This isn’t new…you’re likely facing this situation right now. You struggle to quickly and efficiently balance your supply chain to keep pace with the constant changes in demand. In the past couple of years, we’ve seen rising costs add pressure to supply chains and challenge companies to find ways to reduce costs while increasing efficiency. These difficulties add complexity for organizations trying to maintain their inventory levels which can lead to too much of what they don’t need and too little of what they do.
As we entered the 2022 holiday season, we saw retail take a big hit, swinging from consistent stockouts to an overstock situation as demand quickly weakened and constraints for material, production and transportation eased. Every news outlet was covering these challenges as retailers tried to cancel orders and slash prices to move inventory. Combined with ongoing global supply chain crises, the onset of rising inflation and increasing costs brought on by the Ukraine war, supply chain struggles continue as companies strive to bring balance back to their operations and strengthen cash flow predictability.
Beyond retail, companies across industries are trying to right-size inventory amid volatile supply chain environments as they adapt to a combination of softening demand and shifts in market trends. Recent reports have shown that in some sectors like construction, supply chains are reducing production in the face of softening demand to help lower elevated inventories. However, the action of manufacturers reducing or cancelling raw material orders can have a ripple effect and impact suppliers and partners across the extended supply chain.
Companies need supply chain and cashflow agility to effectively manage inventory and maintain an operations environment where they can better respond to market changes and handle increased uncertainty. We discussed this recently at our webinar with GEON Performance Solutions and shared lessons on the importance of an integrated plan focused on profitability – watch the webinar here.
So how can you minimize the impacts of these swings to strategically position your company for success where others are struggling? The answer is complicated; however, there are three approaches that can help you improve agility and gain a more strategic grasp on your inventory.
1. Scenario & Simulations
What if you could visualize the impact of your decisions? What if you could test multiple options with a mouse click? The practice of using what-if scenarios and simulations to help companies plan for uncertainty is not new. Sports teams have a playbook for most any situation they could face during a match. Governments and Emergency Services have playbooks established to respond to crises at a moment’s notice. The benefits are well understood yet many companies still lack the proper planning to help them quickly respond to market dynamics.
A simple way to structure this analysis is through scenarios used to assess the reaction of your supply chain by changing a variable, like your supply network or inventory targets. Simulations do just that – digitally representing your real-world supply chain to better understand the impacts of variations and outcomes.
Through sophisticated mathematical simulations in advanced supply chain planning technology, teams can examine multiple scenarios by changing parameters based on available data, then compare the outcomes to determine the best path for greater efficiency. Key metrics provide insights to understand the impact of elements such as demand spikes, inventory shortages, transportation disruptions, capacity constraints and more. In assessing trade-offs, planners can test alternative approaches, inventory targets, sourcing policies, and other operational levers.
A major benefit of using modeling and simulation in supply chain planning is that it helps remove latency from the decision-making process. Companies can anticipate potential problems and develop plans to respond to them in advance.
Modeling demand drivers provides an advantage for better forecasting, with the ability to foresee customer demand patterns and understand the underlying factors that drive demand, such as market dynamics, seasonality, promotions, and demographics. This allows companies to better predict future demand and adjust and optimize inventory levels.
Additionally, modeling cash flow impacts provides a more accurate view of the financial implications of inventory decisions. By understanding the impact of inventory management decisions on cash flow, companies can better plan their inventory levels and make more informed decisions about when to purchase inventory and how much to stock.
2. Effective Collaboration, Postponement & Nearshoring
Continuously improving inventory performance goes beyond operations and forecasting; it requires alignment of leaders across key areas across the business – sourcing, manufacturing and finance teams, as well as collaboration with demand planning and commercial stakeholders.
Collaboration and strengthening the relationships with suppliers is becoming more important amid supply chain shortages and disruptions. An increasing number of companies are adopting alternative supplier strategies and proactively implementing postponement strategies to further protect their supply chain. By postponing the final stages of production, companies can “risk pool” to reduce the overall amount of inventory they need to hold, and therefore reduce the amount of working capital tied up while minimizing the risk of stockouts or overstocking.
We’ve seen an increasing number of companies collaborate more closely with suppliers, for example to bulk order raw materials on their behalf to gain access to larger price discounts while also shortening lead times. Suppliers in return can benefit from greater visibility into requirements for raw materials, which effectively reduces end to end lead-time for you.
As global supply chains continue to face cross-border trade challenges, for example when importing from China, many businesses are adopting nearshoring strategies and shifting to nearby suppliers or other entities to mitigate risks. Recent research found that 88% of small and midsize supply chain professionals have switched, or plan to switch, at least some of their suppliers to ones closer to home. Nearshoring can help companies reduce the costs of transportation and the lead time for delivery of goods, which also helps to better match inventory levels with demand. However, this isn’t always the best answer and running scenarios to test the impact on one’s costs, service levels and profitability are needed to decide the best course of action to take.
To foster agility based on strong collaboration in a complex environment, it’s critical to increase visibility beyond the four walls and create a panoramic digital view across the supply chain network with the ability to model at a finer level of detail. This helps companies plan and gain the flexibility required to continuously adapt during these times of change and uncertainty.
3. Demand Shaping and Demand Sensing
Demand shaping involves influencing the demand for specific products, to increase or decrease sales based on business objectives, inventory and production capabilities. To influence demand companies can take actions through marketing and sales initiatives, including discounts, promotions, changes to distribution and so on.
Recently, and particularly in the retail sector, increasing costs and changing consumer demand urged companies like Walmart and Target to release huge discounts and rollbacks to quickly liquidate inventory and free up cash – however this comes with a significant margin impact. Many retailers are still working to get the right inventory while supply chain stability remains fragile – and the expectation is that demand will continue to soften throughout this year. A similar response further up the supply chain is required for CPG and other companies where retail sell-in will be softer than sell-out to consumers.
Beyond manipulating demand, companies can get ahead of challenges and use demand sensing as a competitive advantage to anticipate changes in demand based on leading indicators. Advanced demand planning solutions incorporate AI and machine learning to leverage high levels of data granularity and analyze demand information to detect and predict changes. This also involves extending supply chain visibility and looking for patterns in Point of Sale (POS), social media, weather, IoT and other sources for companies to adjust their forecasts. Companies can then optimize their inventory levels, keeping the right amount of stock of products to meet the demand but not having too much in stock that could lead to waste and overstocking.
With effective demand sensing in place, companies can leverage demand shaping strategies to actively influence demand, as opposed to having to react to changes in the marketplace.
Demand shaping and demand sensing strategies allow supply chain teams to improve forecast accuracy and use this as part of a more holistic inventory management approach to drive up service levels, free up working capital and improve profitability.
These are just three strategies you should look into as you strengthen your supply chain to be more responsive to the constant shifts that are likely to occur. While we don’t know if there will be another Black Swan event or what the combination of smaller, equally impactful events will be, one thing that is for certain – supply chain volatility is here to stay. It’s up to the industry to be prepared. Are you?