Whether it's a truck, a tsunami or an economic downturn, the same general rule applies: You're better off if you can see it coming from a safe distance.
There aren't many companies that understand this notion better than Cisco Systems. White-hot during the '90s, the company was pummeled after its vaunted inventory forecasting system could not - or did not - predict the dot-com bubble's collapse.
The result of this miscalculation was that sales were halved, the company lost 25% of its customers in a matter of weeks, and it ultimately wrote off over $2 billion in inventory. After that experience, Cisco's supply chain team vowed that it would never get blindsided again.
"There is a huge difference cutting head count between now and 2001," says Karl Braitberg, Cisco's vice president of customer value chain management. Back then, Cisco's supply chain model was built on a "push" system, where products were made and inventory was built up in anticipation of market demand based on best-guess forecasts. "Then, when demand dropped, the supply chain froze. Nothing happened," Braitberg says. "We knew we had to build a new system that reacts better than just 'push.'"
Every company is tasked with matching its supply to consumer demand. In a normal business cycle, how well that job is accomplished determines whether the company is profitable. But this current economic downturn is anything but normal, and businesses are struggling to simply stay liquid. There are various strategies to help preserve working capital, including cutting head count, outlets and manufacturing lines. But for most companies, the key to capital preservation will be how well they can reduce their inventory levels.
Supply chain managers say the following are their top investment priorities this year:
* Reduce operating costs: 61%
* Improve efficiency and/or productivity: 55%
* Improve customer service: 38%
* Use the supply chain to drive business growth: 23%
* Align supply chain with corporate business strategy: 18%
Source: Gartner Inc. survey of 201 supply chain managers in North America, December 2008; multiple responses allowed
Largely, companies are in survival mode, and they're looking to their supply chain management team to free up precious capital to help them do that. While it may not fall directly on IT executives to make that happen, their role in the equation is very strategic.
With globalisation, outsourcing and increased compliance and security concerns, managing supply chain operations becomes increasingly complex. And shorter, more frequent product cycles targeting more-sophisticated markets create a need to manage more products and parts from remote locations.
Add the pressure of shorter cash-to-cash cycles - the time from when a business extends credit to build inventory until the time it gets paid - into the equation, and the need for an intelligent, nimble and timely flow of information becomes critical.
To have visibility as well as command and control, supply chain operations must be tightly integrated with the IT infrastructure. That isn't the case at many companies, and yet it may be the factor that determines success or failure as they endure and emerge from this downturn.
Like bloodletting, reducing inventory is a delicate matter that most people would prefer to avoid. Inventory can range from materials, to parts, to fully assembled products. Nobody wants to run out. If there's too little, customers won't get orders in a timely manner and market opportunities will be missed. Yet if a company carries too much and demand drops, then the inventory must be "bled down," or reduced in price, until it has a buyer.
During a strong economy and when cash flow is loosened, many companies can get by without rigorous inventory management practices, says Larry Lapide, director of demand management at the MIT Center for Transportation & Logistics in Cambridge, Mass. But during a recession, he adds, "companies had better bleed down inventory to reflect the downturn in sales. If they don't, it just sits there."
Inventory optimisation is so critical now because of its impact on available cash, Lapide says. In accounting terms, inventory is an asset. So inventory that is on the books through manufacturing, assembly and distribution represents credit-funded inventory. With credit at a premium, it's in a company's best interest not only to keep inventory levels tight, but also to sell goods as soon as possible.