Inventory management has a dark secret: Forecasting isn’t only worthless; it also exacerbates the very problem it was designed to solve.
If forecasting worked, retail inventory levels would have decreased and availability levels would have increased over the past decade. But despite unprecedented spending by retailers and third-party logistics providers on forecasting technology, retail supply chains consistently carry too much inventory, and product availability remains below what the market demands.
That’s the view at Agentrics, a Chicago-based 3PL that sees collaborative planning as the key to managing lean inventories. In April, the company launched a hosted software-as-a-service platform to help retailers and their suppliers create more collaborative, synchronized supply chains.
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“We want to support our customers and market to achieve a fully integrated business network, delivering efficient processes in a spirit of more collaboration and openness,” CEO Wellington Machado said.
Agentrics was formed in 2005 as a service member organization to provide a hosted collaborative exchange platform for major retailers including ASDA, Carrefour, Marks & Spencer, Pepsico, Coles, Walgreens and Best Buy. The company entered the U.S. market in 2005 and expanded its scope from a member service organization to a commercial entity.
The timing is fortuitous. With the 2008-09 recession wreaking havoc on inventory planning, it’s more important than ever for retailers to improve their logistics and inventory management. And with memories fresh from 2009’s inventory slashing and the rapid restocking that started last year, many retailers again are pulling back on inventories to wait out weak consumer sentiment in a stuttering recovery.
Last year’s restocking was a big reason inventory costs are rising despite lower interest rates. The annual State of Logistics Report, released last month by the Council of Supply Chain Management Professionals, put those costs up 10.3 percent in 2010. Companies also face higher insurance, depreciation, tax and obsolescence costs, according to the report.
Although companies are keeping inventories tight, they’re still higher than in 2009, said Rosalyn Wilson, senior business analyst at Delcan Corp. and author of the benchmark report. They’re also out of balance; although retail sales are about 8 percent higher than they were at this time last year, inventories are up only 5 percent, according to Walter Kemmsies, an economist at transportation engineering firm Moffatt & Nichol.
The imbalance could be explained in part by retailer pessimism in the face of a U.S. economy that sputtered to an anemic growth rate of 1.8 percent in the first quarter. Rising food and gas prices, high unemployment and a battered housing market are weakening consumer confidence.
“The consensus forecasts started 2011 full of optimism and have been steadily declining,” Journal of Commerce Economist Mario Moreno said.
Technology is only part of the inventory management equation. While it gives 3PLs their competitive advantage, it can’t solve management problems, said Steve Robinson, senior vice president of retail for Transplace, a Dallas-based logistics and technology provider.
Robinson likens 3PL technology to a high-end racing bicycle. One person may mount it and fall off while another gets on and wins the Tour de France.
“Breakthrough performance is driven not by technology but by having the right business processes in place,” he said.
For Transplace, the process side is about combining lean principles for eliminating non-value-added steps with a Six Sigma focus on rigorous process discipline and a quantitative engineered approach to reducing variation.
Retailers hope consumers will return, but they can’t exactly plan on it, so they will continue to be conservative and selective in restocking inventories. “Not much risk will be taken this year,” Robinson said.
With buffer and safety stocks drawn down and little margin for error, retailers’ logistics performance must improve dramatically. Transplace serves as a 3PL and lead logistics provider for a number of major retailers, providing an integrated, Web-based platform for transportation planning, order management, appointment scheduling and real-time visibility into inventory both at rest and in motion.
It’s been said that inventory is the lack of visibility into changes in supply or demand, and the inability to do anything about it. It’s a point well taken, Robinson said, because all the visibility in the world won’t help retailers unless their 3PL partners provide the business intelligence and analytics capabilities to execute corrective actions.
Collaboration is the key to gaining the visibility into consumer and supplier behavior needed for effective inventory management. For retailers, the goal is to meet specified service levels, which could be in-stock levels at stores or distribution centers or percent on-time of requested date.
Demand planning and forecasting are necessary for inventory management but hardly sufficient. Forecasts by definition are always wrong; even among collaborative organizations, accuracy rates are often in the 70 to 75 percent range, which means high rates of error.
“That’s as good as it gets,” Robinson said. “You need tomorrow’s newspaper or a crystal ball to get better.”
To compensate for forecasting errors, 3PLs must be able to respond to disruptions quickly with decisive action and flexibility.
Retailers are experimenting with a number of practices to better manage lean inventories. Flexible fulfillment allows them to use store buffers to fulfill orders made through other channels and gives consumers the option of receiving goods by home delivery or store pickup.
As retailers gain confidence in Internet sales and embrace their new identities as multichannel sellers, flexible fulfillment represents one of several new frontiers in terms of consumer choice. “It is another tool for retailers to be more efficient relative to their initial investment in inventory,” Robinson said.
Increased in-transit visibility enables retailers to use dynamic allocation, an inventory planning process that takes into account inventory in the warehouse and in transit. Its use is predicated on the predictability of inbound shipments. By planning to ship inventory that has yet to arrive, retailers can hold less inventory, and can divert or reroute inventory in transit based on demand swings.
Collaborative, synchronized supply chains offer the best hope for improving inventory performance and improved availability, easier detection of missing goods, streamlined store deliveries and increased sales from efficient replenishment of stock, said Bob Rossman, Agentrics’ vice president of supply chain.
The key elements of collaborative inventory planning include sharing key operational information, building cooperative business processes that complement the processes of each organization, and building common goals, to ensure both partners are working to optimize the results.
Today’s retailers gather massive amounts of data related to demand, distribution, operations, new products and various sales channels. Sometimes collaboration fails because too much attention is paid to data rather than processes, resulting in a loss of focus on the end customer. To be actionable, data must be shared among supply chain partners and analyzed for optimal inventory levels.
Retailers in general are trying to tie their inventory management decisions much more closely to the demand side, with a huge push to get closer to the customer. “We are very focused on the demand side,” Rossman said. “Through execution, we make sure the product is in the right place based on demand.”
Agentrics sees inventory forecasting and demand-driven supply chains as mutually exclusive and proposes a five-point plan for retailers to transition to a “perfect pull” supply chain: optimizing display stock levels; determining replenishment frequency; minimum batch sizes; where to hold non-retail inventory; and establishing an IT system that generates operational signals for each link in the supply chain.
Agentrics’ hosted SaaS model offers the advantages of the hosted transportation management systems that are growing in popularity in the U.S., including fee-based cost structures that lower purchasing, implementation and service costs associated with installed software, as well as scale and flexibility.
SaaS models also place fewer demands on IT departments that give top priority to store systems and mission-critical applications.
Post-recession, retailers are engaging in more collaborative programs such as vendor-managed inventory or collaborative planning forecasting and replenishment. In traditional replenishment models, suppliers wait for the retailer to place orders. Because the suppliers have no advance visibility into when orders are coming or what they will be, there is increased risk they won’t be filled.
In the most successful vendor-managed inventory models, suppliers are apprised of what is happening on the inventory side at store and warehouse levels, and they generate orders themselves. The model has long been in place among pharmacies and grocery chains, where manufacturers of consumer goods make replenishment decisions based on retailer warehouse inventory. Merchandisers in the snack foods and beverage segments of the retail industry will drive out to stores and make replenishment decisions on the spot at the store level.
VMI is making headway into traditional retail-supplier relationships as some retailers launch pilot programs. The programs usually start with top-tier suppliers in which the two parties align strategies and goals. Data more limited in scope, such as forecasts, is shared with lower-tier suppliers in emerging VMI relationships.
Contact David Biederman at email@example.com.