As we’ve previously highlighted, the supply chain is a collection of 300-year-old processes. Even with automation, many of the parts that make up modern logistics are not actually that new. Look at inventory, for instance. The digitalization of the supply chain might feel relatively new, but that certainly isn’t the case for the use of technology in inventory optimization and management. It’s been going on since the 1980s, with the introduction of the first warehouse IT systems.
Despite this history, however, inventory still has its fair share of problems.
The Inventory Optimization issue
The problems stem from a lack of trust and inefficiencies. A customer, perhaps a retailer, foresees a rush on certain types of products, so increases their order from a supplier. That supplier, not wanting to miss out on future increases, doubles their order from their own sources. This continues down the chain, right the way to the manufacturer stockpiling raw materials to meet increased demand.
But what happens when the retailer only wants a one-off increase? All the additional ordering down the chain is left idling, and consuming resources. Physical space, yes, but also the management of that warehousing, the logistics of keeping it in place and moving it around, insurance, the working capital it ties down – it all adds up to a lot of money. This issue, also known as inventory carrying costs, can run to anywhere between 20 and 30 percent of the value of the goods being stored.
This isn’t solely a retail industry problem. In the automotive sector, original equipment manufacturers (OEMs) are leading proponents of lean manufacturing principles, such as Just-In-Time, which ensure that OEMs don’t pay for inventory sat around waiting.
The problem is, they don’t control inventory – they’ve outsourced it.
The Crisis in Inventory Management
Companies that have outsourced their inventory have given their problems to someone else, rather than fix the issues themselves. However, when a problem is worth money, it’s not always in everyone’s best interest to fix the problem, but just move it down the line and charge a handling fee.
In inventory, company A wants to free up valuable space in their factory. They give the inventory to company B, an expert third party. This frees up that space and puts the emphasis on the third party to continue operating the inventory and ensure company A’s JIT goals are satisfactorily met. But has the issue been solved? What happens when company B is struggling to meet the JIT requirements?
In good times, this may increase carrying costs, but at least customers won’t be disappointed. In a crisis, however, it makes an unpleasant situation much worse.
In the current pandemic, we have seen a rush on different goods, from personal protective equipment to certain basic foods and toilet rolls. This has shown that businesses cannot move their inventory fast enough, as shelves have gone bare and frontline staff is left in danger. Even the run on flour, a basic baking ingredient, highlights the problem. Not that there is a shortage of flour, but that packaging materials aren’t available. Small bags of flour can’t be shipped because the packaging manufacturers use suppliers out in the Far East, having long since outsourced parts of their inventory.
Outsourced inventory also slows down those businesses looking to pivot quickly to counter the effects of the pandemic. Their idle inventory is a weight, severely restricting their ability to move. To add insult to injury, that stock has consumed raw materials that cannot be used elsewhere.
The answer to the revitalizing inventory optimization? Care about every part of your supply chain
What businesses should aspire to is the idea of lean inventory. It’s a similar principle to lean manufacturing – inventory is manufactured, ordered, and arrives when required. Its goals are to increase value by reducing costs, improving flexibility, and freeing up more time to focus on customers. On paper, it makes complete sense. It would help drive down the consumption of natural resources, the stockpiling of finished products, the high inventory carrying costs, and the tying up of working capital.
To unlock all this, however, requires trust. Businesses have to trust every part of their supply chain if they are to improve inventory optimization. They have to know what’s happening, and quickly, so they can react to changes and act accordingly, minimizing disruption to customers.
To do that requires reliable insights, independent data, and real-time intelligence. It means having the ability to acquire and analyze data in real-time, from suppliers and manufacturers to transport and warehousing providers.
With that insight, you can start making faster, evidence-based decisions, rather than leaning on assumptions. This leads to optimized working capital and reduced inventory carrying costs.
In other words, true trust is attained, and businesses can unlock the value of lean inventories.
Empowering the supply chain to deliver true customer value
Inventory has long masked inefficiencies in the supply chain. That’s because businesses have been loath to address it – they’d rather outsource the issue than fix it. The coronavirus has exposed the flaws in this approach. For businesses that want to not only deploy a cost-efficient supply chain but one that is resilient and agile, data offers a way to trust their suppliers. This empowers all parts of the supply chain to continuously improve, build competitive advantage, and deliver true customer
How can Arviem help you achieve efficient optimization?
Arviem uses cargo monitoring to deliver the visibility businesses need to trust their supply chains. Its combination of Internet of Things sensors and cloud-based software allows its customers to challenge the bottlenecks that arise in inventory management. Thanks to continuous improvement initiatives, Arviem’s customers can create efficiencies such as shorter lead-times, reduced demurrage, and expediting costs. Delivering accurate independent data, Arviem helps build stakeholder trust throughout the supply chain, reducing the tendency to overcompensate and leading to lower inventory levels and, ultimately, leaner, more resilient operations. It can also improve customers’ working capital positions by providing the data that allows suppliers and buyers to more accurately manage their risk, allowing each actor within the supply chain to optimize their finances and reduce costs.