Inventory Management in Dealer Oriented Industries

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This Aberdeen Group report focusing on Inventory Management in Dealer Oriented Industries highlights the application and benefits of establishing a Retail Inventory Management to improve dealer supply chain management. Some of the benefits of RIM or include improved inventory planning, replenishment planning and inventory optimization, improved inventory visibility and customer service.

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Inventory Management in Dealer Oriented Industries

  1. 1. October, 2009 Inventory Management in Dealer-Oriented Industries Sector InsightIn these times of economic uncertainty and global credit crunch, companies Aberdeen’s Sector Insightsneed to actively seek out best practices in how to move from working provide strategic perspectivecapital optimization theory to practical initiatives that will improve and analysis of primarycorporate financial performance while maintaining customer satisfaction. research results by industry,The focus of this sector insight is to highlight the responses of over 60 market segment, or geographycompanies in "Dealer oriented industries" (Inventory Management: 3 Keysto Freeing Working Capital) about how their finished goods and spare partsinventory management is performed. Ninety-three (93%) of respondents inthese industries have indicated that their top management has providedrecommendations for making inventory related process changes.Business Context Dealer Oriented IndustriesDealer oriented industries are those whose primary (and often only) The definition of dealer-channel of sales is the dealer ship network. The products in these industries oriented industries includes:are characterized by long production lead-times and are extremely durable √ Automotiveand long life products. Examples of these products are mining equipment,construction equipment, automotive, etc. The price points of these √ Industrial equipmentproducts are extremely high but the volumes are low. Hence the spare manufacturingparts business of these companies is key due to two primary reasons: the √ Industrial productprofit margin associated with spare parts is high and the customers of these manufacturingproducts are involved in mission-critical activities and need the partsimmediately. In fact, spare parts availability plays a very important role in the √ Mining Equipmentcustomer satisfaction/customer service level metrics and has a direct impact √ Medical device equipmenton the sale of new of equipment.Ninety-three (93%) of respondents in these industries say they have madeor been asked to provide recommendations to management in the past sixmonths on how to improve their company’s inventory managementprocesses. Fully 50% of respondents say they have made, or have beenasked to make, inventory-related technology recommendations within thepast six months.In terms of the key pressures being faced by the dealer-oriented industries,customer service levels is closely behind the corporate need to improvereturn on invested capital. This is in contrast to the rest of the sample,where shortage of working capital is in the top 2 pressures. The reason whycustomer service levels are so critical is due to the mission critical nature ofprocesses in which their customers are involved. Examples includeconstruction, repair, road-building, and mining. Increasing costs within thesupply chain is a key concern for these industries as well.© 2009 Aberdeen Group. Telephone: 617 854 5200www.aberdeen.com Fax: 617 723 7897
  2. 2. Inventory Management in Dealer-Oriented IndustriesPage 2Figure 1: Key Pressures Faced by Dealer-Oriented Industries Corporate need to 43% improve return on 23% invested capital Pressure to improve 41% service levels 16% Increasing overall 21% supply chain costs 26% Shortage of working 21% Critical capital to support our 21% Very Influentialoperations/expansions 0% 10% 20% 30% 40% 50% Percentage of Respondents, n = 61 Source: Aberdeen Group, September 2009The key strategic actions being taken by the dealer-oriented industries areillustrated in Figure 2.Figure 2: Key Strategic Actions Taken by Dealer-Oriented Industries Optimize how much and where to hold 71% inventory across our network Improve forecasting accuracy 69% Improve replenishment strategies 62% Improve Inventory Visibility 55% (including dealership) Make suppliers more responsible for 33% inventory 0% 20% 40% 60% 80% Percentage of Respondents, n = 61 Source: Aberdeen Group, September 2009From the overall market standpoint, it is important to look at forecastaccuracy and inventory optimization as two sides of the same coin and notprioritize one over the other. Gaining high forecast accuracy is only themeans to an end – namely gaining higher customer service levels andreduced inventory. It is also to be noted that in these industries© 2009 Aberdeen Group. Telephone: 617 854 5200www.aberdeen.com Fax: 617 723 7897
