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Supply Chain Executive BriefFive Strategies for Improving Inventory ManagementAcross Complex Supply Chain NetworksHow Companies Think about Growing Network Pressures and Ways they can Effectively RespondIntroductionEffective inventory management is at the core of supply chain management excellence.in-process, partner inventories and more, truly sits at the intersection of demand and supply.Yet our understanding of inventory management practices in many respects still has a long way togo. In fact, it is really only in the last decade or so that the direct link between inventory managementConsultant Gerry Marsh, who works with some of the world’s largest companies, hasthan competitors will usually have higher stock price multiples even if earningsingsper share and growth rates are similar between the companies.“.it is onlyin the last decade.Yet, leading up to the recession, inventory levels in most industries hadthat the direct link betweenchains, SKU proliferation and other factors that have been putting upwardpressure on inventory levels actually meant companies were making solidprogress on the basics.That may very well be true, but in the end leaves companies with little toshow in terms of bottom line improvement.inventory managementeffectiveness and corporatewell understood, (and) hasMost companies did cut inventories sharply in the deep recession year of2009, but primarily through “slash and burn” type approaches, sometimes withthe goal of corporate survival, using techniques that may not be sustainable as theeconomy continues to recover.Chief Supply Chain Officer Insightslevel interest.”in ightsightCSCOinsThe knowledge source for Supply Chain and Logistics executives

Five Strategies for Improving Inventory Management.Now, coming out of the recession, companies are again facing a number of issues that are adding to theirsupply chain network complexity, which serve as headwinds to inventory reduction. Today, many if notmost supply chains are feeling at least several of these sorts of network pressures: Increased global scope and reach that must be managedIncreasing virtualization and resulting loss of visibility and controlChallenges resulting from multi-channel go-to-market strategiesShrinking product lifecycles not only in well-recognized areas such as high tech and electronics butin virtually every manufacturing sector.As a result, companies realize that effectively managing inventories a node or level at a time is no longergood enough. The problems and challenges must be tackled more holistically, considering strategies andtools that can tame the growing network inventory beast in a way that brings those inventory levels downwhile maintaining or even improving customer service levels.CSCO Insights survey on network inventorymanagement practices.Survey ResultsIn late Spring,inventory management.conducted a survey on supply chain networkFirst, we will review some of the basic demographics of the respondent population, which we thinkrepresents a very balanced mix of companies and industries.Scope of Respondent’s AnswersEnterprise: 57.8%Business Unit/Division: 42.2%2Chief Supply Chain Officer InsightsJune 2011in ightsightCSCOinsThe knowledge source for Supply Chain and Logistics executives

Five Strategies for Improving Inventory Management.decentralized).As can be seen on the previous page, about 58% or respondents were answering for the whole company,versus 42% for aIn terms of overall size, there was a good mix across all sales levels, with 23% coming from companiesgreater than 10 billion in annual revenue, down to 37.5% with revenues under 500 million per year.However, related to the previous question, about half of the under 500 million respondents are actuallypart of larger companies. In general, therefore, we would say the respondents are somewhat skewedtowards larger companies, though today companies in the 1-5 billion range are generally viewed as“mid-sized” - quite a change from not many years ago.Size of Company/Division 1- 10 Billion:28.9%Over 10 Billion:23.4% 500- 999 Million:10.1%Under 500 Million:37.5%We also asked companies to rate themselves in terms of their supply chain network complexity (see charton page 4).Respondents provided an answer simply based on their own perceptions.various levels, as it seemed an almost impossible task.As can be seen, 24% view their networks as “very complex,” and another 42% see them as “somewhatcomplex,” meaning that nearly 66% believe that they have complex networks - a strong preponderanceof respondents.This is probably not surprising for two reasons: regardless of size, we think most companies do believetheir supply chain network operations are complex today, if nothing else compared to what they mighthave had just a few years ago; second, the promotion for the survey probably tended to connect withcompanies that saw themselves as having supply chain network/inventory management challengesversus those that did not.In fact, only 12% of respondents saw their networks as “simple” or “fairly simple.”3Chief Supply Chain Officer InsightsJune 2011in ightsightCSCOinsThe knowledge source for Supply Chain and Logistics executives

