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AberdeenGroup

Supply Chain Inventory Strategies
Benchmark Report
How Inventory Misconceptions and Inertia
Are Damaging Companies' Service Levels
and Financial Results

December 2004

Sponsored by

The Supply Chain Inventory Strategies Benchmark Report

Executive Summary
Inventory is one of the most valuable assets a company has, yet benchmark results show that most companies fail to manage it effectively. The majority of manufacturers and distributors rely on out-of-date, too simplistic, or overly localized inventory policies. By doing so, companies tie up working capital, harm customer retention, and hurt shareholder value-added. Faced with lengthening supply channels and tighter service-level demands from customers, many companies are now wholesale reexamining how to flow inventory across their supply chains and how to set inventory policies. In general, companies are finding they have been burdened with inventory misconceptions (including around Lean principles), oversimplification, corporate discomfort with changing inventory strategies, and significant underinvestment in breakthrough collaboration and optimization technology.

Business Benefits
A number of companies, however, have broken free of these constraints and are driving 20%+ reductions in on-hand inventory and 20%+ improvements in time to market from supply chain inventory initiatives. By changing how products are designed, how replenishment is triggered, and how inventory policies are calculated, these companies have dramatically improved financial performance and customer satisfaction. Best-in-Class Processes Lead to Much Greater Cost and Service Improvements 0-10%

Improvement

11-20%
Improvement

More Than
20%
Improvement

Reduced inventory carrying costs

65%

25%

10%

Reduced lead times to customers

68%

15%

17%

Increased perfect orders to customers

65%

21%

14%

*% of respondents achieving improvement level from their latest supply chain inventory initiative

Companies that stand out in adopting new, technology-supported processes include the HP Imaging and Printing Group, Seagate, Stryker Instruments, Deere’s consumer and commercial equipment business, and a handful of consumer packaged goods firms.

Recommendations for Action
To optimize inventory investment, companies need to rethink how to stage inventory across their channels, how to use postponement and risk pooling strategies, and how to leverage the inventory capabilities of their trading partners. Technology support is critical to selecting and executing a supply chain inventory program. Disturbingly, key supply chain inventory technologies are used by just 10-35% of companies today. Companies should seek technology that allows them to optimize the positioning of inventory globally across supply chain tiers, rather than locally, and enables collaborative inventory processes with suppliers.

All print and electronic rights are the property of AberdeenGroup © 2004. AberdeenGroup • i

The Supply Chain Inventory Strategies Benchmark Report

Table of Contents
Executive Summary .............................................................................................. i Business Benefits ........................................................................................... i Recommendations for Action.......................................................................... i Chapter One: Issue at Hand.................................................................................1 Inventory Misconceptions .............................................................................. 1 A New Opportunity for Inventory Savings ...................................................... 3 Chapter Two: Key Business Value Findings .........................................................4 How Old Is Your Inventory Strategy?............................................................. 5 Supply Chain Inventory...
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