Supply Chain Innovator's Footprint for Closed Loop Inventory ...


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Supply Chain Innovator's Footprint for Closed Loop Inventory ...

  1. 1. October, 2008 Supply Chain Innovator's Footprint for Closed Loop Inventory Management Inventory has been and continues to be the lifeblood of the supply chain, Research Brief especially in challenging economic times. Properly managed, it drives Aberdeen’s Research Briefs revenue and efficiency for companies across industries. Aberdeen provide a detailed exploration benchmarked the people, processes, technologies, and metrics associated of a key finding from a primary with inventory management in March 2008 with over 200 companies taking research study, including key part in the Technology Strategies for Closed Loop Inventory Management study. performance indicators, Best- The focus of this research brief is to identify the priorities of inventory in-Class insight, and vendor managers and the key components of Closed Loop Inventory Management. insight. The role of Service Oriented Architecture and web services in enabling inventory management is explored in this document as well. Key Application Areas of Interest in 2008 Aberdeen's survey of over 805 supply chain executives from all over the world identified that 80% of companies are involved in the transformation of their domestic or international supply chains, according to the Supply Chain Innovator's Technology Footprint 2008 report. In this study, participants were asked to list the top three application investment areas used to meet their key supply chain objective (e.g., lower cost or meet customer mandates). Companies ranked supply chain visibility at the top of the list (Figure 1). Inventory optimization was ranked number three behind S&OP. Figure 1: Top Application Investment Areas Definition of Best-in-Class Supply chain visibility 54% The top 20% of aggregate Sales and Operations Planning 34% performance scorers experience: Inventory Optimization 32% √ Average customer service Supplier/ Customer Collaboration 25% level: 97% Supply Chain Netw ork Design 21% √ Average cash conversion cycle : 15 days Performance Management 19% √ Initial customer order fill Transportation Management 19% rate: 94% √ Perfect order fulfillment 0% 20% 40% 60% 80% metric: 95% % of Respondents √ Average forecast accuracy at Source: Aberdeen Group, September 2008 the product family level: 87% © 2008 Aberdeen Group. Telephone: 617 854 5200 Fax: 617 723 7897
  2. 2. Supply Chain Innovators Closed Loop Inventory Management Page 2 In addition, 82% of surveyed respondents indicate that it is highly important to their company to increase service levels without increasing inventory investment. Customer service level is a metric that is impacted by several process steps across different organizations even though the owner of this metric is the order fulfillment group. Multi-tier inventory optimization continues to be the area companies are most focused on today in terms of inventory improvement priorities. Inventory Management Priorities Best-in-Class companies follow the principles of closed loop inventory management. Figure 2 shows the components of a complete closed loop inventory management approach. The outermost circle shows the events that occur and the inner circle shows the metrics that should be tracked as these events occur. Figure 2: Process Playbook for Closed Loop Inventory Management Source: Aberdeen Group, September 2008 Each component of closed loop inventory management directly addresses the root causes of poor customer service levels, rising costs and poor RONA. The numbers in Table 1 show the percentages of respondents that indicate "strong" or "very strong" capabilities for each closed loop inventory management event. The table illustrates that Best-in-Class companies are more likely to be using a technology enabler in each of these key event areas. © 2008 Aberdeen Group. Telephone: 617 854 5200 Fax: 617 723 7897
  3. 3. Supply Chain Innovators Closed Loop Inventory Management Page 3 Table 1: Closed Loop Inventory Management Technology Enablers Best-in-Class Average Laggards Demand analysis 46% 23% 18% Inventory segmentation 33% 18% 7% Inventory optimization 36% 15% 12% Inventory replenishment 50% 30% 29% Global inventory visibility 35% 14% 7% Event management 33% 12% 11% Responsive execution 28% 15% 12% Source: Aberdeen Group, September 2008 Notable technology innovations include: composite applications built using service oriented architecture for managing inventory, network optimization tools that are able to perform operational planning in addition to longer term multi-echelon tools, tools that optimize the customer service levels through mix-optimization. These innovations deliver the following value: reduction in inventory, higher customer service levels, lower out of stocks. Supply Chain Enterprise Infrastructure Areas Figure 3 shows the enterprise infrastructure areas that companies believe are most important for their SCM technology roadmap. Companies are focused on leveraging the following capabilities in their supply chain technology roadmaps: BPM, SCEM (and alerting platforms), and MDM (internal). Figure 2: Supply Chain Infrastructure Technology Priorities Business process management or workflow 47% Supply chain event management and alerting 44% platform "We are utilizing an innovative SOA-based solution to bridge Master data management (internal) 41% the gaps in our APS inventory Data warehouse or business intelligence replenishment management and 27% warehouse management platform packaged products." Enterprise application integration 22% ~ Dan Grosz, VP of IT, Service-oriented architecture and composite VIP Auto Inc. 21% application support 0% 10% 20% 30% 40% 50% % of Respondents Source: Aberdeen Group, September 2008 © 2008 Aberdeen Group. Telephone: 617 854 5200 Fax: 617 723 7897