Five Strategies for Improving Inventory Management.Supply Chain Network ComplexityVery Complex24.1%Somewhat Complex41.7%20.4%Average9.9%Fairly SimpleVery Simple1.9%Not Sure1.9%0.0%10.0%20.0%30.0%40.0%50.0%One dimension of supply chain network complexity is the number of inventory stocking points or“nodes” the network contains.Here, we had a very broad mix, with a combined 39% of respondents having 10 or fewer nodes, while analmost equal number (38%) reported having more than 50 stocking locations.Of course, these numbers do not represent trading partner inventories (suppliers, contract manufacturers,co-packers, channels), areas where many companies are also looking to better manage inventory levelswhen doing network inventory planning even if they do not “own” the inventory there.Supply Chain Network Complexity18.7%1-520.3%6 - 1015.6%11 - 2021 - 507.0%38.2%More than 5040.0%Chief Supply Chain Officer Insights10.0%20.0%June 201130.0%40.0%50.0%in ightsightCSCOinsThe knowledge source for Supply Chain and Logistics executives

Five Strategies for Improving Inventory Management.Practices and Priorities!"# %# &#%'()* ,&- ".%'&#&%&/%0&.1 ,*23'4%5(%5"66%3*5%#2,3%*2,%&##(3#"*3%#*%# %"38(3#*,9%)&3& ()(3#:!(%/#&,#('%09%&/1"3 %,(/-*3'(3#/%;2/#% *5% " %&%/2--69%. &"3%-,"*,"#9%")-,*8('%3(#5*,1%"38(3#*,9%)&3& ()(3#%"/% *,%# (",%.*)-&3"(/: (%,(/26#/%/-(&1% *,%# ()/(68(/ %[email protected]%.&66('%"#%# (%#*-%/2--69%. &"3%-,"*,"#94%&3'%&3*# (,%B?A%/&"'%"#%5&/% " 69%")-*,#&3#:%C2/#%&% &3' 26%* %,(/-*3'(3#/%/&"'%"#%5&/%&%6*5%-,"*,"#9:Priority of “Inventory Management Excellence”in Your Company/DivisionTop SCM Priority24%52%Highly ImportantMedium Importance19%Lower Level PriorityNot Really a Concern3%1%2%Not Sure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hief Supply Chain Officer InsightsJune 2011CSCOinsightsThe knowledge source for Supply Chain and Logistics executives

Five Strategies for Improving Inventory Management.Process Maturity for ManagingInventory Across Full Network8.5%Excellent27.5%Good34.1%Average24.1%Not Very Good3.3%Poor2.3%Not Sure0.0%10.0%20.0%30.0%40.0%D)-*,#&3#694% *5(8(,4%;2/#%*8(,%NOA%/&"'%# (",%.2,,(3#%-,*.(//(/%5(,(%&8(,& (%*,%5*,/(%J%)(&3"3 %# (%)&;*,"#9%* %.*)-&3"(/% &8(%&%6*#%* %5*,1%#*%'*%#*%#&.16(%# (%3(#5*,1%"38(3#*,9%-,*06()% *6"/#".&669: (%/#*,9%5&/%)2. %# (%/&)(%5 (3%"#%.*)(/%#*%# (%),"#9%* %#(. 3*6* 9%(3&06()(3#%.*)-&3"(/% &8(%,(&. ('%#*%)&3& (%.*)-6(G%3(#5*,1%"38(3#*,"(/:!"# %&'()&*' ,'-.',)%,)P(,(4%;2/#%NA%* %,(/-*3'(3#/%-2#%# ()/(68(/%"3%# (%E(G.(66(3#I% ,*2-4%&3'%[email protected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hief Supply Chain Officer InsightsJune 2011CSCOinsightsThe knowledge source for Supply Chain and Logistics executives

