Effective Inventory Management Leads to Business Success

Aberdeen Research benchmarked the people, processes, technologies and metrics associated with inventory management and determined that Best-In-Class companies are able to continuously manage their inventory throughout their supply chain to improve customer service levels, forecast accuracies and perfect order metrics. They defined Best-In-Class as companies that had:

• 97% Average Customer Service
• 15 days Average Cash Conversion Cycle
• 95% Perfect Order Performance
• 87% Average Forecast Accuracy at the Product Family Level

These companies are able to continuously manage their inventory throughout their supply chain to improve what they deliver to the customer, which encompasses more than the specific product or service that they deliver. Other aspects of what is delivered that don’t show as specific items on the invoice, but are improved with effective inventory management, include total order lead time, product quality, ease of doing business and the ability to deliver changes to the product or service without having to go through major business changes.

Regarding inventory management, successful companies follow the principles of Closed Loop Inventory Management which include the ability to:

• Determine safety stock targets for inventory at critical nodes in the supply chain.
• Replenish inventory into distribution buffers based on customer demand.
• View end-to-end inventory while providing available to promise inventory.
• Respond quickly to market events while executing the inventory requirements.
• Segment inventory based on customer service requirements.

Although most involved with business management will admit that the above impacts on delivering to the customer are reason enough to make inventory management improvements a priority, there are also internal benefits to the organization from becoming Best-in-Class that should be mentioned:

• Best-in–class companies are 10 times more likely to have reduced their inventory carrying costs year after year.
• Best-in–class companies are 7 times more likely to have reduced their warehouse labor costs year after year.
• Best-in–class companies are 63% more likely to practice centralized transportation planning.

Whether it is via the successful pursuit of Lean Enterprise Performance or effective implementation of ERP or Supply Chain principles, improving the performance of inventory management will improve the organization’s total customer delivery performance.