Thought Leadership

Inventory Policy Optimization

Unlocking the Cash Hidden in Your Supply Chain

B Y J D A S O F T WA R E S D A N N Y H A L I M , V I C E P R E S I D E N T, I N D U S T R Y S T R AT E G I E S

Danny Halim is
vice president,
industry strategies
at JDA Software.
He is responsible
for developing

strategic supply
chain innovations
for the consumer products industries.
Prior to this role, Halim served as
director of product management
where he delivered innovative
solutions in the areas of supply
chain planning and optimization.
Halim has also held several senior
consulting positions in Manugistics and
PricewaterhouseCoopers.
I
ncreased product mix, integration of mergers and acquisitions,
economic fluctuation and consumer demand variability are just
a few of the current market challenges adding to the complexity
that must be managed by todays supply chain professionals. As
they struggle to try and do more with less, the management of one
their largest financial assets, their inventories, is still being driven
by policies that are mostly misaligned with the dynamics of the
business and based on outdated assumptions. This all results in a lot
of unnecessary cash being tied-up in misaligned inventories.
Thought Leadership
Inventory as a Strategy to Deliver Cash
Back to the Business
For most companies inventory management has been
viewed as an operational process that determines how
much product is needed, where and when. But economic
fluctuations have drastically impacted consumer demand
patternsnot just on a global scale but on a market-
by-market basis. However, a shortage in time, skill sets
and resources have left many companies relying on
tradition and habit to determine inventory policies that
consequently create a disconnect between the present
demand patterns and the inventory policies used to
satisfy them.
According to AMR Research, there is a radical shift from
traditional technologies and processes that focus on
inventory levels to the development of inventory strategies
that define the role of inventory in demand-driven value
networks.1 In doing so, companies that adopt such
technology and process shifts and consider factors such
as cash flow, service-level objectives and go-to-market
strategies are experiencing tangible benefits that extend to
all aspects of the organization.
For example, after assessing its product portfolio and
identifying that 15 of its brands were generating 70
percent of its revenue, H.J. Heinz Company launched a
strategic initiative to rationalize its inventory policies
based on its present demand patterns. With optimization
technology in place on top of existing supply chain and
ERP systems, Heinz implemented a three-phase rollout,
focusing first on categories of items that have the highest
opportunities for inventory reduction. After completion
of the first phase, the company saw a 9 percent decrease
in safety stock levels and freed up $7.5 million in working
capital. These savings are expected to increase with each
subsequent phase.
Finding Hidden Treasures
As the economy continues to fluctuate and the market
shifts, companies are finding it more critical than ever to
have a stronger cash position. Those entering into a merger
or acquisition are looking to free up cash to improve
debt leverage. Others need funds for product innovation
or research and development. And still others need
cash simply for survival. Regardless of the specific need,
strategic inventory policy optimization can quickly uncover
unnecessary capital expenditures.
2
While Heinz has taken significant steps to free up working
capital, not all companies can say the same. In its All Tied
UpWorking Capital Management Report 2009, Ernst &
Young found that the 2,000 largest companies in the
U.S. and Europe could still have up to U.S. $1 trillion
of cash unnecessarily tied up in working capitalan
amount which is equivalent to 6 percent of sales for those
businesses. In other words, for every $1 billion in sales
the opportunity for working capital improvement is, on
average, U.S. $60 million.2 With numbers like these, its
easy to see why market leaders are realizing the impact of
strategic inventory management.
Dont Play it Too Safe
Of course, safety stock is critical to protecting the
business from the risk of out-of-stock situations as a
result of fluctuating market demand. But playing it too
safe will cost the company a lot of money and increase
the risk of obsolescence. Companies should consider
dynamically increasing safety-stock levels where the risk
of out-of-stock is higher, or reduce safety stock where it
is lower, in order to remove excess inventory. To do so, an
inventory policy monitoring solution needs to be in place
to effectively manage this in a practical manner. Now
more than ever, companies are adopting inventory
optimization as a continuous, on-going process instead of
just a one-off project.
Leveraging Outside Expertise to Free-up
Cash from Inventory
Fairchild Semiconductor International, one of the pioneers
in semiconductor chips, wanted to accelerate moving to
more dynamically managing their inventory as a strategy
to free-up cash. Fairchild recently completed an inventory
optimization implementation delivered as a managed
service with software hosted by their technology partner.
Not only was the implementation 50 percent faster than
a more traditional implementation, but it was done at a
much lower cost. As a result, Fairchild now possesses a
robust, just-in-time analysis capability that enables it to
evaluate different forecast scenariosa critical process
during turbulent economic times. Fairchild has also
moved from a 100-percent, manual-inventory review to a
prioritized, exception-based processreducing end-to-
end targets planning, review and approval times by 40
percent. The long-term benefits include lower inventory
costs, higher service levels, flexible postponement
strategies and inventory policies that dynamically adapt to
business conditions.
Thought Leadership

Knowledge is Power About JDA Software Group, Inc.

One of the many benefits of sophisticated inventory
JDA Software Group, Inc. (NASDAQ: JDAS), The Supply
optimization solutions is the ability to allow companies
Chain Company, is the leading global provider of
to construct powerful what-if scenarios for continuous
innovative supply chain management, merchandising and
improvement or contingency planning. Heinz, for example,
pricing excellence solutions worldwide. JDA empowers
can analyze which inventory policies should be adjusted
more than 6,000 companies of all sizes to make optimal
to achieve several million dollars of inventory reduction
decisions that improve profitability and achieve real results
without impacting its overall service levels. With a solution
in the discrete and process manufacturing, wholesale
in place that takes a holistic view of inventory, optimizes
distribution, transportation, retail and services industries.
against budgets, service levels and present demand
With an integrated solutions offering that spans the
patterns, Heinz is well positioned to quickly react to
entire supply chain from materials to the consumer, JDA
changing market demand with a minimum of working
leverages the powerful heritage and knowledge capital
capital.
of acquired market leaders including i2 Technologies,
Similarly, Texas Instruments (TI) had the technology Manugistics, E3, Intactix and Arthur. JDAs multiple
and processes in place to rapidly respond to changes in service options provide customers with flexible
demand when the economy began to take a downward configurations, rapid time to-value, lower total cost of
turn. Unlike its competitors, TI was able to draw down ownership and 24/7 functional and technical support and
inventory quickly and maintain a steady inventory level as expertise.
a percentage of sales, while industry peers saw a sharp rise.

Bottom Line
As companies look to cut excess costs out of existing
operations, optimizing inventory policies offers a quick
time-to-value solution for freeing up cash, improving
service levels and being well positioned to set strategies
in alignment with the most current market trends. Many
times companies can see a return on investment in
just four to six months with minimal IT investment or
organizational change; its an opportunity companies 1 Make Money: Investment Strategies that Matter, AMR Research, May 2009
literally cant afford to miss. 2 All Tied UpWorking Capital Management Report 2009, Ernst & Young, 2009

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