How COOs can manage inventory risk across systems and operations

Inventory risk can lead to problems for an entire organization, with supply chain disruptions, loss of inventory value and price fluctuation all potentially affecting the C-suite.

COOs, CSCOs, CFOs and CIOs can work together on inventory risk management. Two of the most important aspects of inventory risk management are high-quality, integrated data and collaborative relationships with suppliers.

Here are four strategies that COOs can implement to improve their organization’s inventory risk management.

1. Develop a single source of truth

Using different software systems can make it difficult to obtain an accurate, real-time view of inventory and analyze historical trends for forecasting.

Many companies use standalone WMS platforms, spreadsheets, supplier portals and other tools for inventory, sales and customer relationships in addition to an ERP system. This fragmented approach can lead to data silos.

In addition, poor data quality is very common and leads to the “garbage in, garbage out” problem. Poor data quality can lead to inaccurate forecasts, which will lead to chronic overstock, stockouts and aging inventory.

COOs can help prevent data problems by adopting a rigorous approach to systems integration, data quality and data governance. Begin by mapping the end-to-end flow of data, from demand signals through procurement, manufacturing, warehousing and customer fulfillment. The COO should work with the CIO and CSCO to improve transactional discipline throughout those business processes, either by replacing outdated systems or modifying existing ones. Prioritize critical elements like ERP, WMS and planning, and consider incorporating IoT sensors for real-time visibility.

During the integration or consolidation of data, assess the quality of the data and begin developing a data governance program, which will help improve data accuracy, completeness, compliance and accessibility. Develop a system of automated exception reporting, which will help improve and maintain quality, and implement regular data-quality audits, which will prevent small errors from becoming systemic problems.

2. Deepen supplier collaboration and multi-tier visibility

Supplier challenges can include late deliveries, poor quality, capacity problems and financial issues. Organizations that share forecasts, capacity plans and risk signals with their suppliers will have better overall supplier relationships.

CSCOs should own the supplier collaboration strategy, but COOs must be involved as well. Implement Vendor-Managed Inventory where appropriate and build out shared data platforms that give the company’s suppliers visibility into consumption wherever possible.

In addition, companies should map the multi-tier supply chain and implement risk monitoring systems so second-tier and third-tier issues are revealed early as well as including risk-sharing and performance incentive clauses in key contracts. COOs should also ensure that the internal demand signals sent to suppliers are credible.

3. Make inventory risk management a cross-functional responsibility

The old go-tos for managing inventory risk are static safety-stock policies and annual planning cycles. Those strategies are a good starting point, but they’re simply not sufficient today. COOs need to continuously scan for emerging risks and model scenarios as well as possible outcomes.

COOs should establish a routine inventory risk review with COOs, CSCOs, CFOs and any other relevant business unit leaders and use advanced analytics and AI tools to monitor indicators such as supplier financials, commodity prices, demand forecast accuracy and geopolitical trends. Scenario planning can help predict any potential high-impact disruptions and recommend possible mitigation measures.

4. Implement segmentation and dynamic optimization

One-size-fits-all inventory policies usually lead to negative results. Stable, high-volume SKUs should be treated differently than slow-moving or high-variability items, and service-level targets should not be arbitrary numbers but should reflect actual impact on customers and margins.

COOs should mandate ABC frameworks or similar approaches that classify items by value, demand variability and strategic importance, then establish policies for safety stock, reorder points and review frequency based on those classifications. Consider using optimization engines that can recalculate policies as conditions change.

Reviewing and revising categories as needed is also important, as routine reviews prevent the “set it and forget it” mindset that can increase risk exposure over time.

COOs can use these four strategies to help their organizations be more resilient, proactively manage inventory risk and deliver more consistent service.

James Kofalt spent 16 years at SAP working with SME business applications and was a product manager for integration technology at Microsoft's Business Solutions division. He is currently the president of DX4 Research, a technology advisory practice specializing in ERP and digital transformation.