Wednesday, August 24, 2005

Global Inventory Management – From Theory to Reality/Driving value from the global supply chain

With globalization and outsourcing of manufacturing capabilities to offshore producers it is time to look at the effect this is having on inventory across the global supply chains. The analysts, Gartner, Aberdeen, ARC and AMR who have looked at the issue of inventory in the supply chain have come to the conclusion that globalization is beginning to have a major negative impact on the amount of inventory in the supply pipeline.

Much has been written on the value proposition of managing inventory across the supply chain. In most instances the issue of inventory control is discussed in terms of domestic supply chains. This perspective is understandable because until recently most companies were not participating in global sourcing and therefore the need to understand supply chains from a global perspective was not of much interest. However, this view of inventory pre-supposes relatively short supply chains that are reasonably forgiving. The literature generally focuses on the ability of organizations to position their raw material and semi-finished products to meet their tight manufacturing or distribution environments.

Companies like the automobile manufacturers, computer manufacturers (Dell comes immediately to mind), and others have been able to lean their supply chain by working with their suppliers to have supplier inventory pods close to their facilities to meet their demanding manufacturing schedules. True, they collaborate with their suppliers, to a greater of lesser extent, and share demand information so that suppliers can adjust their production and distribution schedules. But the reality is OEMs have been able to “lean” their supply chains by pushing the inventory back onto their tier one, tier two and tertiary suppliers.

Research has shown that over the past 10 years the amount of inventory in the supply chain has declined very little. I am hearing from these same analysts that their research is beginning to show that with globalization and the outsourcing of manufacturing to off-shore companies the amount of inventory across the supply chain is beginning to swell and this is a hidden component that most domestic manufacturers are as yet unaware of and ill prepared to address.

There are 3 major strategic areas that a manufacturer must address if it truly wants to take advantage of globalization. Firstly, it must understand whether its business model is still fundamentally a manufacturing model or has shifted to that of a brand-marketing model. Secondly, it must recognize that if its model has changed the skills required of some key people in the company are fundamentally different from those that have been employed. Thirdly, it needs to understand that the way to manage outsourced manufacturers and the logistics providers requires extremely different tools than are currently being offered by their ERP suppliers.

Without understanding the impact in the change in the supply model because of globalization, companies will not begin to take the required action to address the opportunities that are promised. There are many solutions that are being offered that address elements of the global supply chain. Global Track and Trace, Global Customs Compliance, Total Landed Cost calculators, and the 3PL phenomenon are several that immediately come to mind that are designed to extend ERP systems and make them adaptable to the global sourcing environment.

While each of these solutions is of value by themselves, they are limited constrained in truly helping companies manage their global supply chains. Our experience shows that track and trace solutions that are currently supplied by software ASPs or 3PLs and focus on global shipments (purchase order and shipping information) are really limiting. In truth one of the areas that is most offered as a solution but is most controlled in the global supply chain is the shipping/logistics component. Carriers have very tight schedules and barring major disruptions due to congestion compounded by security issues goods that are prepared for shipment will most likely be laded and arrive at the port of receipt as planned.

The areas of the supply chain that are the most difficult to monitor and control are:
  • the performance of the suppliers in preparing products to meet shipping schedules
  • the tracking of raw materials, semi-finished parts and components, and packaging materials from primary and secondary global sources to suppliers
  • the ability to manage costs in a complex multi-level outsourced contract supply chain environment
  • the managing of compliance at multiple levels – country, supplier, service provider, product, customs, security, etc.

To create a complete global supply chain solution requires strong ERP functionality where owned manufacturing capability is a strong component and equally powerful global supply chain management functionality to manage the global outsourced contract manufacturing environment. Both systems must be integrated and synchronized and provide a global view of the entire supply chain. Without integrating full ERP and full global supply chain functionality into one seamless environment information will be maintained in disparate systems and provide limited actionable information.

ERP systems are fundamentally designed to manage within the four walls of the organization. In many instances large organizations have multiple ERP solutions or multiple instances of the ERP solution. The corporate information environment is far from homogeneous and getting a view of the entire organization is virtually impossible. ERP solutions are augmented with additional business intelligence systems that are intended to collect and normalize information and provide it in a manner that is actionable.

This business environment is now made more complex with globalization. A global supply environment requires different tools and skill-sets than are currently available within the organization. To build a complete environment to support direct manufacturing and outsourced supply chains requires a comprehensive strategic view of the entire supply demand environment. Companies that understand this will have a powerful advantage over their competitors.

Companies are going global but there are very few that understand what the real benefits are and fewer still have a plan of how to achieve them. Those companies that build the infrastructure to take advantage of global sourcing will have significant competitive advantage that delivers dramatic and continuous value across the entire organization.