Reducing Costs Within the Supply Chain by Reducing the Risk of Stock-Outs

Oct. 3, 2007
Because of the excess inventory held, organizations are not gaining the expected cost savings from their off-shoring initiatives.

In an effort to reduce overall manufacturing costs, an increasing number of companies are turning to offshore suppliers for sourcing direct materials all the way to finished goods within their supply chains. An implication of this trend is that these manufacturers are struggling to cope with the downside of more complex and extended supply chains. One key negative effect is the increased risk of costly stock-outs and the resulting excess buffer stock that is carried to mitigate this risk. Because of the excess inventory held, organizations are not gaining the expected cost savings from their off-shoring initiatives.

With these challenges in mind, two technology-enabled techniques in particular can enable organizations to reduce inventory risk and costs and reach target savings from their global sourcing initiatives.

Collaborative Inventory Management Solution

Traditional purchase order procurement methods are outdated for many industries, especially component assembly operations. Purchase order methods put the emphasis on reducing the cost per unit of the procured part and place all the risk of stock-outs on the procurement organization, which in turn compensates for this risk by buying in excess. The resulting excess inventory increases inventory carrying costs, which average 25% of inventory value across industries and are often over 40% for high technology companies. The increasingly popular practice of having suppliers monitor and manage replenishment to min/max targets in a 'pull-based' model, rather than replenish to purchase orders in a 'push-based' model, can generate significant inventory savings and service level improvements for the organization.

However, being successful with a supplier replenishment technique such as the min/max approach requires organizations to provide their suppliers with good visibility into forecast, consumption, shipping and receipt information. By gaining accurate and clear visibility into these elements, suppliers understand demand and expected supply requirements clearly and use that information to confidently replenish inventory, such that it stays within the min and max levels without the risk of causing stock-outs.

Case-in-Point: Stryker Instruments

By deploying such supplier visibility solutions, Stryker Instruments, a surgical instruments manufacturer, reduced its direct material inventory and expedited freight costs by a large percentage. Stryker serves a market in which more than half of orders placed need to be fulfilled on that same day.

In the past, Stryker's materials managers used spreadsheets and manual processes to determine what to procure from suppliers, but this process was time intensive and resulted in too much "just in case" inventory and expedited freight. Using these manual processes, Stryker found it challenging to reduce inventory levels without suffering stock-outs. As a result, the company decided to overhaul its inventory management process with suppliers. Rather than issue purchase orders to the suppliers, Stryker elected to share forecast, consumption, shipping and receipt information with those suppliers over a web-based application and asked them to manage the replenishment process. Since many of its suppliers lacked the technical resources and budgets to support an Electronic Data Interchange (EDI) connection for information sharing, Stryker knew that a web-based solution was the right approach.

With this solution in place, Stryker was able to reduce direct material inventory by 30% and significantly reduce expedited freight, stock-outs of direct materials and supply chain administrative costs.

Automated Trade Visibility Solution

While pull-based, Web-enabled inventory collaboration solutions are often deployed to reduce inventory costs and lower the risk of stock-outs from suppliers that are located close to manufacturing facilities or within the same hemisphere (i.e., intra-EU, intra-NAFTA), another visibility technique is used to reduce the risk of stock-outs from highly extended offshore supply base.

These manufacturers have highly-globalized, geographically distributed supply chains where products are shipped via a network of third-party global logistics providers and can be in-transit for days or weeks before they reach their destination. The foundation for reducing the risk of stock-outs (and hence carrying lower inventory) is early visibility into any issues such as strikes, security issues in less stable countries, weather, capacity issues, congestion or holdups at customs that will cause a delay in receiving the shipment. However, most organizations still rely on phone calls, emails, or manual Web lookups through individual carriers to track down shipments, leading to a lack of early warning into such delays. In order to compensate for the risk of stock-outs due to lack of visibility, organizations end up carrying excess inventory.

By deploying trade visibility solutions, organizations can easily obtain visibility from logistics partners into any product shipment delays and use that 'advance warning' information to let stakeholders proactively manage the uncertainties of international shipments or proactively take actions to address issues and reduce potential stock-outs. By deploying trade visibility solutions, organizations can reduce 7 to 10 days of inventory from their supply chains.

Case-in-Point: Global Link Logistics

As a freight forwarder specializing in containerized ocean freight transportation across Asia-U.S. trade lanes, Global Link Logistics (GLL) sought a way to gain a sales advantage over the competition. By providing their customers with shipping information stretching from the status of orders, to identification and resolution of potential problems, to the real-time location of inventory, their customers would have a way to proactively address potential issues in a systematic manner and enable them to reduce excess inventory in their supply chain.

However, GLL's process for sharing information was time-consuming and incomplete. Customer service staff had to manually re-key basic shipment status information housed in the forwarder's back-end operational systems into spreadsheet reports. These reports were then sent to the customer on a periodic basis, often once a day.

With an automated trade visibility solution, GLL can now proactively manage-by-exception using online or email alert notification of delayed shipments. For instance, alerts can be triggered if a container has not departed on the date indicated on the purchase order or if a shipment has not cleared customs. Such visibility allows GLL to proactively address issues that may otherwise have gone unnoticed for a period of time, and reduce a week or more of inventory for their customers. An additional benefit for GLL and its customers has been increased speed to market, as well as increased operational efficiencies through process automation.

In summary, supply chain visibility solutions can be deployed by many types of organizations: from manufacturers with a domestic or regional supply base, to importers with highly globalized supply chains; and from logistics service providers to banks and governments providing solutions for entire communities of trading partners. As companies globalize their supply chains, there are two key technology-backed solutions that can help minimize the inefficiencies of globalization: Pull-based, Web-enabled Inventory Collaboration, and Supply Chain Event Management. These systematic approaches to leveraging 'early warnings' from potential cross-border shipment delays, as well as sharing demand and supply information with suppliers to create a predictable flow of components, enables organizations to feel comfortable with lower inventory levels within the supply chain.

Graham Napier is President and CEO of Trade Beam, which is a global Trade Management (GTM) software and services company providing on demand solutions that streamline global trading processes for enterprises and their partners. TradeBeam's integrated solutions provide import and export compliance, inventory management, shipment tracking, supply chain event management and global trade finance solutions such as open account and letter of credit management. For more information, please visit

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