Free Up Cash!

Inventory optimization -- more important than ever -- can preserve working capital in tough times.

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Crisis = Opportunity

O'Reilly Auto Parts Inc. in Springfield, Mo., uses inventory as a competitive differentiator, says Greg Beck, vice president of purchasing. One of the largest specialty retailers of automotive aftermarket parts, tools, supplies and accessories in the U.S, O'Reilly is responding to the recession differently than many other companies.

"Business is increasing because of the downturn," Beck says. "People aren't buying new cars but instead [are] putting more money into fixing old cars."

This isn't to say that O'Reilly lacks supply chain challenges or that it can let down its guard. As the result of an acquisition last year, the company increased its total store count to more than 3,300 and now operates in 38 states. To bolster its competitive advantage, O'Reilly's strategy is to increase customer service levels and replenish inventory on a nightly basis, while at the same time managing an increasing number of products.

The partnership between the supply chain operation and IT was critical to O'Reilly's strategy. The company is using Manhattan Associates Inc.'s replenishment software to collect product data information on the half-hour, while updates from the distribution centers are transmitted nightly. The replenishment system uses this data to determine the forecast for these products. As a result, O'Reilly has increased inventory turns by 44%, and it still manages to fulfill 97% of customer requests immediately, with 3% handled through separate channels. At the same time, the company reduced its inventory levels, freeing up $60 million.

Underinvesting

Companies say that driving costs out of the supply chain is an important goal, but the big question is whether -- especially during a recession -- they can afford to invest in their supply chain IT infrastructures to help make that happen.

Dwight Klappich, an analyst at Gartner Inc., says he expects IT spending on supply chain applications to decrease through 2010 and that spending won't pick up again until 2011. Between now and then, IT departments are likely to focus on tactical investments, such as forecasting or transportation management systems, rather than on strategic supply chain transformations.

Klappich calls that a short-sighted and, in the long term, costly approach. "If this trend continues," Klappich stated in a report, "this myopic focus on short-term tactical issues, while necessary for many businesses, could widen the gap between the best-performing organizations and lower-performing organizations."

MIT's Lapide agrees. Companies need to pay more attention, not less, to using cross-functional collaboration to get a better view of demand variability. "IT is needed to get these operational and system silos connected," Lapide says. "IT, supply chain, sales -- you name it -- they all have a common enemy. They have to join together and work to get rid of these silos."

Cisco understands this. After the 2001 downturn, it made major system investments to transform its "push-driven," siloed supply chain model into an integrated "pull system" that can extract timely data from suppliers and downstream partners. This reorder data is sent to Cisco after being triggered by specified parameters and algorithms, to shape "demand signals."

The system doesn't operate in a vacuum. Cisco has optimized its forecasting algorithms by bringing together representatives from its marketing, finance, sales, supply chain and IT departments, and from key customers, as part of its sales and operations planning process. This group collaborates to create a common view of demand signals. This input drives an agreed-upon plan of action to align manufacturing capacity and inventory deployment and meet customer service levels. In short, they work together with the same data to optimally match supply and demand.

"Now, if there are no pull signals, nothing gets brought into the system," says Cisco's Braitberg. Manufacturers don't continue to source and build inventory that may sit in some warehouse waiting for customers who may never buy it. Cash is freed up for other purposes.

While Braitberg acknowledges that even past history can't be used as a template for this downturn, Cisco is confident that it has better visibility into market demand when it goes down, and that it will be ready when the green shoots emerge.

"We now have the techniques in place to be hypersensitive to demand changes," Braitberg says, "and we can manage our way through a downturn."

Brandel is a freelance writer and industry analyst in Newton, Mass. Contact him at wbrandel@verizon.net.

Copyright © 2009 IDG Communications, Inc.

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