Small Steps, Big ResultsThe transition toward the demand-driven supply chain is now best achieved through small, well-planned steps
by Jeff Kavanaugh Continued from Page 1 CMMs also allow management of trade-offs. For some companies, the cost of moving from one level to another for a specific process may outweigh the foreseeable benefits. If the how is more expensive than the benefits of the what, then the improvement may not be practical unless it helps a company improve its strategic position, which is more greatly influenced at higher CMM levels. The key processes in a CMM are not intended to require a specific implementation or organizational structure. Instead, they relate to activities that the organization must implement to reach a certain level of maturity. For example, for an Inventory Targeting CMM, this progression can mean moving from "targets developed for high volume items only" (Level 3) to "targets set at all product levels" (Level 4). Exactly how this progression takes place is the subject of implementation-focused tools, not a CMM. The manner in which they're implemented can vary from firm to firm. Each section within a CMM framework outlines the activities and best practices that should be implemented at each stage. Strategies for Inventory SuccessPursuing inventory improvements can be a daunting endeavor, especially for companies that have historically focused on components of the inventory problem in a piecemeal or top-down fashion. As I've described, a CMM for inventory-related processes can be a useful tool to aid improvement. Once the CMM has been established, the probability of rapid return on inventory investment increases dramatically when companies focus on five specific demand chain management strategies: Become customer-centric first. Customer centricity is key to becoming a demand-driven organization, and it needs to be in place for inventory strategy, planning, and execution to achieve maximum results. For example, proper customer segmentation allows companies to establish differentiated service policies, which in turn separates inventory policies, targeting, and positioning. Acknowledge uncertainty — then exploit it. Forecast accuracy is a noble pursuit and certainly an inventory driver, and a comprehensive body of knowledge exists on the subject. However, many companies have come to acknowledge the existence of uncertainty in demand and lead times, and that there's a practical limit to how much that uncertainty can be reduced. They've also accepted the idea that responsiveness is as important as — and more controllable than — forecast accuracy as companies move toward demand-driven replenishment. For products companies, inventory policies play a critical role in designing and maintaining responsive supply chains. In fact, policies for inventory planning, replenishment order frequency, and order quantity are keys to success for initiatives such as Collaborative Planning, Forecasting and Replenishment (CPFR). Design supply chains according to product type. Analyzing uncertainty and inventory components (form, purpose, and time) is required to achieve demand responsiveness, but companies first need to align product strategy with the makeup of the physical network. (See Figure 2.) According to Wharton School of Business professor Dr. Marshall Fisher, there are two types of products: functional and innovative. Functional products have predictable demand, long product life cycles, and typically low margins; innovative products have relatively unpredictable demand and short product life cycles, but carry higher product margins and initially appear more attractive than functional products. Functional products require efficient supply chains, which emphasize low cost and minimal inventories. Innovative products require buffered, quick response supply chains. This characteristic translates into requiring greater buffer stocks, deployed strategically to minimize order lead time and to maximize fill rates and profit contribution. Find the frontier before optimizing. Conventional inventory wisdom suggests that companies must manage inventory and service levels by trading off one against the other, in an apparent zero-sum relationship. However, many companies don't operate along the so-called efficient frontier and can improve both inventory levels and customer service levels. By decomposing inventory into its various purposes throughout the physical network, analysis can reveal appropriate amounts of inventory to carry at each node. Pay attention to systems integration. The importance of systems integration becomes apparent as companies attempt to operate after implementing a wide range of inventory planning and execution systems, including ERP, supply chain management, and customized applications. Systems integration has a strategic element as well. Insightful decisions about inventory and true value creation depend upon accurate and timely data, which must come from a variety of sources such as forecasting systems, points of consumption, transportation providers, warehouse systems, and enterprise systems of record. To gain the advantages of enterprise software and Internet architecture for their inventory control mechanisms, companies also need to avoid adopting generic out-of-the-box packaged applications and instead be willing to tailor deployment of technology to their particular strategies. Getting StartedFor a deeper understanding of a company's potential for inventory effectiveness, companies need to combine the benefits of CMMs with the power of inventory analysis. An inventory diagnostic includes a set of analyses that determine return on inventory investment by modeling demand and the physical network. The correct supply chain approach for each product is determined, based upon corporate strategy and considering inventory drivers. The CMM can be used to examine current state and develop a roadmap to achieve inventory-related best practices. The diagnostic shows areas for improvement and establishes a foundation to build stronger demand responsive capabilities. Today, companies must strike a realistic balance between customer demands for 100 percent availability and the total inventory costs involved in making total availability happen. By combining CMMs with inventory analysis and a deeper understanding of demand, companies can use inventory as an effective tool in their quest to improve bottom-line results. Jeff Kavanaugh [jeff.kavanaugh@inforte.com] is vice president of the products business unit at Inforte Corp., a customer and demand management technology consultancy that helps clients improve customer interactions, revenue forecasting, and profitability. RESOURCESSCOR overview: www.supply-chain.org/slides/SCOR5.0OverviewBooklet.pdf Software Engineering Institute's CMM page: www.sei.cmu.edu/cmm/cmm.html Supply-Chain Council: www.supply-chain.org
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