  3. 3. Inventory Management in Dealer-Oriented IndustriesPage 3replenishment-related strategies such as Vendor Managed Inventory andManufacturer Managed Inventory are also very common. We see that theneed to improve visibility of inventory, especially at the dealerships, is acritical action being considered by the companies in these industries.Inventory Management Business Challenges in Dealer "Our dealers were almost in shock when they saw howOriented Industries quickly service levels increased,The following are some of the key challenges being faced by organizations in while rush-orders anddealer oriented industries: transport costs plummeted." • Large number of SKU-location combinations: There are a ~ Jan Paulsson, large number of SKUs for which the inventory has to be managed Global Supply Chain Manager due to the following reasons: deep bill of materials for products Volvo Construction Equipment, resulting in large number of spare parts requirements; need to store Customer Support Division inventory for models of products that are old (for instance 10-15 year old models); large number of warehouse locations across which SKUs have to be stored. It is a complex task to manage inventory across hundreds of stocking locations as well as for these large number of SKUs. • Legacy IT architecture: There is a requirement for integration with independent businesses and many different business systems and applications. 79% of respondents indicate that the supply chain- related technology in their organizations is either partially automated or fully manual. These industries are characterized by a large number of disparate ERP, DMS and legacy systems. • Lack of well-defined inventory management practices: It is very important to optimize the stocking profile (stock breadth and stock depth) in achieving benefits in these industries. It is also important to perform a multi-dimensional segmentation (e.g. including picks) for the SKUs. However, 74% of these respondents state that they adopt rule of thumb approaches for solving their inventory problems rather than adopting a statistical-based approach. • Lack of well-defined metrics, measurement and visibility: There needs to be a strong KPI capability and management oversight for managing the spare parts inventory across the dealer network. Unfortunately, only 35% of respondents indicate that they have clearly defined metrics and measurement across their dealer network. • Dealer collaboration: 80% of respondents have indicated that they lack collaborative capabilities with their dealers, resulting in increased inventories throughout the dealer network. There is also a lack of trust towards the OEM by the dealers further increasing the need to hedge by storing additional parts inventory. There needs to be clear strategies and policies for managing returns policies and “buybacks” that have to be defined. Effective initial© 2009 Aberdeen Group. Telephone: 617 854 5200www.aberdeen.com Fax: 617 723 7897
  4. 4. Inventory Management in Dealer-Oriented IndustriesPage 4 stock holding polices have to be adopted in order to avoid obsolescence.The following case study illustrates how these challenges can be resolvedthrough the usage of specific closed loop inventory management processesand technology.Case in Point - Volvo CE Case StudyVolvo Enables Best-in-Class Dealer Inventory Management through aManufacturer Managed Inventory program.Company:Volvo CE is a global Industrial Equipment manufacturer, headquartered inBrussels. Its product line includes wheel loaders, compact equipment,wheelmounted and crawler excavators, motor graders, and articulatedhaulers. The company manufactures its products on four continents anddistributes in more than 150 countries via dealerships and rental outlets.Key Business Pressures:Volvo CE faces challenges that are unique to the dealer oriented industries.Volvo CE has two distinct inventory management needs – one for itsfinished goods business and the other for its spare parts business. Its dealernetwork is vast and global and is critical to handle customer relationships.The products in this industry have long cycle times resulting in increasedinventory levels for spare parts. Customer service is a key metric for Volvodue to the mission-critical nature of the operations of the customers. Witha global dealer network comprising 300 inventory locations and variousdisparate systems, Volvo CE faced challenges in delivering consistent serviceparts availability across the world. Aiming for market-leading dealer servicelevels, Volvo CE saw the need for one common solution to ensure globalsupply chain visibility.Actions Taken:Volvo CE realized that their dealers did not have adequate visibility into theglobal inventory and also that they had excess inventory buffers in theirnetwork. Volvo CE also realized that their and their dealer’s technologyinfrastructure was inadequate to solving the issues outlined above. In orderto resolve these challenges, Volvo CE partnered with Syncron, who is asolution provider for spare parts planning and order management solutions.Specifically, the Supply Chain Planning (SCP) solution was implemented.Also, the solution that was implemented was not just a spare parts planningsystem. It was part of an extended process called Manufacturer ManagedInventory (MMI). This process resulted in an increased trust between thedealers and the manufacturer wherein the dealers were able to automatethe ordering process of parts based on historical information. If in the futurethese parts are not sold, then based on the agreement with the OEM, these© 2009 Aberdeen Group. Telephone: 617 854 5200www.aberdeen.com Fax: 617 723 7897
