Advanced Inventory Management

Get your customers what they need, when they need it.

Analyst Perspective

Get your customers what they need, when they need it.

In 2015, Microsoft cofounder Bill Gates dramatically rolled a barrel of survival supplies from the Office of Civil Defense onto the stage for a TED Talk titled “The next outbreak? We’re not ready.” Gates predicted, based on the global response to the Ebola epidemic in 2014, that another viral outbreak would wreak havoc because of how unprepared we were. When COVID-19 began to spread worldwide, we did not have enough epidemiologists or medical workers, and we had no idea of treatment approaches. To prevent this from happening again, we need to use technology to build a playbook to respond effectively. This holds true for modern supply chains, as well.

From identifying new suppliers and switching modes from sea to air to managing promotional pricing followed by price hikes due to variability in demand and supply, businesses had to deal with multiple risk management scenarios during the COVID-19 pandemic. The backbone on which global supply chains had been built, just-in-time inventory management, was shattered by the pandemic and other geopolitical events.

Is the answer, then, to be more agile or resilient, or both? Agility is great for responsiveness, whereas resilience involves preparing for an eventual shock to the system. Agility is difficult to achieve when all your supply comes from one country or supplier and you maintain low or almost no safety/buffer stock, depend on one mode of transportation, and rely heavily on physical stores to sell your inventory. In comparison, resilience requires significant physical changes to supply chains. McKinsey & Company says “it’s quicker to build inventories than factories,” and that is what most businesses have done as a temporary solution to challenges from the pandemic. For the long term, businesses will have to balance regionalization as a means of risk aversion with digitalization as a means of capability building. This is where an inventory management playbook can help. In this research, we help you unpack and analyze the components of an inventory management playbook and study advanced features of inventory management systems that can be deployed to get you ready for the next shock to your supply chain.

Shreyas Shukla
Principal Research Director, Manufacturing Industry
Info-Tech Research Group

Executive Summary

Info-Tech Insight

The most critical aspect of any inventory management playbook will be the inventory management system, which will ultimately help businesses plan better, procure more efficiently, and fulfill in an optimized manner across more channels, customer types, and geographies.

Overview of the inventory management ecosystem

Inventory management is the monitoring and supervision of the flow of materials, resulting in finished goods. Inventory management covers processes such as procurement, production, storage, distribution, and sales. It is enabled by full transparency of your supply chain and the required inventory levels of raw materials, work in progress, and finished goods. Good inventory management enables your business by ensuring that finished goods are available for customers to buy and that enough raw materials are at hand to continue production and meet demand.

Source: SelectHub, 2019

Inventory management challenges originate from internal and external factors

Common operational problems that companies face due to poor planning, manual processes, and impractical policies, as well as headwinds and disruptions from external factors such as natural disasters and the pandemic, result in a variety of inventory problem.

Source: Supply Chain Game Changer, 2022

The COVID-19 pandemic impacted supply chains

Workers migrated.

Workers slowly migrated to better-paying industries, stayed home to collect stimulus checks or protect themselves from COVID-19, or fell sick from COVID-19. The resulting shortage of truck drivers and port workers made the movement of merchandise difficult in North America.

“… ships were waiting four weeks to unload due to the lack of workers on land.”

Shipping costs increased.

Sea transportation is an oligopoly. Only seven companies account for 77% of the global sea-transportation market. Sea transportation accounts for the movement of 90% of goods around the world. The impact of rising fuel costs, a lack of workers, and government-mandated pandemic control measures resulted in rising shipping costs.

“… the average global value of transporting a container went from $1,362 USD in November 2019, to $9,628 in February 2022 …”

China’s zero-COVID policy had global impacts.

China is the world’s largest exporter of goods and the largest trade partner of the North American economies. China’s zero-COVID policy was a crushing blow to global supply chain reliability.

“… average shipping times from China doubled …”

Consumer demand was volatile.

Stimulus checks to individuals and businesses sparked a quick recovery in demand. Many people had more money to spend and, by mid-2020, most businesses were rushing to revise their demand forecasts due to the explosive growth in e-commerce activity.

“… global e-commerce has jumped to $26.7 trillion, up by more than 4% ...”

Source of quotes: McGill Business Law, 2022

Supply chains were not prepared for a fast recovery. Rapid cratering of demand, followed by global supply and logistical challenges, resulted in businesses not being ready to address the pent-up demand as economies reopened.

