Inventory optimisation--still treasures to unearth for CPG manufacturers

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Consumer demand is driving complexity and cost into supply chains and at the same time suppliers have to invest more in meeting customer requirements. Is there a solution to this expensive problem?

Todays fast-paced, technologically advanced global marketplace is having a dramatic impact on the supply of consumer goods. Brand loyalties are weakening, and there has been a transformation in the consumers taste for new products and new features.

Take just one exampleshampoo. Not only do we now have dry, greasy, baby and anti-dandruff varieties, but also colour rejuvenating, coloured hair, conditioning, curly hair, detangling, damaged/lifeless hair, fine hair, fragrance-free, frequent-use, frizzy hair, hairloss, healthy/organic, jojoba, moisturising, permed hair, pH balancing, revitalising, thickening, two-in-one, vitamin-enriched and other versionsand thats before getting into the different brands, ingredients, fragrances and packaging.

...the supply chain can be a valuable strategic weapon in the battle for competitive advantage.

This explosion in consumer demand is driving complexity and cost into supply chains at just the time that the parties involved need to invest more in keeping pace with customer requirements.

With the big multiple retailers dominating most channels to market, where does this leave the small to medium sized consumer packaged goods (CPG) manufacturer?

Savvy SMEs are already taking a leaf out of their multinational cousins books and are recognising that the supply chain can be a valuable strategic weapon in the battle for competitive advantage.

The real cost of buffer stock
Manufacturers sourcing raw materials and components either from their local area or from around-the-world, cant risk a production line closure because one component is unavailable line-side at the allotted time. So they have traditionally relied on buffer stocks.

will tomorrows model render todays buffer stocks unusable?

The problem is that most SMEs, when they think they are managing the supply chain, are not looking at the complete picture. They tend not to have visibility across other business units, or suppliers, or sub-contractors. Each is maintaining its own safety stocksand together these add up to a lot of unnecessary inventory in the supply chain.

Although inventory appears on the books as an asset, in reality it is anything but. Unnecessary inventory is a real liability and generates several types of costs. Theres the hard cost of the capital employed in the inventory itself, of course. But there are also the soft costs of storage, handling, transport, losses and insurance. With products changing more frequently, there is also a real problem with obsolescencewill tomorrows model render todays buffer stocks unusable?

Improve availability, reduce inventory
The key to achieving supply chain efficiency is inventory reduction. However no manufacturer deliberately sets out to tie-up cash and capital in inventory that is not offering any competitive advantage. They do so in order to keep production flowing and to maintain quality of service to their customers.

Manufacturers need to strike the right balance between improved product availability and reduced inventory. However, most do not possess the tools and skills necessary to measure and manage variability in demand and supply. Enterprise resource planning solutions and even some very sophisticated business systems do not provide the functionality to manage the ever-changing inventory landscape.

Where firms once relied on suppliers supply chains, they must now take control themselves, developing strategies to see, manage and influence the chain along its entire length. In our experience, although about 80 per cent of companies may be thinking along these lines, only 20 per cent are actually moving in this direction.

The greatest challenge faced by CPG manufacturers is gaining sufficient visibility of raw materials, components and finished goods in the supply chain.

Integrate and collaborate
The solution for most manufacturers will be to combine the power of sophisticated IT systems with the expertise of supply chain specialists in a process that drives continuous improvement through inventory optimisation. The key here is that the approach must be holistic, integrated and collaborative.

If stocks held at each node in the supply chain are not optimised, then other elements also become sub-optimalfor example, warehouses or fleet are under-utilised. On the other hand, when supply matches demand and inventory is reduced, the supply chain becomes not only leaner, but also more agilebetter able to respond to customers changing demands.

Exel estimates that companiescan achieve up to a 20 per cent reduction in supply chain operating costs; and up to a 50 per cent reduction in stock levels

The greatest challenge faced by CPG manufacturers is gaining sufficient visibility of raw materials, components and finished goods in the supply chain. Much of Exels investment in recent years has been in the development of technologies to monitor and track the movement of such productsfor example to make just-in-time delivery schedules viable. The company now operates sophisticated control towers providing visibility across its customers entire supply chainscollaboratively with all partners, from end-to-end.

With professional supply chain management support and appropriate IT systems, the necessary levels of visibility and control can certainly be achieved, and consistently high availability ensured at minimum cost. Exel estimates that companies taking such a collaborative, holistic approach to supply chain management can achieve:
up to a 20 per cent reduction in supply chain operating costs; and
up to a 50 per cent reduction in stock levels, with improved materials availability and better customer service.

For most CPG manufacturers that represents a great deal of buried treasure still to be unearthed!

 



Gerry Jones is Development Director for Exels Fashion and Home sector. The company provides a wide range of supply chain services including: network and facility design, ambient and multi-temperature warehousing, transportation management and consolidation, primary and secondary packaging as well as comprehensive inbound logistics management solutions.

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