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Lessons from COVID-19: 4 inventory management strategies
COVID-19 highlighted a number of problems with current approaches to inventory management. Here are four strategies that leaders can use to correct those inefficiencies.
The outbreak of COVID-19 has exposed the fragility of the global supply chain and, in turn, the organizational structures of many companies.
To understand why, it helps to look at supply chain management philosophy before the COVID-19 pandemic hit.
Pre-COVID-19 supply chain management
As companies aimed to operate more efficiently, save money and eliminate redundancies, many relied on tightly coupled, interdependent systems, said Howard Yu, the LEGO professor of management and innovation at the International Institute for Management Development in Lausanne, Switzerland.
"In this type of system, there is little slack and few buffers among its parts and, as we are seeing now, little room to maneuver when something goes seriously awry," Yu said. "Dependencies span vast geographic distances, and they can be especially vulnerable to delays in another part of the chain."
A rapid pivot is the only path away from hurtling toward bankruptcy, he said. The resilience of successful companies is due to a simple fact: They have transformed their traditional business models rapidly -- literally overnight.
In the auto industry, for instance, manufacturers -- from Toyota in Japan to General Motors in the U.S. -- all rely on parts from China, and the industrywide emphasis on just-in-time delivery means they don't carry much safety stock, Yu said. In normal circumstances, this system is extremely efficient and productive, but no one can build a car with only 99% of its parts, he said.
For example, when Hyundai first shuttered its assembly plants in South Korea in February, it wasn't because of the rampant spread of COVID-19 in the country, but because Hyundai couldn't keep its plants open without Chinese parts, Yu said.
"In an inflexible system populated with companies run from the top down that are too slow to adapt, those channels that prove so efficient in periods of calm are now a source of severe disruption," he said.
4 critical inventory management strategies
The COVID-19 pandemic has provided numerous lessons, including for all aspects of the supply chain. Here are four inventory management strategies supply chain leaders and inventory managers can use going forward.
1. Pay closer attention to consumer signals
Today's leaders must pay even closer attention to customers' demands than they ever have.
As the COVID-19 pandemic began, companies experienced abrupt shifts in customer demand and channel preferences, said Suketu Gandhi, partner and global leader for the digital supply chain at Kearney, a consulting partnership in Chicago. The organizations that weren't prepared likely failed their customers, he said. To have avoided this, companies needed as much visibility as possible into their inventories.
"Your fundamental techniques of inventory management were [likely] based on a [core] principle that said, 'What happened yesterday has a pretty high likelihood of happening tomorrow,'" Gandhi said. "When that rule was broken [due to COVID-19], everything went haywire."
The companies that navigated this successfully after the first initial shock took their signals from the end customer.
Some e-commerce retailers are seeing a 250% increase in demand for such products as hand sanitizers, soap, and cold and flu medication, Gandhi said. When it comes to these essential health needs, it's important to check on inventory levels, particularly in areas where there are more coronavirus cases.
In addition, companies should establish stronger communication channels with their distribution networks so they can share information more accurately to identify regional demand patterns, he said.
However, businesses should question whether the demand signals they're receiving from their end customers in the short and medium term are realistic, according to the McKinsey & Company report "Supply-chain recovery in coronavirus times -- plan for now and the future."
"The demand planning team, using its industry experience and available analytical tools, should be able to find a reliable demand signal to determine necessary supply -- the result of which should be discussed and agreed upon in the integrated sales and operations planning process," the authors noted.
2. Focus on data
Because inventory management can be so complex, prioritizing data is a critical inventory management strategy for virtually every company.
Take the example of Direct Relief, a nonprofit, humanitarian aid organization based in Santa Barbara, Calif., that distributes donated life-saving medical resources to doctors and nurses worldwide free of charge.
In the early days of the U.S. COVID-19 outbreak, Direct Relief's business intelligence software provider, Qlik, reached out to understand how it could help, said Andrew Schroeder, vice president of research and analysis for Direct Relief. The answer: Direct Relief needed clear and clean data -- and lots of it -- so it could deliver medical aid where it was most needed.
Direct Relief routinely runs its core business analytics in QlikView to operate its humanitarian warehousing and distribution operations, Schroeder said. However, because of the COVID-19 pandemic, it's important for Direct Relief to connect these operations with the constantly changing epidemiological information about the spread of the virus, risk factors and its impact on medical infrastructure.
So, Qlik developed a supply chain application to provide the organization with valuable insight into the regions, counties and individual healthcare systems with the greatest need for masks, gloves, gowns, intensive care unit medicines and more.
The data analysis app, which is updated in real time, enables Direct Relief to constantly track the changing dynamics of COVID-19, Schroeder said.
"[This app] brings epidemiological data and clinical capacity information in so we can do contextual analysis around the progression of the outbreak and the linkage into the risks at various places so that we could link together our shipment planning with more of a view of how the disease was shifting," he said.
Accurate data -- properly selected and transformed into insightful information -- is one of Direct Relief's best weapons against the pandemic, Schroeder said.
3. Diversify the supplier network
The organizations that are better positioned to weather the COVID-19 outbreak or any pandemic are those that are able to quickly find alternative suppliers to keep operations running, said Ben Shrewsbury, who leads the global operations and supply chain officers practice at Russell Reynolds Associates, a management consulting firm in New York City.
Ben ShrewsburyGlobal operations and supply chain officers practice lead, Russell Reynolds Associates
The COVID-19 pandemic has caused organizations to consider investing in more "flexible and resilient" supply chains -- that is, supply chains that can resist disruptions and recover operational capabilities after disruptions occur -- by adding additional sources of supply for critical items so they can quickly pivot to meet changing market demand, he said.
So, the lesson learned is that the companies that have built-in levels of redundancy and aren't just-in-time-optimized when it comes to inventory are better positioned to meet customer demand, he said.
For example, if an organization's suppliers are typically in East Asia and China, it's important to have the ability to look at other markets, such as Vietnam, Singapore or Malaysia, to enable the company to adapt in the case of a global pandemic, such as COVID-19, or even political or financial risk, Shrewsbury said.
"Flexibility in terms of the ability to reposition or have a nimble network that will allow companies to respond appropriately is necessary," Shrewsbury said. "Although speed and cost to serve remain important, supply chain flexibility and resilience have proved to be critical differentiators."
4. Focus on inventory accuracy
Another critical inventory management strategy is understanding what products are accessible.
During the COVID-19 pandemic, the accuracy and reliability of an organization's inventory levels have become exceedingly more important, said Bernie Donachie, global supply chain lead for Protiviti Inc., a consulting firm in Menlo Park, Calif.
"Knowing what you have -- being precise about what you have -- is really important, and where it's located is also important because some organizations have distributed inventory in multiple locations," he said. "You have to understand what's in each one of those warehouses, how accurate the records are, whether people are updating inventory when they put something in or take something out."
Organizations that don't have good inventory management processes and access to accurate numbers will likely find themselves struggling to keep up with demand in some categories or having an oversupply of items that customers are suddenly less interested in.
"Problems arise when a company thinks it has 10 weeks of inventory of a particular item in its warehouses and then realizes that it really only has six weeks of inventory," Donachie said. "And then, if your vendors are impacted by COVID-19 either because they're a nonessential business or they're shut down for whatever reason, you've lost your ability to deliver to your customers, and in this example, you've lost four weeks of revenue."