Supply chains are often divided into make-to-order and make-to-stock segments, each having its own respective drivers; agility or efficiency.
Alignment of supply chain strategy to organizational goals is crucial in optimizing benefits. For example, in a make-to-stock supply chain, where the strategic focus is on maximizing productivity by leveraging economies of scale, it would be more appropriate to take advantage of the lower costs associated with bulk purchases. This is particularly true in any case where production is planned further in advance for long production runs. Make-to-order strategy has its own dynamics, sacrificing some efficiency for greater agility.
Sophisticated distribution services, such as those offered by Avnet, offer solutions that squarely address these issues by providing lower prices from quantity purchasing; reducing the cost and risk in holding inventory; enabling financing flexibility; steadying inventory supply; and making the supply chain more stable.
Inventory uses precious corporate capital, and sellers carefully price goods based on market conditions, including order quantities and scheduling. In some instances, buyers are large market players that make demands on the seller, including vendor managed inventory (VMI) or vendor owned inventory (VOI). The sale price is a response to market demand, and to a certain extent the seller's own internal financing.
In some models where the seller can only deal in limited quantities, the lowest potential unit cost is not realized because demand doesn't justify driving production efficiencies. In other models where the seller, at the behest of a large buyer, owns inventory, the costs associated with holding inventory must be priced into the final unit cost. In these two models, the lowest unit cost is not recognized.
Inventory is the lifeblood of firms in our industry and typically requires large sums of capital devoted to its presence. It is also subject to market conditions and can, therefore, be unpredictable, unsound, unaffordable, or unavailable. When assurance of supply can be provided, firms may rationally plan production, generate forecasts for customers, arrange financing, and allocate capital towards other business needs. Knowing that supply will be available at a certain price, in certain quantities, and at a certain time allows firms to “know” one of their firm's previous “unknowns.”
International banking is becoming a larger factor in inventory management. Rather than serving only as a means to financing, international banking has become an actual physical link in the supply chain. Sophisticated banking institutions partnering with a trusted logistics provider create a contributing player that can serve the supply chain with access to lower Weighted Average Capital Cost (WACC) and operations capabilities. Typical buyers have limitations in access to capital, and their firm's WACC is a characteristic of their size and industry.
A buyer that engages with these bank-logistics provider hybrids can leverage the advantages of unconstrained capital and realize substantial balance sheet benefits. The bank-logistics provider hybrid can offer volume purchasing, thereby taking advantage of the universal commercial principle that sellers offer lower prices for large purchases.
Further, the bank-logistics provider hybrid has, with its access to operations facilities, the opportunity to have large amounts of inventory at the ready over long periods. This allows the ultimate buyer access to inventory realizing direct advantages in working capital, as well as advantages associated with the hidden cost of holding inventory (warehouse space, insurance, administration, etc.).
In order to address a buyer's capital limitations, the risks associated with holding inventory and the challenges of planning manufacturing operations with components that may have a limited life cycle, the assistance of a sophisticated third party can be valuable. Both buyers and sellers can benefit from this innovative trade finance option. Sellers are able to maintain low levels of both days sales outstanding (DSO) and days inventory outstanding (DIO). Buyers realize advantages normally reserved for direct customers such as optimizing purchase price variance (PPV) and a future assurance of inventory availability.
As supply chains and the product development cycle operate with ever-heightened velocity, innovative solutions that target areas such as inventory obsolescence and the management of financial and supply risks can contribute greatly to effective supply chain strategy and enhanced profitability.