  4. 4. Supply Chain Innovators Closed Loop Inventory Management Page 4 Compared to 2007, SOA and composite applications are seeing enhanced interest in the marketplace. The general market is becoming more aware of the underlying technology used by BPM and SCEM solutions. There are proof-of-concept implementations underway in the IT organizations of Fortune 500 companies with oversight by the supply chain line of business organizations. SOA for Enabling Closed Loop Inventory Management The evolution of SOA has enabled significant opportunities for companies to expand their existing SCM solutions without making large scale upgrades and re-implementations. However these solutions tend to be more suitable only for larger companies rather than mid-size companies due to the initial investment needed to enable these solutions. These are the characteristics of SOA enablement of SCM applications: • Configuration templates. These allow enterprises to reduce deployment time by subscribing to common global business processes. These customers can log in, collaborate with their partners, load master data, and then on-board suppliers. After the system or process has been set up, then their customers can execute processes (both transactional as well as decision support processes). • Ease of integration. In order to help customers leverage existing back-end systems, SaaS solutions need to make their business process libraries available as part of an SOA Application Programming Interface (API). The intention is to allow this API to be leveraged by customers and third party solution providers as a supply chain platform. • Business process library. In order to feed the configuration templates and also to allow extension through the SOA API, there needs to be a set of process solutions and functional enhancements such as self-service reporting. These process libraries must be continuously enhanced and maintained by the solution provider and must allow innovators to keep their IP separate from the 'core' solutions. Apptricity is an example of a next generation asset inventory management and maintenance solution that is built on top of a ground up SOA architecture. This solution is an example of a closed loop inventory management solution to support today’s globally integrated supply chains. This solution is interesting is because of its usage in government applications specifically within the US army to get end to end visibility into inventory assets. With this infrastructure in mind, two of the critical areas within closed loop inventory management that are suitable for usage of SOA based architecture are explained in the following sections. © 2008 Aberdeen Group. Telephone: 617 854 5200 Fax: 617 723 7897
  5. 5. Supply Chain Innovators Closed Loop Inventory Management Page 5 Event Management This is a key enabler for linking the planning and execution phases of the process. This is an alert based system that automatically alerts two main areas: (exception management) • Execution personnel - gap between actual and predicted outputs (like inventory levels) • Planning personnel - changes in input parameters (like forecast error, lead times) This way not only can short term responsive execution be enabled but also the system corrects itself by rapidly changing the input parameters that feed the entire process. Responsive Execution This refers to the flexibility of the execution process to adapt to changes and to respond effectively. The upstream event management process and execution processes are tightly coupled and may run multiple times iteratively. Some of the approaches that companies can adopt for responsive execution are DOM (being able to fulfill from multiple distribution centers), allocation of in-transit goods to orders, direct shipment to customers, adopting non- standard routes for fulfilling orders, DC to DC transfer of inventory, etc. Case in Point - Consumer Electronics BPM To facilitate their transition from a traditional push-based supply chain to a demand driven supply chain, a Consumer Electronics Company retained IBM Global Business Services to develop their transformation strategy to become a demand driven company. The key business issues that necessitated such a transformation were: • High inventory levels in the channels • High price protection to channels • Stock outs at the store level • Long replenishment lead times • Informal collaboration processes • Lack of established metrics Key challenges in making this transformation a reality were lack of process, organization skills, and loosely integrated systems. IBM developed an approach using their BPM services framework which would provide quicker value, while planning and executing long-term transformation. As part of the BPM services delivered to the company, IBM implemented and is now operating the CPFR forecasting and planning processes on an outsourced basis using key resources from IBM GBS Supply Chain Strategy and Planning practices. IBM consultants work alongside this Electronics Company’s © 2008 Aberdeen Group. Telephone: 617 854 5200 Fax: 617 723 7897
  6. 6. Supply Chain Innovators Closed Loop Inventory Management Page 6 employees and its channel partners, such as Best Buy, to create consensus channel sales forecasts and replenishment plans each week. As a result of this BPM work, IBM GBS allowed the client to realize the following benefits: • Increase in forecasting accuracy. The forecast accuracy is higher than it was prior to the project and is also more accurate than the manufacturer's retail partner's own forecast. Typical forecast accuracy achieved by the solution is around 79%, four weeks out, at the level of channel partner / SKU / DC. • Reduced inventory levels. Based on the improved forecast accuracy, this Consumer Electronics Company is now using these forecasts and the associated replenishment plans to target reduced inventory levels in the channel without compromising service levels. The typical weeks of supply has been reduced from 10 weeks on many products down to six weeks, with a long term goal of cutting weeks of supply in the channel to as low as three weeks. The solution