Infotech Lead India: Shyam R Rao, head – CoE for Sales and Fulfillment, Infosys BPO, says companies will have to look internally at increasing efficiency of operations and at newer technologies such as operating these efficiencies on the cloud. The Centralized Inventory Optimization Group (CIOG) will be one way of achieving this to unlock and utilize cash in a recessionary environment.
In this whitepaper, Shyam Rao says cash tends to be an elusive commodity in a depressed fiscal environment. The global market is constrained and typically refuses to release traditional levers of mobilizing cash such as fresh investments, increased collections or simply better sales. However in spite of such a cash poor climate we find that the top 1000 US companies have $740 billion tied up in excess inventory representing nearly 36 percent of their working capital needs. This represents a rich opportunity to not only unlock cash required to finance further sales and growth but also to correct and optimize inefficient inventory management systems. An exercise in inventory optimization will not only help unlock much needed cash but also improve delivery rates and ultimately customer satisfaction.
Cash Vs Service: A balancing act
Improving inventory turns typically comes at the cost of delivery or order fill rates and thus a delicate balance between the two must be made – hence the emphasis on inventory “optimization” rather than “improvement”.
Though the effort expended in optimizing inventory will require a close understanding of the business and the competitive market (and customers) in which the business functions, the returns will more than compensate for the same. A company with turnover of $ 1 billion can expect to unlock $ 10 million in inventory cost by reducing the days in inventory by just 5 days. But reduced inventory can lead to stock outs and reduced fill rates leading to customer dissatisfaction. Another fact to keep in mind is that a small increase in fill rates also leads to an increase in sales – a quick approximation would be an increase of 1.5 percent in fill rate can improve sales by $15 million (for the same company with a total turnover of $ 1 billion).
Thus the focus on inventory costs and sales revenues need to be carefully balanced. Industry has evolved tools/applications to address this conundrum – mainly by designing analytics using historic and forecasted demand with fill rates demanded by the customer. Parameters used to arrive at desired inventory levels are usually lead times, volatility, VED (Vital, Essential and Desirable), consumption patterns etc. But the questions remain as to how often are these actually done by companies? Inventory optimization needs to be done regularly to cope with the constant change in these parameters. Typically a monthly analytics report and bi-annual inventory optimization project is required to cope with the rapid changes in the market. However, recessionary times make executives run to short time fixes or constantly fire fight and not take a longer term view to inventory management. A centralized inventory optimization analytics group is a good answer to this problem…one which can also easily pay for itself in the short term
CIOG – an Avenue to unlock cash in a recessionary environment
The application of short term fixes in troubled times is a norm during a downturn, hence we have the immediate reactions of pulling the plug on risky investments, negotiating higher credit terms with suppliers and instituting inventory reductions in a tight fiscal environment where both credit and cash are in short supply. In the past few years we have seen the need for a longer term strategy in what is seen to be the new normal in terms of the continuation of the slow growth and high cost economic scenario. A key to unlock cash and operate more efficiently in a sustained manner in such a scenario is to take advantage of the ability to centralize and optimize inventory management from a low cost location, preferably on the cloud – the CIOG.
The basic tenets of the Central Inventory Optimization Group (CIOG) are as below:
- Use statistical tools and applications to optimize inventory on the cloud by integrating with base ERP systems across the worldwide operations of the company
- Conduct periodic diagnostics (bi-annually) of inventory and provide recommendations on optimized stocking levels
- Generate forecasts and stock replenishment orders on a daily basis
- Monitor stock out and excess inventory reports to transfer stocks as appropriate
- Expedite and substitute material to ensure increased product visibility and sales across points of sale
The investment needed to set up and operate a CIOG in a tight investment climate is addressed by using opex commercial models such as “pay as you go” platform solutions where the technology is hosted on the cloud and the skilled resources in a low cost country location. Additionally keeping in mind the transformative nature of the service, gain-share models of pricing can also be explored. A small study of the indicative benefits of a CIOG on the cloud showed the following figures by industry:
Though the benefits realized from the CIOG seem to pay off the investment required, some concerns will remain – will increased visibility on the cloud translate to better inventory decisions on the ground? Will regional variations/nuances on the ground demand more near shore/onsite presence and will companies be open to considering remote replenishment? Answers to these are already coming in the positive – we find that cloud based technologies have provided standardization of processes with reduction in regional variations leading to better decision making capabilities.
The extended period of lower levels of growth which contrasts with the earlier economic boom makes it imperative for companies to find innovative ways to adjust to the new normal. Companies will now have to look internally at increasing efficiency of operations and at newer technologies such as operating these efficiencies on the cloud. The Centralized Inventory Optimization Group (CIOG) will be one way of achieving this to unlock and utilize cash in a recessionary environment.
Shyam R Rao, head – CoE for Sales and Fulfillment, Infosys BPO
Note: Shyam has over 15 years of experience in supply chain, inventory optimization and after sales operations. He is responsible for conceptualizing and implementing shared service and outsourcing solutions and has led several solutions and consulting efforts for clients across the supply chain and sales operations domains.