Amidst the recent continued economic volatility, C-level executives’ focus has shifted from revenue growth to profitable growth, and hence global supply chain performance has gained a great deal of attention. As global supply chains are devising ways and means to respond to unpredictable customer demand and increased competition, one of the greatest challenges they face is achieving inventory optimization while maintaining higher customer service levels and reduced variable costs.
In my experience of working with a number of clients in the energy and chemicals market within manufacturing, in addition to some in the consumer packaged goods (CPG) and pharmaceutical markets, I have observed some common challenges facing these industries, including:
- Ineffective Master Data Management: Data definition and data quality are common pain areas across industries, driven by acquisitions (multiple disparate systems) and lack of data management practices. These organizations are sitting on a pile of data, without being able to use this data for effective decision making. For example, almost all of the clients I worked with had inaccurate procurement and manufacturing lead times in their transactional systems, leading to judgment-based inventory planning. Inaccurate planning leads to frequent expediting and de-expediting and the resources were constrained by available capacity. To free up capacity, each component in the value chain buffers the lead time component and this lead to excess ordering and stocking to meet customer service levels.
- Individual goals not aligned to overall objectives: While all of the clients I worked with believed that cycle time reduction would bring a competitive edge to their business, and had an overall objective of reduced order-to-delivery cycle time, individual elements of the overall cycle time did not have any goals around lead time adherence. Similarly, procurement and logistics functions were measured on cost savings only, while CXOs’ objective was to improve customer service levels and working capital. There were no processes around supplier or freight forwarder performance management on fulfillment or lead time adherence, or the processes were so ineffective that it didn’t drive any actions or behavior.
- Lack of communication and collaboration: Whether it’s within the organization or between supply chain partners (customers and suppliers), lack of communication and collaboration was one of the top three challenges across industries. Here’s a typical example: New product development or R&D developed a new product without involving procurement, which resulted in procurement of customized parts from specialized suppliers, resulting in higher total cost of ownership. In some cases procurement was involved during new product development, but quality control were not informed of the raw material testing requirements. This resulted in material rejections and a poor supplier relationship.
To address these challenges, I recommend a five-step structured approach to set up an effective global inventory planning and control process, as follows:
