Improve stock control and predictability to overcome inventory performance barriers

Delivering reliable product supply from a complex network of suppliers and service providers has only become more difficult in recent years with market challenges such as supply constraints and risk, demand signal volatility and resource instability. There are also multiple internal barriers that cause companies to struggle with inventory. These include:

• Organizational mindsets and incentives that drive oversupply based on biases for maximizing growth, minimizing cost and avoiding shortages.
• Structural gaps between the business operating model, product portfolio and supply network resulting in chronic trapped and unplanned inventory.
• Planning capabilities and performance management practices that are overwhelmed by business complexity.

To get back on track, organizations should focus on the development and practice of two performance management disciplines: Stock control for improved predictability to mitigate oversupply biases; and prioritize rebalancing within defined network and portfolio scopes to overcome complexity.

Let’s take a closer look at each.

Measure and improve stock control for improved predictability

Inventory surprises are a significant contributor to financial dismay that can damage supply chain credibility. They require extensive recovery time and effort that can be avoided by managing expectations in advance and proactively providing a summary of significant variance drivers against projected inventory.

Avoiding inventory surprises, and responding to pressure for cash flow, requires reflection and foresight. Consideration must be given to the supply planning decisions and other supply commitments that have led to surprises in ending inventory, as well as discussion about an appropriate inventory range that will fulfill demand and maximize cash flow going forward.

There are often situations in which business leaders simply want to meet a target to avoid engaging and being forced to confront the reality of an over-constrained network. Supply chain leaders must show discipline in these scenarios by:

• Driving conscious, transparent supply decisions: Create awareness and discussion about the impacts of competing performance objectives that impede inventory control through a balance of supply with demand. Multiple scenarios can be presented to illustrate the options for achieving the desired balance of cash, margin, risk and growth.
• Quantifying key variance drivers to create transparency: Establish a comfortable margin between target and actual inventory and drive awareness for factors creating variances among the proposed plan, adopted plan and actual inventory such as demand shortfall, excess supply and unplanned demand. Multiple versions of this analysis may be needed to satisfy monthly and quarterly financial planning cycles while also measuring the impacts of different supply lead time constraints.
• Understanding variance root causes and corrective actions: Improved control and predictability is only possible if leaders document key stock variances and investigate root causes. Root causes may include: demand plans that don’t align with current market conditions, unplanned overproduction or unexpected, opportunistic buying beyond supply requirements. Transparency here helps leaders consider changes in commercial tactics (both buy-side and sell-side), additional governance of situational decisions and modified functional incentives.

Drive focused improvement with prioritized rebalancing

Prioritized rebalancing applies methods consistent with define, measure, analyze, improve and control (DMAIC) principles. The purpose is to overcome common pitfalls, such as improvement scopes that are too broad or a preoccupation with perfection that emphasizes comprehensive modeling over the focused identification and pursuit of immediately available opportunities.

Prioritized rebalancing dives into more granular performance details to identify the next layer of improvement needed. This step requires a comparative analysis of inventory performance across time and within the context of business activity to determine the sequence for applying deeper portfolio diagnostics. Considerations during this stage include:

• Conduct inventory trend analysis across time, within the context of business performance, to characterize the nature of the problem and opportunity. Have inventory values (relative to demand and supply) increased substantially in the past year or two? How do these changes compare with relevant industry trends?
• While optimized performance requires end-to-end thinking and analysis, what is the location of the most immediate opportunity for “prioritized rebalancing?” A demand-side opportunity would be applied in geographic sales regions and distribution channels where finished goods represent the most significant immediate opportunity. A supply-side opportunity would focus on raw materials at specific factory locations.

Supply chain leaders have an opportunity to engage and motivate the responsible planning and operating teams for these specific scopes and locations. Through prioritized rebalancing, rather than arriving with the answer and fixing the problem one time, there is an opportunity to ensure that performance can be sustained by evaluating and enabling them to capture and sustain the opportunity.

Bringing it all together

The two practices we’ve outlined here are the best way to demonstrate that every effort has been made to eliminate wasteful stock that is not protecting or creating business value. After applying and mastering these steps, more strategic and structural initiatives for optimized network performance can be pursued. These can include realignment of supplier portfolios and contract terms to support optimized product supply, better synchronization between supply and product life cycle transitions or investment in technology-enabled planning and scheduling capabilities.

Structural realignment for optimized network performance involves more complex decisions and longer time horizons that are not appropriate (or possible) until the organization is prepared to shift its focus beyond short-term cash for a balance with profitable growth. Mastering stock control, predictability and prioritized rebalancing allows supply chain leaders to demonstrate in a constructive way that available opportunities for inventory reduction have been captured. By doing so, the organizational focus can return to optimized network performance in support of profitable business growth.

About the author

Paul Lord is a vice president analyst in Gartner's Supply Chain research organization, creating content and leading coverage for inventory excellence and cost-optimized supply chain performance across all manufacturing industries.

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