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Scrap Your Inventory Mindset

The first step to rebuilding supply chains is to rethink inventory, says Eclipse Managing Partner, Lior Susan.

  • Apr 27, 2022
  • 4 min read

By: Lior Susan

Around the world, countries are in a supply chain crisis of their own making. Inventory-centric thinking strongly influences our decision making on how and where in the world we manufacture, assemble, store and distribute products. This approach of stockpiling what may be needed has served us well for decades. However, as our global supply chains falter in response to the multiple impacts of pandemic, wars, natural disasters and trade conflicts, an inventory mindset is a crumbling foundation on which to build manufacturing and logistics. With the right data and technology, we can start to move away from a reliance on just-in-time or just-in-case inventory toward making what we need where and when we need it.

A sizable percentage of the gross domestic product of many nations around the world is tied up in inventory that is sitting unused. As companies replenished their pandemic-diminished products, increases in inventories in the U.S. accounted for 71% of the growth in GDP in Q4 2021. There are vast amounts of raw materials as well as half-finished and completed products gathering dust in warehouses or in transit onboard ships, airplanes, trains or trucks.

At one time, amassing stockpiles of goods in anticipation of possible demand hikes made economic sense. Now, due to the complexity and fragility of our global supply chains, an inventory-driven philosophy has become a costly and unsustainable approach. Toolmaker Stanley Black & Decker found itself in October with in-transit inventory at $800 million, up from $300 million at the start of the pandemic, due to the issues across the supply chain caused by the impact of COVID-19. Supply chains across eight industries account for over half of global emissions, and an estimated 40% of those emissions could easily be abated through the use of renewable power and other efficiencies with only a marginal impact on product costs.

Think about the convoluted journey taken today by consumer electronics or foodstuffs, for example. They are built or harvested, then readied for usage or consumption, and finally, after weeks or months, delivered to consumers. How many different countries, companies, facilities and types of transportation are involved in one or more elements of that lengthy trip?

Simply looking at suppliers, on average, an automaker works with a total of 18,000 companies across all tiers of their supply chain, while a technology company works with more than 7,000 organizations. There are so many different potential points of failure. Retailer Gap faced massive disruption to its supply chain when Vietnam, its top manufacturing country, was effectively closed for 2.5 months due to COVID-19 outbreaks. Any holdup ripples out across our entire supply chain causing delays or even no delivery at all. And, don’t forget to take into consideration the lost revenue and the forfeiting of consumer trust and partner confidence.

Inventory is our failure to predict consumption

We live in an increasingly data-driven world where we already have the technologies to collect, store and query vast amounts of supply chain-related information. Set against the data insights we can gain from the combined use of cloud computing, analytics and machine learning, an inventory-centric mindset is an outmoded concept. After all, what is inventory but a representation of our failure to accurately predict product consumption?

We now have the tools at our disposal to dramatically improve our demand planning capabilities and to mine historical data to fully understand patterns in supply and demand. For instance, PepsiCo uses analytics and machine learning to predict when items are likely to go out of stock and then to alert retailers to reorder those products in a timely fashion. We can further look to apply machine learning to model what-if scenarios to better prepare our supply chains in advance of the next man-made and natural disasters. IDC estimates that by 2023, half of all supply chain forecasts will be automated through the use of AI, improving accuracy of those reports by 5%.

Our traditional manufacturing techniques and logistics can no longer satisfy consumer appetites for rapid delivery of an ever-broadening array of products, while, at the same time, fewer people are willing to work in plants and warehouses. The impact of the COVID-19 global pandemic and, more recently, the war in Ukraine have magnified just how vulnerable our brittle supply chains are to sudden change.

The inventory-based approach fails to work when ports are shut down and ships are backed up and when factory and warehouse staff get sick en masse and facilities have to be closed. To survive and thrive, organizations now understand that they must completely rethink how they source, make and distribute products. It is their inventory-centric mindset which is holding them back from taking that imaginative leap. Instead, they continue to put bandaids on their broken supply chains, including buying extra inventory from more sources, rather than addressing the root causes of the problem.

Scale back on the need for inventory

Changing that thinking which is inextricably linked to physical industries is the first step on the journey to build data-driven intelligent and resilient supply chains that are no longer dependent on transporting goods around the world. It’s ironic that we humans used to know how to predict demand fairly accurately when the point of production was much closer to the point of consumption, as in agrarian cultures.

I believe we’re now at an inflection point where the world is ready to rebuild supply chains that leverage onshoring and nearshoring, adopt the mantra of produce-to-order, and take advantage of innovative new technologies. For example, that’s the case with indoor farming, which can operate anywhere and produce food all year round, and additive manufacturing, which can create a network of on-demand manufacturing nodes.

The combination of data-driven demand planning and truncated supply chains will reduce the necessity for inventory. I’d also anticipate changes in consumer purchasing driven by interest and willingness to buy goods that are locally produced with minimal environmental impact.

Sowing the seeds for success

While a full move away from an inventory-centric mindset will take years, we are already seeing new and established companies successfully rethink elements of manufacturing and logistics. The trend speaks to the success of a new data-driven approach to the supply chain, where inventory is no longer the driving force but shifts to a much smaller supporting role.

We’ve seen Amazon effectively solve the issue of last-mile delivery through the use of software algorithms to accurately predict the most efficient way to put products into the hands of consumers. By rewriting its vehicle software to support alternative silicon, Tesla was able to sidestep the global semiconductor shortage. Long-established vendors have started to rethink their approach to inventory, with some deciding to stay lean like Levi Strauss, which later diversified suppliers. While others, including Nike, rely on technologies like radio frequency identification (RFID) tags to automatically track products across the supply chain to help lower the cost of inventory holding and transportation.

Reap the harvest of a data-driven approach vs inventory-centric thinking

We need to recognize that we can do things in a different, more efficient and sustainable way once we ditch the constraining inventory-centric thinking. When we move away from that view we open up the possibility of rebuilding supply chains that prioritize data-driven reasoning, waste reduction, sustainability and agility.

Our goal is a true fusion of the physical and digital domains, involving the best of both worlds in terms of new infrastructure and leading-edge technologies. This combination enables us to meet customers’ ever-changing needs so they can order and receive the products they need when they need them.

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Tags
  • Inventory
  • Logistics
  • Manufacturing
  • Supply Chain

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