INVENTORY PLANNING & OPTIMIZATION
Can Inventory Reductions Achieved in
2009 Be Sustained?
Although companies were able to reduce absolute inventory levels by 10 percent from Q3/2008
to Q3/2009, a closer look reveals that Days Inventory On-hand deteriorated by 7. 5 percent,
resulting in excess working capital requirements of $50bn for the largest 1,000 U.S.-headquar-
tered public companies. If not regained, this lost efficiency will become a more significant cash
drain than expected in 2010.
—Henri van der Eerden, global practice leader, REL, a division of The Hackett Group
reating sustainable improvements in efficiency
is the biggest challenge with regards to inventory performance. Based on the 2009 working
capital performance research by REL among the largest 1,000
with a leaner, more flexible supply chain. Some products
could have a low-cost strategy based on volume and predictable demand patterns, but others with more erratic
demand may require a strategy focusing on greater flexibil-public U.S.-headquartered companies, 51 percent of compa- ity. Reducing lead-times at the expense of cost may seem
nies improved their Days Inventory On-hand (DIO) per- inefficient, but the reduction in lead-time can provide insur-formance in 2008. Only 46 percent of those companies ance against the risk created by inability to accurately fore-improved in two consecutive years and less than 17 percent cast demand, which may otherwise result in excess
in three consecutive years. The 10 companies with the inventory, write-offs and lost customer sales.
largest gains over the last three years, with improvements in
each year, released an average of over $260m a year from
Dropping sales and brute force cuts enabled absolute inven-The most successful companies have a robust product tory reductions this past year, but inventory efficiency slipped.
range management approach that classifies products based on The challenge for 2010 will be to prevent inventory from tying
both value and risk drivers and leverage this differentiated up an increasing amount of cash as sales increase by improv-view to set policy in a variety of supply chain areas such as ing inventory efficiencies. Improvements will require a cross-product rationalization, service level agreements, safety stock functional approach, including sales, marketing, engineering,
management, postponement strategies, etc.
procurement, operations and executive-level support to reA challenge to supply chain professionals is to better bal- evaluate product range approaches, shift priorities and realize
ance product cost, whether purchased or manufactured, sustainable inventory savings.