Evolving Inventory Management Practices
By: Scott Moon
Vice President, MonarchFx
We all remember as a kid the first time we put two cups on the end of a string and learned that the sound could travel along the string to a friend a hundred feet away. If you are like me, this simple example of a mechanical acoustic device sparked an inquisitiveness to understand how things work.
From the early days of a mechanical phone to today’s mobile phone, there have been a lot of developments. A look back at history unlocks the evolution that drove the enhancements. There are a lot of parallels to the evolution of information management practices related to the supply chain that drive today’s inventory management practices.
We will be remembered as the information management generation. Now that we can manage the complexity of information sharing in real-time, approaches are evolving to deliver on the high service levels customers are demanding.
Mobile phone evolution
The story starts in 1752, when Benjamin Franklin connected static and lightning electricity to develop our foundational understanding of electricity and its management. This single invention started the electronics age that has evolved over the past 150-plus years.
Samuel Morse created the teletype in 1838 that used dots and dashes to send information over long distances. When the first voice device (i.e. modern day telephone) was created in 1876, many critics thwarted its introduction because the teletype accomplished the long-distance communication itch. With the first phone the user had to contact the local operator who then connected two lines together so people could talk.
Once introduced, the phone gained wide acceptance and the first phone book was produced just two years later. In 1882, the first switchboard was introduced, making management of this expanding network manageable. This is important because it took a laborious process and set the wheels in motion of self-management.
In 1896, the first rotary phone enabled an automated circuit to be developed to consume the pulses bypassing an operator engaging a circuit to patch lines together. As the network expanded, enhancements plateaued, while the network was expanded domestically. In 1915, the first transcontinental phone line was laid.
Fast forward more than half a century, once the mobile phone made the market, the resulting time to our current status is the evolution of the power of the signal, the coverage of the service, and the capacity of the information that can be shared.
Goods and services have always been sold and bartered. The independent, single-site retail location was the mainstay for years. Inventory was bought and sold by local interests or needs. Stock was managed by site with profit managed by the end profits delivered.
The concept of manual or visual stock management remained for several generations. As stores got larger and more complex, a ledger book was created that compared the owned inventory to that on the shelf. This comparative analysis of cost and retail helped the merchant perfect the margin (profit) of this owned inventory and a recognition of items that did not sell.
With the advent of a multi-store retail network, the knowledge of the owner was now stretched to multiple markets. The oversight of cost and profitability had to become more paper-based. While management was still manual, inventory was tracked on paper.
The advent of the department store moved the focus of operations from a local level to a central level. Under this evolution, inventory was bought collectively and shipped to the store by allocation. The warehouse is now a component of the process and inventory is managed by location.
The advent of the computer centralized all information to a single database. Now, algorithms can be created to review data and manage inventory by a central team. The ‘merchant’ now determines what goods each store has based on their perception of demand. The store manager transfers from a product manager to an operations manager.
With the advent of the internet, inventory became ‘allocated’ or specifically ordered for the eCommerce business.
Distributed inventory management
Amazon changed the expectation of delivery. The traditional store-centric supply chain was rocked by the concept of a variable destination. The methods for determining the ‘optimal’ site location changed from known end points to variable ones.
From the advent of the catalog business by Sears, beginning in 1888, where an order would take weeks to receive to today, where the customer wants it within hours, the supporting supply chain must change to be economical.
The distributive model moves inventory to local fulfillment hubs that enable quick delivery at an economical cost. To drive this, one requires flexible inventory planning and flow management tools to place the right items and quantities at the right location to minimize inventory.
Developing the right supply chain is based on the strategy of the business. Defining priorities will define the inventory strategy that is needed for success.
There are two critical choices:
- Service Focus: If service level is the priority, each location-item will be planned and apply the requisite safety stock to consider demand and supply variability. This approach, because you are fragmenting demand and introducing more risk, will result in additional overall inventory.
- Capital: If inventory spend is the priority, you would plan at the total company level and maintain a centralized safety stock to be deployed as needed to cover the variabilities of performance and demand. This will ensure constrain on inventory in a planned manner and use the site level forecast to flow to true demand. The only risk under this strategy is in leaving transportation savings off the table.
Both approaches can deliver on the value of the distributed model. The difference is determining how to integrate this value strategically that empowers the business.
Bringing it all together
Gone are the days where manual and isolated inventory management will deliver the requisite service level at a cost that is competitive. Only by deploying a planned distributed inventory can the supply chain be preposition in order to be utilized quickly to meet a moving demand profile. While the network must better contemplate the eCommerce requirements, the inventory management approach must change to deliver on the cost savings potential.
Are you ready to evolve your supply chain? Can you deliver a high service level with minimal incremental inventory and a competitive cost? Have you engaged your customers to optimize your business opportunity?
Like the evolution of the phone, technology is the enabler in bringing these opportunities to bear. It is now time to change the supply chain paradigm and evolve to a distributed approach to deliver value.