-hanging supply chain improvements. That situation has since reversed, with many companies focusing on the best way to align inventory demand and supply.
Inventory evolution
Optimization and alignment are all well and good, but how do you implement them? Specifically, how do companies that have grown accustomed to the industry's highs and lows minimize the inventory swings that accompany the cycle?
For big players, inventory management and its descendant, inventory optimization, are part of sweeping supply chain transformations. These efforts are instructional and likely will be the blueprints for midtier companies to follow.
Consider IBM Corp. (Armonk, N.Y.). It spent the last few years refocusing business operations around its On Demand program. The company brought its procurement, manufacturing, logistics and materials management functions under its Integrated Supply Chain (ISC) group, creating a common framework of IT tools and problem-solving techniques.
IBM, which buys about $39 billion worth of materials annually, has seen extraordinary results. Inventory levels dropped to their lowest point in 10 years, and cash conversion cycles have accelerated by 33 percent in two years, because of improvements in inventory management, accounts receivables and supplier payment terms, according to company documents. IBM claims to have realized at least $5.6 billion in productivity and efficiency savings.
Several factors contributed to IBM's success. One had to do with how employees viewed the supply chain process and inventory's role in it, according to Stephen Rogers, vice president of demand/supply for ISC.
"You have to change the way people think about inventory," Rogers said. "You have to educate the management team and everyone in the company that inventory equals cash."
"If you tell people that one inventory turn equals $150 million, then people realize $150 million fuels things like pensions and payroll and sparks business growth in other ways," he added.
Running activities off a common IT infrastructure also was a pivotal part of IBM's turnaround.
The company's operations are built around an SAP backbone, an i2 Technologies planning system, a Siebel sales management tool, an E2open business-to-business connectivity platform, a Selectica brand configurator, and IBM's WebSphere cross-brand shopping mechanism and DB2 database, Rogers said.
"We are designing a system and products with supply chain optimization in mind," he said. "Once you have designed and built the management system, you can focus on inventory issues, information flows and getting people to understand that the targets that have been set are linked to the corporate On Demand strategy."
With much of the preliminary inventory management activities now firmly in place, IBM is expanding its capabilities with its Business Optimization for Supply Chain Operations model.
Bosco, which started with hard-disk drives and is now being rolled out across the company, is a customization program that takes postponement tactics into consideration. Under the initial concept, IBM buys and stocks fewer hard-disk drive part numbers and then personalizes them to brand requirements closer to the delivery stage, according to Rogers.
"We get a better price from the supplier on the hard drives because we're asking them to supply fewer part numbers for the same total demand, thus lowering their costs," he said. "Inventory will then benefit in two ways: lower cost on the parts, and fewer parts to stock, since we can personalize them late in the cycle. This also makes our planning less sensitive to forecast inaccuracies."
VMI works
Another trend on the inventory management landscape is a pickup in vendor-managed inventory (VMI) programs, especially where the underlying theme is better communication and response time.
In this environment, IT applications link trading partners and facilitate information flow about inventory needs, material requirements, replenishment signals and forecasted demand.
To curb inventory imbalances, SMT, which puts its contract manufacturing business at $50 million, is pursuing a VMI strategy, according to COO McGill. The EMS company is using the services of software provider RiverOne Inc. (Irvine, Calif.) to increase its inventory turns and more accurately report replenishment signals from suppliers and customers.
"The only way to know what is going on at any given time with our inventory is to have a system that ensures integrity with our communication processes," McGill said. "We have forecasts that we transmit to suppliers, and they send us back commits and inventory signals."
SMT's signals are generated in its enterprise resource-planning (ERP) system and routed through RiverOne's tools. The tools translate the information into a format that can be read by various IT applications and accessed via a Web browser on the supplier end.
Although McGill could not quantify the savings because it has only been a few months since the project launch, he said a driving force behind the program is to increase inventory turns gradually from the present level of 10 a year. Currently, the EMS company is integrating three of its largest suppliers and three of its largest customers on the RiverOne platform, with plans to bring up a handful of additional suppliers and customers on a monthly basis.
By the end of 2004, McGill said, he expects that 60 to 70 percent of SMT's component purchases will run through the company's VMI process, up considerably from the 15 to 20 percent it started with earlier this year.
"One of our goals is to leverage the system to improve our costs and our inventory management capabilities," McGill said.
Closely tied to the VMI trend is the stepped-up need to extend the ability to check the status of available and dedicated inventory. That's the determining factor in allowing companies to match inventory levels on the supplier side with promised delivery dates on the customer side.
"Tools that addressed extended supply chain visibility have been missing in the industry until recently," said Chris Smith, RiverOne's president and chief executive.
"Before, the trend was to focus on inventory within your four walls. But optimizing inventory in that way has played out. Now there's a shift in focus, and the question is, 'Where does inventory sit within my entire supply chain?' "
Other software and service providers are seeing similar requests from their customers.
For instance, E2open Inc. (Redwood City, Calif.) is working with several top-tier electronics companies to create a hub-type culture where inventory and forecast planning information are constantly passed between trading partners.
"The majority of companies trying to do VMI want to know how to automate supplier visibility functions and figure out what is in the [just-in-time] hubs," said Lorenzo Martinelli, E2open's executive vice president.
"Much of the need for this information ties into liability concerns," Martinelli added. "For EMS companies, particularly, this is a big issue. Companies want to know if trading partners can take orders, and what happens if there's a cancellation. Are products pushed back down to the supplier to hold? Who will be stuck carrying the inventory?"
RiverOne executives have also seen the liability discussion take on new life, reflecting the finger-pointing that occurred during the downturn when companies had to take responsibility for the purchases they made.
"The market has matured in the last two or three years," Smith said. "Companies didn't talk about liability before, but it obviously was a huge issue during the downturn. Now discussions focus on the liability of VMI inventory and what metrics and rules can be developed to measure liability."
Making sense of it all
Even though portions of the inventory management puzzle are being seen more clearly and companies claim to be dedicating more time and resources to finding better solutions, much remains to be done.
One of the most common hurdles to get over when scoping out the next phase of an inventory management strategy is to realize that existing systems may not support the extensive amount of calculations and algorithms that are required to run inventory optimization scenarios.
"Companies have made lots of investments in technology. They have ERP systems and planning systems, and those systems have brought tremendous capabilities in helping them run more sophisticated supply chains," said Jim Lawton, vice president of marketing at software vendor Optiant Inc. (Bur-
lington, Mass.).
By their nature, however, those ERP and planning tools are operational; they help place purchase orders or reorder materials, Lawton said. They are limited in what they were designed to do; they were not designed to deal with the complexity of selling products to multiple tiers of customers who have different inventory requirements and different service level terms.
Realizing that another platform may need to be added to the IT operational stack, companies must plan an integration strategy and be able to set parameters around demand uncertainty. Although they control different aspects of the supply chain process, the various systems in use deal with information that is crucial for optimizing inventory placement, replenishment signals and production schedules, observed Martin Barkman, vice president of sales and strategic services at SmartOps Corp. (Pittsburgh).
From here, biting off small pieces at a time and solving glitches in a systematic way is the most advisable route, according to analysts and industry observers. Rome wasn't built in a day, so don't expect something as overwhelming as inventory management and optimization to come together overnight.
"You have to remember you are not trying to optimize your inventory or supply chain for today, tomorrow or this month," said IBM's Rogers. "You are optimizing to help your customers in the long term."
