Supply Chain Management Insights

In today’s competitive manufacturing environment, a key issue on the mind of general managers and financial executives is that of net working capital management.  Net working capital refers to dynamic use of funds as reflected in accounts receivable, accounts payables, and inventory.  Supply chain executives are primarily interested in inventory—and specifically in the velocity of inventory throughout the supply chain.  As companies desire to use precious capital for a variety of uses—including growth, procurement of assets, and channel development—management is increasingly being charged to efficiently manage net working capital, in addition to other key performance indicators (KPI’s).

Several factors drive or impact excessive inventories that consume more working capital than is necessary.  These drivers can be structural, process, or systems related.  The network—the number, size/capacity, location, and mission of manufacturing and distribution facilities—can often have a structural impact on inventories, as inefficiencies can be “locked in”.  Processes which are not “in control” and generate supply-side or demand-side variabilities create planned or assumed safety stocks in order to achieve customer service levels.  Poor product portfolio management also contributes to excessive inventories when marginally profitable products place a drag on the inventory velocity, or when products that are a make-to-stock (MTS) status should really be make-to-order (MTO).  Finally, systems often don’t have the functionality—or are not configured—to manage the processes effectively, to provide the visibility to meet demand, to effectively use capacities, or to service the customer expectations.

Companies are undertaking a variety of initiatives to ensure judicious use of capital invested in inventory.  These efforts span network analysis, functional diagnostics for business fit for supply chain and ERP systems, supplier collaboration, customer collaboration, and changes to the way the product portfolio is managed.  One of the most effective and growing processes across several companies is instituting, or re-vitalizing, Sales & Operations Planning (S & OP).  This monthly planning cycle is designed to best match supply with demand, with decisions on inventory plans (as well as other important plans) as explicit outputs.

The risk companies face is often the risk of omission.  Too often, there are barriers or reluctance toward taking action.  The challenge is to “do something”, and more importantly to “do something differently” to improve inventory performance, as well as margins and service.

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