Balancing service levels and costs in the new supply chain
Inventory management has always presented manufacturers with a difficult dilemma—keep enough expensive excess stock on hand to achieve high customer service levels, or keep inventory costs low and risk missed sales and unhappy customers? Rising customer expectations and an increasingly complex supply chain are making this classic inventory dilemma even more challenging, and many manufacturers are struggling to both satisfy customers and maintain healthy margins.
Two trends have transformed the modern manufacturing marketplace: personalization and globalization. Today’s customers demand more specialized, tailored products, leading to an explosion in the number of components and finished goods that manufacturers must make. Simultaneously, globalization has put pressure on a progressively dispersed supply chain, increasing complexity while driving down margins. Product proliferation has made it much harder for manufacturers to achieve high service levels, while growing supply chain complexity has cut into profitability. Dealing with the classic inventory dilemma of service levels versus costs in the face of these pressures has never been more difficult.
Achieving high service levels is increasingly challenging
As the supply chain has shifted to keep up with the demand for more personalized products and become more customer-focused, satisfying service level expectations has become key to winning a competitive advantage. To keep customers happy, manufacturers must have the right stock in the right place at the right time. Unfortunately, that is an increasingly expensive endeavor, due to demand volatility and the growth of products in the “long tail.”
Demand for more personalized, differentiated goods has led to a tremendous proliferation of products, making it difficult for manufacturers to accurately forecast demand. The increased complexity and cost of effectively answering the what, when, where, and how much of stock-keeping to attain high service levels hampers businesses they must now rely on a greater variety of products in the “long tail” for revenue, and thus must keep more unique components and finished products on hand. These difficulties are amplified by increasingly volatile demand—the number one challenge of chief supply chain officers. As products multiply, volatility becomes more frequent, and sudden sales spikes of specific goods can lead to costly overreactions from manufacturers—who significantly boost supply to meet demand, maintain high service levels, and prevent stock outs.
This problem is especially acute with high-margin products. Manufacturers can ill afford to lose sales of products that offer high margins, as so much profit contribution is at stake. To maintain profitability, organizations must ensure they achieve high service levels for high-margin products, and many often compensate by keeping excess inventory across the supply chain. Maintaining high inventory levels means paying for producing, moving, storing, and managing items that may sell slowly or not at all. Legacy supply chain planning, unable to accurately forecast modern demand, forces manufacturers to prioritize either addressing volatility and the “long tail” with excessive, expensive inventory, or cut costs at the expense of service levels.
Controlling inventory expenses often comes at a cost
The other approach is to focus on keeping costs down. Mismanaged, excess inventory is often one of manufacturers’ biggest inefficiencies, tying up working capital through holding costs and obsolescence and significantly harming profits. Worse, the demand for more personalized goods and the increasing rate of new product introductions and iterations are causing inventories to quickly become obsolete, heightening the risks and costs associated with maintaining inventory. Modern manufacturers must stay lean and mean to compete, and minimizing stock boosts profitability and increases liquidity—eliminating ineffective inventories that are not aligned to profit or customer service goals. Plus, for manufacturers’ low-margin products, cutting inventory costs is especially important as there is very little wiggle room for supply chain expenses before these products become detrimental to profitability.
Legacy supply chain planning systems do not provide the insights necessary to individually optimize inventory and service levels for various products, relying on rules-of-thumb and arbitrary segmentation. While keeping stock low based off guesswork or unscientific processes may temporarily minimize operational expenses, backorders, cancelled orders, and of course lost customers come at a heavy cost to manufacturers. In addition to the tangible, logistical challenges and expenses incurred in handling stock outs—which cost the US economy $634 billion in 2017—there are severe consequences for customer satisfaction and loyalty.
Manufacturers do not need to choose between service levels and costs—enable both high service levels and low operational costs with a transformational inventory optimization solution
In the modern marketplace, manufacturers must move beyond simple tradeoffs between adding inventory to increase service levels or reducing inventory to cut costs at the expense of satisfied customers. The key to long-term, sustainable success is greater inventory efficiency, where every dollar invested in inventory contributes to service levels in the most effective way. With today’s technology and best practices, manufacturers can achieve higher service levels and lower supply chain costs, with optimization engines that both maximize inventory efficiency and empower organizations to make intelligent decisions to further minimize costs or enhance service.
ToolsGroup’s Multi-Echelon Inventory Optimization solution, Built on Microsoft Cloud technology, optimizes inventory by empowering manufacturers with automated demand modeling and inventory management across the supply chain. The solution intelligently analyzes manufacturers’ existing data with advanced analytics and balances inventory across different echelons, locations, bill-of-materials levels, and service level agreements–minimizing costs while maximizing service levels according to the diverse needs of each business. The results are real and powerful—one medical supplies manufacturer was able to reduce stock outs by 26%, inventory by 8%, and back orders by 52% while increasing service levels by 2%, and another customer was able to reduce inventory levels by 23% and increase service levels by 12%.
See for yourself how ToolsGroup Multi-Echelon Inventory Optimization will enable your business to achieve lower operational costs and higher service levels at Microsoft AppSource.