Five Strategies for Improving Inventory Management.Technology Maturity for ManagingInventory Across Full Network6.1%Excellent24.1%Good34.8%Average20.8%Not Very Good8.0%Poor19.0%Not Sure0.0%10.0%20.0%30.0%40.0%We also asked respondents on their opinion as to what was more important in terms of effectivelymanaging network inventories, process or technology.As shown in the chart below, a majority of 52.6% of respondents said that each area was equallyimportant. 31% said process was more important, while 16% said that technology was more important.But the answer to that question really depends on where you sit, as one respondent noted.“Most companies have a number of people and process issues that they need to address to get better atnetwork inventory management,” one consumer durables manager said. “But after you reach a certainlevel of process excellence, the only path left to get much better is new technology.”Process Versus Technology ImportanceProcess31.3%16.1%Technology52.6%Both Equally Important70%Chief Supply Chain Officer Insights10%20%30%June 201140%50%60%in ightsightCSCOinsThe knowledge source for Supply Chain and Logistics executives

Five Strategies for Improving Inventory Management.We also wanted to understand what levels of inventory improvement respondents thought were possiblein their supply chain networks - and the results were eye opening.More than a quarter of respondents (26.5%) thought they could reduce inventory by 15 days or more presenting a compelling opportunity.All told, some 79% thought their inventory improvement capability was at least 5 days - representingPotential Inventory Reduction ThroughProcess/Technology ImprovementMore than 15 Days26.5%11 - 15 Days17.5%34.6%5 - 10 Days17.0%Less Than 5 DaysLittle/No Improvement Possible4.3%0.0%10.0%20.0%30.0%40.0%We also took another look at this question from a percentage standpoint, with similar results.As can be seen on the next page, about 29% thought their total opportunities to reduce network inventorywas at least15% - meaning a company that carries a billion dollars worth of inventory could reducethat amount byincreased sales.Again here, only a small percentage saw little opportunity for improvement.8Chief Supply Chain Officer InsightsJune 2011in ightsightCSCOinsThe knowledge source for Supply Chain and Logistics executives

Five Strategies for Improving Inventory Management.Potential Inventory Reduction ThroughProcess/Technology Improvement28.9%More than 15%24.6%11 - 15%34.6%5 - 10%9.5%Less Than 5%Little/No Improvement Possible2.3%0.0%10.0%20.0%30.0%40.0%What are the Barriers to Improved Network Inventory Management?Companies obviously understand the potential opportunity to reduce network inventories, as illustratedin the last couple of charts above taken from the survey data.Given that the prize is large, what is preventing companies from making those improvements?We asked respondents to rate a number of potential barriers as being low, medium or high, as shown inthe chart below.Some things stand out. For example, senior management vision/focus is not perceived to be an issuefor most companies; nearly 42% rated it as a low barrier, and 66% combined rated it as either low ormedium.The annual planning process and supplier collaboration challenges also rated fairly low as barriers.On the other hand, 56% of respondents cited their inability to optimize the network holistically as a highbarrier.9Chief Supply Chain Officer InsightsJune 2011in ightsightCSCOinsThe knowledge source for Supply Chain and Logistics executives

Five Strategies for Improving Inventory Management.Perceived Barriers to More EffectiveCross Network Inventory ManagementOrganization Alignment27.1%33.0%41.8%Sr. Mng’t Vision/FocusTechnology Integration21.5%33.9%Functional SilosMisaligned MetricsTechnology CapabilitiesSupply VariabilityMulti-Channel IssuesDemand VolatilityLevel of Trading Partner Collab.28.2%37.9%29.4%23.71%34.5%16.9%High BarrierMedium BarrierLow 2%41.8%Annual Planning ProcessCan’t Optimize Network Holistically24.2%33.3%Level of ExpertiseLack of 3%34.5%100%Other areas receiving high scores included lack of technology integration, having internal functionalsilos, misaligned metrics (related, no doubt, to functional silos) and demand volatility (as always seemsto be the case).Where do companies plan to invest to improve network inventory management? As shown on thechart on page 11 technology scored high, with improving supply chain visibility (41.7%) and generalenhanced inventory management/planning technology (also 41.7%) listed as areas many respondentssaid they were quite sure to make investments in over the next 2-3 years.We were most sur