  5. 5. Inventory Management in Dealer-Oriented IndustriesPage 5parts are bought back. This type of approach has resulted in an increasedadoption of the MMI process among Volvo CE’s dealers.Benefits Gained:The following are some of the key benefits (both quantitative as well asqualitative) that have been gained by Volvo and their dealers. • Significant improvement in OTC for dealers • Significant improvement in OTC for Volvo • Realigned inventory levels to improve customer service levels resulting in an increase in health inventory mix. • Improved collaboration with the dealers resulting in improved loyalty • Improved forecast accuracy for Volvo due to enhanced visibility to customer trends • Reduced freight for emergency orders due to more accurate parts inventory in stock • Improved ability of the OEM to directly control the availability level to end customer • Improved overall supply chain visibility (closer to source of demand, see trends at market level) • Improved capability to redeploy inventory as a result of this visibility (and prepares the way for Distributed Order Management) • Improved ability to ensure consistency across the dealer supply chain (service levels from global DC, through regional to dealer and customer) • Improved deployment of parts through the lifecycle (new parts in place before they are needed, reduced risk of obsolescence at end of life) • Significantly reduced costs of doing business (including logistics costs)Required ActionsThe following are some key steps that must be taken by companies indealer-oriented industries in order to improve their inventory managementprocesses: • Segment finished goods inventory based on financial performance. Twenty-nine percent (29%) of Laggards have indicated strong process capabilities in optimizing inventory based versus 47% of Best-in-Class companies. The key attributes typically used for inventory segmentation are volumes, picking volumes, complexity of customization, lead-times and profit margins. Given© 2009 Aberdeen Group. Telephone: 617 854 5200www.aberdeen.com Fax: 617 723 7897
  6. 6. Inventory Management in Dealer-Oriented IndustriesPage 6 the current economic challenges, companies need to segment the finished goods inventory based on profit margins. • Move away from “rule of thumb” inventory target settings. Thirty-five (35%) of Laggards have indicated strong process capabilities in analyzing demand patterns and creating accurate SKU- level forecasts, versus 63% of Best-in-Class companies. One of the reasons why Best-in-Class companies have been able to achieve this is that they are 1.5-times as likely as Laggards to employ statistical forecasting approaches. • Collaborate with dealers and create a win-win strategy. Best-in-Class companies are 30% more likely than all others to be managing inventory at the network level, which includes the dealers and other distributors. Organizations that have either provided a single owner of inventory or provide a cross-functional team for managing inventory are better positioned to achieve closed loop inventory management excellence. This is due to the fact that the associated processes are cross-functional in nature and the organization’s structure impacts how the process is executed. In the context of dealer-oriented industries, this means the need for providing global visibility of inventory to the OEM and thus resulting in the ability to share inventory across dealers.All of the Best-in-Class differentiators outlined are key influencers inachieving closed loop inventory management and are impacting severaldifferent organizations and have different frequencies / cadences. Theamount of effort required in gaining success in enabling each of theseprocess steps cannot be underestimated. For example, the usage ofstatistical methods for computing inventory targets can result in unreliabletargets unless the correct process and technology enablers are adopted.For more information on this or other research topics, please visitwww.aberdeen.com. Related Research Technology Strategies for Closed Inventory Management: 3 Keys to Loop Inventory Management; April Freeing Working Capital; May 2009 2008 Sales and Operations Planning: Sales and Operations Planning: Integrate With Finance and Improve Aligning Business Goals with Supply Revenue; June 2009 Chain Tactics; June 2008 Author: Nari Viswanathan, VP / Principal Analyst, Supply Chain Management (nari.viswanathan@aberdeen.com)Since 1988, Aberdeens research has been helping corporations worldwide become Best-in-Class. Havingbenchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provideorganizations with the facts that matter — the facts that enable companies to get ahead and drive results. Thats whyour research is relied on by more than 2.2 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% ofthe Technology 500.© 2009 Aberdeen Group. Telephone: 617 854 5200www.aberdeen.com Fax: 617 723 7897
  7. 7. Inventory Management in Dealer-Oriented IndustriesPage 7As a Harte-Hanks Company, Aberdeen plays a key role of putting content in context for the global direct and targetedmarketing company. Aberdeens analytical and independent view of the "customer optimization" process of Harte-Hanks (Information – Opportunity – Insight – Engagement – Interaction) extends the client value and accentuates thestrategic role Harte-Hanks brings to the market. For additional information, visit Aberdeen http://www.aberdeen.comor call (617) 723-7890, or to learn more about Harte-Hanks, call (800) 456-9748 or go to http://www.harte-hanks.comThis document is the result of primary research performed by Aberdeen Group. Aberdeen Groups methodologiesprovide for objective fact-based research and represent the best analysis available at the time of publication. Unlessotherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not bereproduced, distributed, archived, or transmitted in any form or by any means without prior written consent byAberdeen Group, Inc. 043008a© 2009 Aberdeen Group. Telephone: 617 854 5200www.aberdeen.com Fax: 617 723 7897

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