The Cure for Chronic Inventory Distress

You would think that an industry as numbers-oriented as high-tech would have conquered supply chain management. Clearly, {complink 7426|Gartner Inc.} thinks so. Nine of the companies in its 2011 Supply Chain “Top 25” are high-tech firms. But, in fact, many high-tech supply chain executives privately concede they have major challenges with inventory performance.

High-tech businesses often cannot satisfy demand for their most popular products due to availability issues, and they also experience inventory overhangs when a slump in demand catches them off-guard. The fix for this problem is creating a segmented supply chain based on product lifecycle.

Segmentation has been around for decades as a marketing discipline that targets the subset of prospects most likely to purchase a product or service. But it can also be used in supply chains as a means of aligning capabilities to serve customers efficiently and avoid waste or product shortages.

In supply chain segmentation, the chain is divided into manageable categories according to the desired organizational response to demand. While you can segment many parameters, there is a strong reason to consider focusing on product lifecycle. That's because 80 percent of availability and overhang issues in high-tech are created by just 10 percent to 20 percent of products — typically the shorter lifecycle products or components. Fix these, and you'll fix 80 percent of your supply chain problems.

Most US companies have at some point utilized a basic form of supply chain segmentation, such as segmenting on rate of sale, country of origin, customer tiering, channel to market, or criticality of supply. {complink 1544|Dell Inc.} has taken this a step further by segmenting according to product variety, level of customization, forecast accuracy, volume, and the potential cost of lost sales.

Dell's approach is a step forward within high-tech, but for most companies the biggest pain point is product lifecycle. {complink 1131|Cisco Systems Inc.} experienced product lifecycle pains a decade ago and was forced to take a $2 billion write-off. Since then it has operated a bearish inventory strategy at the cost of periods of lower product availability. More recently, Acer and Texas Instruments experienced highly-publicized bouts of inventory distress.

Lifecycle segmentation is surprisingly straightforward. Consumer and retail organizations headquartered in Europe such as Tesco, Marks & Spencer, and Unilever have been applying it for years. To understand if it's right for your company, you need to examine two approaches, and for each ask which attributes to segment, and in which order.

The first planning approach is based on the anticipated length of a product's life, which is the primary driver of availability as well as obsolescence. Most organizations should be able to segment products into three relative groupings: 40 percent long lifecycle, 40 percent medium lifecycle, and 20 percent short lifecycle.

The second planning approach concerns where the product or product elements currently reside in their lifecycle status. There are three product stages:

  • Launched and live.
  • The stage in which sales are stable or actively growing.

  • Distressed.
  • The stage in which sales are showing signs of erosion (this is a key area for predictive analytics where subtle changes in demand signals can have great meaning when data is correctly manipulated).

  • Obsolete.
  • The stage in which sales have all but ended.

This second approach to planning can be highly valuable in the correction of early issues; it also provides more accurate stock valuation than simple stock aging.

Segmentation will drive substantial operational changes in your supply chain execution, the most visible of which will stem from your planning approach. It's likely that 80 percent of your product will slot into the longer lifecycle/lower volatility segments, which is a great fit for highly automated ERP systems. This frees up resources to focus on the 10 percent to 20 percent of products with shorter lifecycles — the ones likely creating most of your inventory distress. These products are better suited to complex predictive analytics, collaboration tools such as Kinaxis, and a high level of expert intervention.

Product segmentation is a major change in thinking for high-tech, which tends to spread supply chain expertise evenly across categories, instead of focusing efforts where the most value can be added. It's also a major change from a systems perspective, since most high-tech firms expect ERP to fulfill both of the very different planning approaches, which leads to unnecessary complexity, high implementation costs, and underwhelming results.

In my next blog, I will highlight some of the benefits companies can expect to gain from implementing lifecycle segmentation.

4 comments on “The Cure for Chronic Inventory Distress

  1. Eldredge
    August 4, 2011

    Predicting, then meeting demand is a very challenging problem, and impacts inventory dramatically. One thing you can guarantee about a prediction – it will be wrong! The trick is to not be wrong by too large a margin.

  2. Shrikant K
    August 5, 2011

    The points /remedial measures given by Chris look to be relevent to FMCG/Retail industry. But in telecom operator service indusrty the challanges of obsolescence is daunting. The telecom industry undergoes technological evloution every 4-5 years from say 2G to 3G TO 4G. This leads to high level of obsolecsence . Second factor which leads to mismatched inventory is hetrogencous bill of quantity of installtion kits required at diff cell sites.

    However the apparoch suggested can be surely tried ,may be with limited likely success.  



  3. mfbertozzi
    August 7, 2011

    It is a very fascinating editorial; while vendors/producers products' portofolio is increasing, segmentation becomes a critical internal process to manage. Focusing on telecom market, I agree with Shrikant, I suppose also one more factor to consider is end users trends, very difficult to predicte in advance. Maybe major producers have to cross check also those infos (trend changes fast region-by-region) in order to finalize better segmentation model.

  4. JADEN
    August 20, 2011

    The rationale behind marketing segmentation is to allow businesses to focus on their consumers’ behaviors and purchasing patterns. If done effectively, marketing segmentation allows an organization to achieve its highest return on investment in turn for its marketing and sales expenses.

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