By Stephen Pillsbury, Principal, PwC’s US Industrial Products practice
It’s not always easy to keep track of your inventory, especially when dealing with market volatility, unpredictable demand, and increasingly complex customer service expectations. Which products need to be reordered? Which ones are on their way? How many do you have on hand? How quickly can you adjust your plans and schedules? These are among the questions manufacturers must address day in and day out; making managing inventory levels a daunting task.
While inventory is often considered the most valuable category of assets on a manufacturer’s books, many struggle to manage it effectively; in fact, inventory turns have decreased over the last several years. If companies overestimate customer demand, they wind up with an overabundance of unproductive assets, yet if they underestimate, they are faced with unplanned re-ordering, resulting in delays – hurting both customer relationships and profitability.
As manufacturers continue to add inventory to their books faster than annual GDP growth, how can they more effectively achieve inventory optimization while limiting the impact to customer service and reducing variable costs?
The answer may be advanced information management solutions. With perfect information, the right part would always be at the right place at the right time and there would be no need for inventory. Since the information available is often imperfect, manufacturers are increasingly looking to advanced information management solutions to help further reduce their inventory.
We recently teamed up with the Manufacturers Alliance for Productivity and Innovation for our survey, Inventory performance today: Why is it declining?, with the goal of better understanding how manufacturers are managing inventory levels. We also asked about the effectiveness and benefits of using advanced inventory data management strategies to reduce inventory and improve performance.
Key findings from the survey include:
- 63% of companies report being satisfied with their ERP systems and those with effective systems experienced higher three-year margin growth than their peers with ineffective systems in place.
- Of those with effective ERP systems, 62% were bullish on the usefulness of their supply chain visibility (SCV) systems for replacing physical inventory with actionable and timely data.
- Companies with effective SCV systems (48%) outperformed their peers, delivering average inventory turns 30% better than those with ineffective SCV systems.
- Not surprisingly, uncertainty of supplier deliveries and unpredictable customer demand were among the factors having the biggest impact on supply chain visibility.
So if a majority of companies are satisfied with the effectiveness of their information management systems and are seeing clear business benefits, why do they continue to struggle with managing inventory levels?
Despite the time and money invested in implementing effective ERP and SCV systems, it is management discipline that often acts as a barrier to reducing inventory. In fact, our survey found that a lack of discipline in operating processes was one of the top barriers to maintaining optimal inventory levels. While having the right systems in place is critical, effectively managing inventory all comes down to integrated material management – a disciplined operating model focused on proper inventory policy, decision-making, and constraint-reduction.
Based on our survey, there is still plenty of room for improvement when it comes to inventory management. Important areas to improve moving forward include:
- Integrated materials management: The single biggest driver of excess inventory and unreliable delivery performance is inadequate material management practices. Successful materials management requires coordination across multiple functions and clear, aligned inventory policy. It also requires that planning systems and parameters are configured to reflect that policy and the reality of the physics of the supply chain.
- Data integrity and quality: Even the best, most sophisticated systems rely on accurate and complete data. Businesses need to develop a common supply chain and operating data structure that facilitates communication among key stakeholders and enables effective management.
- Supplier management: More than 70% of supplier delivery issues stem from frequent changes to products, orders, and schedules. A stable production schedule can greatly enhance supplier reliability.
- Demand forecasting: One of the largest gaps in forecast accuracy stems from vague or overly optimistic data about customer demand and the business development pipeline. Tools to improve management, principally pipeline and opportunity tracking, are within the control of a company’s sales function.
For more information, download the full report here: Inventory performance today: Why is it declining?