Digging Behind the Recovery for a Solution: When the Numbers Tell a Risky Inventory Story

Kudos to Procurement Leaders for a great article about how current inventory numbers are telling a risky story for the potential of inventory shortages, stock-outs and overall supply risk than appears on the surface. The author notes that, "with the fog that is hanging around the market at the moment ... companies that are more risk-averse have shown a tendency to retain liquidity and keep capacity and inventory down." Put another way, the challenge, of course, is that companies are hoarding cash and ordering less at all levels of the supply chain. The obvious risk in this scenario is that any changes in demand or supply at one tier in the supply chain can have cascading multiplier effects elsewhere in the chain based on current inventory levels, capital availability, etc. What's a potential solution to the issue? My Chicago colleague Paul Martyn, formerly of CombineNet and now at BravoSolution is quoted in the article, and thinks he has an answer in the form of sourcing optimization. And I think he might be onto something here if we all stop to think about how we could use optimization versus how it's typically put into practice today.

Paul suggests that we expand how we look at the potential of optimization to solicit responses and offers from suppliers based on our own internal constraints and requirements given supply and demand. To wit, "Sourcing optimization provides the ability to look at how that balance between inventory and price works and then to go to the suppliers and show them what the opportunities are, how they can work together and what the models look like." It can align "stakeholders ... [and suppliers by] providing a picture" to both parties "that shows 'here's your demand and therefore here's what the trade off is in terms of price and timing'."??

Might this signal procurement getting more involved in traditional S&OP processes? Perhaps. Paul also notes, "Purchasing needs to be able to work with the sales and with operations to provide these forecasts and be facilitators between the suppliers, who are keeping low inventory levels." Yet I'm not convinced that we'll ever get this far outside of high-tech manufacturing. The divides we must cross to get procurement to work closely with engineering and finance let alone sales are far too great in most companies to create a true demand-driven sourcing optimization model in all cases, however forward thinking the suggestion is, at least for most industries. Still, the concept of leveraging optimization as part of a sourcing process with suppliers to analyze potential demand, inventory and other variables, on an occasional and strategic basis for key spend, makes complete sense.

Which solutions would enable you to do this today? Certainly Paul's namesake employer (and his past employer) could do it, as could Emptoris, Trade Extensions, Iasta, AT Kearney Procurement Solutions (leveraging Trade Extensions) and potentially others as well. Ariba has finally gotten on the sourcing optimization bandwagon with increased capability in 10s2 as well.

Jason Busch

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