The following posting can also be viewed and commented upon on the Kinaxis Expert Community web site.

The nature of inventory can evoke a lot of opinion and management response.  Most senior financial managers and some CEO’s believe that too much inventory is a detriment to working capital performance. It is just plain, evil. Marketing and sales executives view inventory as an ultimate enabler, and having inventory of a hot selling product is tantamount to ‘candy’ to a child, or exclaims, “Give me more!”

Our community knows all too well that having the right balance and composition of inventory is the real test in the ability to satisfy all stakeholders. A previous mentor of mine, Larry Lapide would often evoke the cholesterol analogy regarding inventory in his presentations to clients.  There is good and there is bad cholesterol in our bodies, and the challenge is to optimize good and minimize the bad as much as possible.

There is a rather interesting business situation being played out, which includes inventory, and it involves supply chain icon Wal-Mart.  The world’s largest retailer recently reported its fiscal Q3 quarterly earnings, and while announcing a 9 percent increase in profitability, this retailer experienced the sixth straight quarter of declining growth in existing U.S. outlets. Nearly a fourth of overall sales now originate from non-U.S. retail outlets. Wal-Mart is quick to note that the condition of U.S. consumers has a lot to do with fueling this declining U.S. sales trend. The retailer points to a “pronounced” pattern of store sales at the beginning of the month, as soon as paychecks and welfare payments are issued.  The implication is that U.S. retail consumers have little to spend, have a difficult time in managing cash flow, and have a very keen focus on value. Meanwhile, rival retailer Target Corp. recently reported a 1.6 percent increase in same store sales, with traffic counts up by 2.1 percent.

For those readers unfamiliar with the Wal-Mart situation, there is some history to reflect upon.  Wal-Mart suppliers are acutely aware of the relentless focus on supply chain cost, which includes inventory, payables and process efficiencies. The latest initiative is a program directed at purchasing more goods directly from select global suppliers, bypassing intermediaries. Wal-Mart believed that it could gain even more efficiency through direct purchases of standard items.

In late 2009, Wal-Mart embarked on an aggressive store re-vamp and inventory reduction program.  The intent was to stock only high volume, high demand intems while creating a more streamlined, uncluttered look and feel to a Wal-Mart U.S. store. The premise was value at traditional low prices. Gone were the days of stocked pallets placed in main shopping aisles giving the appearance of a cluttered warehouse atmosphere. The new merchandising plan was designed to help customers navigate easier and located expensive or impulse items in select high-traffic areas.

At mid-year, Wal-Mart reversed course, re-assigned certain U.S. management, and is now adding more merchandise variety to stores. The Wall Street Journal noted that inventory has grown 7.7 percent compared to a year earlier.  By my calculation, in the most recent quarter, days sales of inventory is up to its highest level ever, no doubt in anticipation of an aggressive holiday buying season.

Rival Target has also embarked on a revised U.S. store merchandising program, but the results thus far, seem to be different.  Target speaks to a strategy that allows customers to indulge in small, affordable ways. Target also emphasizes that it is striving to constantly listen to customers and fulfill customer shopping needs.  Both retailers currently stand at very similar days inventory outstanding profiles, yet U.S. sales performance is different. In food and grocery items, Target is boosting food item selection with strong indications that this has been a multiplier effect on same store sales.  Wal-Mart on the other hand, may be losing food and grocery sales to not only Target, but a Costco Wholesale as well.

Technology and business process methodologies have come a long way in the ability to optimize merchandising, plan shelf space, analyze and optimize inventory investments based on consumer needs and revenue targets.  Management behavior or intuition it seems, has not made the same rate of progress.

What’s your view?

Bob Ferrari

Yesterday, I had the opportunity to attend the AMR Research / Gartner Healthcare Exchange 2010 event held in Boston.  The program brought together both AMR Research analysts and a select group of supply chain related executives in addressing current and future challenges within healthcare and life sciences related supply chains.  This event was also a staging point to announce AMR’s Healthcare Supply Chain Top 25 listing of companies, similar to AMR’s Top 25 Supply Chains Rankings.

For me, one of the most insightful portions of the program involved a lively panel discussion that included four industry executives representing Orlando Health, Dana Faber Cancer Institute, Cook Medical, and Broadline Group.  It was one of the better executive panel discussions I’ve observed this year. These executives each did a great job at providing both a customer and patient lens for the ongoing challenges involved in healthcare supply chains, as well as the key challenges needing to be addressed.  One clear takeaway from this and other exchanges is that the current path of healthcare-supported supply chain processes is unsustainable from both an overall cost and services perspective.  The audience, made-up of manufacturers, other health and technology providers, provided, in turn, more insightful Q&A interchange.

There is an acknowledged need for increased alignment in overcoming barriers of shared outcomes, increased efficiency and more cost effective service levels.  Hospitals are frustrated with manufacturers who market, sell and service directly with individual  physicians or clinicians, without some consideration to the need for inventory and service balancing.  Manufacturers, in turn, drive the perception that they prioritize the need for market share and demand creation over helping partners improve overall efficiencies along the supply chain.

In a previous Supply Chain Matters commentary, we noted that the challenge of reducing healthcare’s value chain costs and improving collaboration was bigger than any one player in the network.  Those messages were again delivered loud and clear by the panel participants in the AMR exchange, but there were signs that some progress is being made. Providers and suppliers are starting to better understand where they can align for mutual outcomes.   Clearly, one end goal on which all can agree is the need for the entire value-chain to align to benefit patient and provider needs.  Excess inventory and an overall tendency toward priority air as the prime mode of transportation service level are systemic challenges that need to get solved.

A couple of other observations come to mind.  First, there was a lot of emphasis placed throughout the day on the need for increased collaboration among healthcare supply chain participants.  What I did not sense was more emphasis of segmentation of value-chains, namely understanding supply chain models that can support commodity or replenishment-oriented items vs. models that deal with innovative, time-sensitive, or highly specialized clinical or pharmaceutical supplies.  Some of the panelists indicated that A-B-C inventory classification planning methodologies were being practiced but these methods do not totally address the broader classification and deployment of different value-chain management processes.  Each requires a different perspective on collaboration models and activities, especially around physician-specific supply needs. I came away with a sense that a lot more value-chain segmentation, blocking and tackling concerning process improvements, and a higher sense of urgency among healthcare value-chain participants are the prescriptions for meaningful transformations.

Finally, a comment on the designated AMR / Gartner Top 25 healthcare supply chain rankings.  First, as with the broader Top 25 Supply Chain rankings, too much weighting seems to be placed on subjective and qualitative vs. financial and performance oriented weightings.  This writer just about fell off the chair when Johnson and Johnson (J&J)  was announced as the #2 ranking, ahead of manufacturers such as Novartis, Becton Dickinson, Glaxo Smith Kline and others.  This is the same J&J that experienced a severe breakdown on manufacturing quality that involved multiple over-the-counter brand name product recalls this year, the closing of an entire manufacturing facility, and the acknowledgement from the CEO that the company stumbled. That was a shocker, not so much that J&J would be included in a top 25 ranking, but that it would be ranked that high.  Then again, 2010 is turning out to be the year of ranking extremes.

Bob Ferrari