uses BPM methodologies and a global resource pool, allowing for around the clock process execution. Best Buy won an award from VICS for the best CPFR process implementation for the collaboration process with this Consumer Electronics Company. Best Buy has used this process as a benchmark to expand the collaboration with other Electronics suppliers. Case in Point – Department of Defense The following were challenges faced by the Department of Defense: • Lack of end to end visibility, accountability and integration • Manual requisitions • Manual tracking of inventory, containers and assets • Lack of inventory visibility and control across a globally distributed supply chain • Lack of inbound receiving speed and poor accuracy These business issues manifested themselves into the following technology issues: • DoD required a modernized, integrated and easy-to-deploy Automated Information System (AIS) to support current and re- engineered functional business processes throughout the Department of Defense (DoD). • The solution had to provide web-based unit deployment/redeployment functionality in an enterprise architecture • Finally, the solution had to integrate multiple legacy databases into a lean, unified, easy-to-use system that would consolidate and © 2008 Aberdeen Group. Telephone: 617 854 5200 Fax: 617 723 7897
  7. 7. Supply Chain Innovators Closed Loop Inventory Management Page 7 enhance security, workflow, compliance, reporting and audit requirements for all branches of service. The DoD selected Apptricity Transportation Management (TMS) to create this unified system. Built on Apptricity’s Service Oriented Architecture (SOA) framework, Apptricity TMS enabled the level of adaptability and user configuration as well as rapid deployment that was needed. Apptricity TMS integrated multiple legacy point solutions and delivered a real-time inventory visibility solution capable of meeting the rigorous demands of the DoD. The solution enabled the DoD to quickly and easily configure business rules, and its dynamic framework facilitates future expansion and integration. This ability to quickly modify business processes was due to the underlying SOA architecture. The benefits the DoD saw included: • Flexibility for rapidly modifying business processes at the theatre of operations in war zones • Ability to reduce the total cost of ownership of solutions and legacy systems due to reduced maintenance • Increased visibility into high value assets at the theatre of operations resulting in improved performance • Graphical tracking of all assets in the theater of operation Recommended Actions • Manage at the network level. Forty-four percent (44%) of Best- in-Class companies indicate having the strong process capability to manage inventory at the network level. This implies that there is a need to integrate with disparate ERP and legacy systems. • Assign end to end owner of inventory. Organizationally inventory continues to be looked at as a functional process where individual warehouses and business units only have visibility to inventory. This is primarily due to a lack of an end-to-end inventory process owner. Best-in-Class companies should incorporate inventory into the S&OP process and use it as the forum to reconcile the planning and logistics organizations. • If your company has a complex multi-warehouse and multi- nodal supply chain, in order to enable closed loop inventory management look, into SOA and BPM approaches. Partners for BPM and the underlying SOA architecture need to be chosen carefully because these implementations could add additional complexity and risk increasing the TCO if done incorrectly: o Choose specialized BPM providers only if there are adequate supply chain domain experts in the organization and also if there is a need for enabling composite applications on top of existing ERP / best-of-breed solutions. © 2008 Aberdeen Group. Telephone: 617 854 5200 Fax: 617 723 7897
  8. 8. Supply Chain Innovators Closed Loop Inventory Management Page 8 o Choose ERP providers if there is an easy upgrade path available to the version that supports a BPM platform and if there are applications available in the platform that support extending business processes. o Choose best-of-breed suite providers if you are a leading edge company that wants to create innovative workflows and business processes using a supply chain BPM platform. SOA and BPM technologies can be of great help in enabling closed loop inventory management, but require a thoughtful and experienced approach in order to deliver the anticipated results. For more information on this or other research topics, please visit Related Research Supply Chain Executive's Strategic Supply Chain Innovator’s Technology Agenda 2008: Managing Global Supply Footprint 2008; March 2008 Chain Transformation, January 2008 Technology Strategies for Closed Loop Inventory Management; April 2008 Author: Nari Viswanathan, Research Director, Supply Chain Management and Logistics ( Since 1988, Aberdeen's research has been helping corporations worldwide become Best-in-Class. Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provide organizations with the facts that matter — the facts that enable companies to get ahead and drive results. That's why our research is relied on by more than 2.2 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% of the Technology 500. As a Harte-Hanks Company, Aberdeen plays a key role of putting content in context for the global direct and targeted marketing company. Aberdeen's analytical and independent view of the "customer optimization" process of Harte- Hanks (Information – Opportunity – Insight – Engagement – Interaction) extends the client value and accentuates the strategic role Harte-Hanks brings to the market. For additional information, visit Aberdeen or call (617) 723-7890, or to learn more about Harte-Hanks, call (800) 456-9748 or go to This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc. 043008a © 2008 Aberdeen Group. Telephone: 617 854 5200 Fax: 617 723 7897