Multiple factors impacted supply chains. Pandemic-related restrictions, sick workers, inflation, and geopolitical events, as well as the traditional lean principles that businesses operated by, contributed to supply chain disruptions.

Globalization is on the decline. The last 30 years of global economic activity led to the integration of economies. Globalization linked supply chains to create an extremely complex and interdependent network. Recent struggles are leading to the development of more localized supply chains.

Source: McGill Business Law, 2022

The vulnerability of just-in-time (JIT) inventory management was exposed

Pre-Pandemic

Geopolitical Events
The world has seen significant changes in global trade. Trade wars between the US and China and between the US and the EU, export restrictions by Japan on South Korea, and Brexit are a few examples of geopolitical events that impacted the cross-border movement of goods even before the pandemic hit.

Aggressive Just-in-Time/Lean Manufacturing
For decades, companies emulated Toyota’s production system by collaborating successfully with their suppliers to ensure the availability of raw materials and parts “just-in-time.” While efficient and effective when the supply of goods is moving freely, this methodology failed to account for disruptive events, such as the pandemic and trade wars.

Pandemic

Demand Volatility
Government-mandated restrictions broke supply lines, delayed shipments, and injected variability in the demand for products and services. This led to a mad rush for essential items such as toilet paper, disinfectant wipes, and food products. Empty shelves became common at many stores.

Stimulus Boost
Stimulus packages were introduced to provide relief funds to businesses and affected workers. Financial aid directly boosted spending on consumer products, which had seen a sharp decline in 2020.

Logistical Challenges
Disruption to global supply chains have trickled down to the logistics sector, which had to deal with labor shortages and high demand for goods from stimulus packages and rising use of e-commerce services.

Shortage of Skilled Labor
When businesses started reopening, they were faced with a shortage of labor. Sickness from COVID-19, restrictions on movement, and active unemployment benefits and stimulus checks resulted in businesses having a difficult time attracting and retaining workers.

Non-Pandemic

War in Eastern Europe
More than 600,000 global businesses rely on supply from Russia and Ukraine. The Russian invasion of Ukraine has directly impacted the prices of global commodities. This has resulted from a shortage of skilled labor due to workers from Russia and Ukraine being diverted to war efforts.

Product Recalls
Inventory of baby formula was impacted by a recall. Abbott Labs issued a voluntary recall of its baby-formula products manufactured in Michigan after a Food and Drug Administration (FDA) inspection found traces of a pathogen at Abbott’s factories and production had to be shut down. This affected the availability of formula for months.

Regulatory Challenges
Regulatory policies played an important role during the pandemic. While governments had to step in to prevent the hoarding of critical personal protective equipment (PPE) supplies and to procure imports of baby formula, inflexible regulation had a negative impact on the availability of generic medicines, such as Tylenol, in North America.

COVID-19 + JIT = shortage of consumer goods

Over the past three years, consumers have had to live with widespread global shortages of goods from pandemic-related shocks to supply chains and years of aggressive lean inventory policies enforced by companies across durable and non-durable sectors.

Product availability delays

"Due to industry-wide impacts of COVID-19 on the global supply chain, we are currently experiencing limited availability and significant delays for certain products in-store and online."

Source: IKEA, 2022

Production delays

"… ongoing supply chain issues have significantly impacted our ability to build intra-aortic balloon pumps (IABPs), intra-aortic balloon catheters (IABs) and spare parts due to raw material shortages."

Source: Getinge, 2022

Parts shortages

"The semiconductor shortage and the impact to production will get worse before it gets better. We have work to do to get our industry footprint back to firing on all cylinders."

Source: Ford, 2022

Impacts to pharmaceutical supply chains

The Drug Shortage Staff within the FDA’s Center for Drug Evaluation and Research (CDER) has asked manufacturers to evaluate "… any area of the supply chain that may be impacted due to the COVID-19 outbreak."

Source: FDA, 2022

Fluctuating demand

"As shortages spread across the country, we ramped up operations, and have been working around the clock to produce more formula and getting it to stores more quickly."

Source: Reckitt, 2022

Stock availability issues

"We know you may be having trouble finding our pediatric TYLENOL® products and we know it can be frustrating."

Source: Tylenol, 2022

Failure to manage inventory effectively resulted in a 5% to 7% annual decline in revenue for EU and North American companies, according to a report by The Economist Intelligence Unit

Source: Mechanical Power, 2022