DC Velocity - IdeaBook 2014

3. Implement differentiated inventory policies

Inventory may be the area where supply chain segmentation has been employed most often in the past five years. Inventory optimization has progressed during that period to become a process-driven discipline of regularly determining what inventories to carry, where, in what form, and in what quantities across a multiechelon network. Once again, this starts with the foundational step of understanding the value propositions offered for each customer/ product intersection. Based on this information, companies use analytic tools to evaluate the entire network and determine the stocking policies for each product at each stocking location.

This process will include determining how much fin-ished-goods inventory to carry downstream at regional distribution centers (DCs), upstream at central DCs, and at factory locations. It will also include deciding where to incorporate postponement strategies by determining how much inventory to carry in semifinished mode or as components to help offset higher demand variability or to reduce costs for products that have different service requirements.

Figure 5 shows a simplified example of a company moving away from a one-size-fits-all fulfillment strategy to multiple strategies for different customer/product profiles. This simple example illustrates the ability to reduce downstream inventories by serving some customer/product segments from upstream sources, thus taking advantage of the pooling effect.

4. Implement differentiated customer replenishment programs

Different customers will have different replenishment
relationships, based on the service required, the volume
and profitability of that customer, and the channel used to
support that customer. For example, a high-tech consumer
electronics company typically deals with multiple chan-
nels: retail, distributor, enterprise, and Web. Each of these
channels should have different replenishment programs.
Enterprise customers might be served through a combi-
nation of configure-to-order and build-to-stock strategies.
Retail customers, meanwhile, could be served through
build-to-stock along with a combination of distribution
resource planning (DRP); vendor-managed inventory
(VMI); collaborative planning, forecasting, and replenish-
ment (CPFR); and emerging point-of-sale (POS), analyt-
ics-driven collaboration. Further segmentation within each
of these channels would provide differentiated service based
on customer/product dynamics. The type of replenishment
relationship between a manufacturer and a giant, big-box
retail chain will be different than that with smaller retailers.

An emerging trend in retail replenishment is the increasing use of analytical information based on point-of-sale data to drive orders from the retailer to the manufacturer. This is part of a larger trend toward manufacturers looking further downstream to leverage independent demand (demand for an actual end product that is bought and used by a consumer or customer) to drive their upstream operations. The intention is to reduce the “bullwhip effect” that comes from using dependent demand, which is derived from independent demand.

Sony Electronics has successfully used this POS-analytic-driven replenishment approach with its customer Wal-Mart Stores to improve its in-store availability while reducing channel inventories. These sophisticated approaches are appropriate for certain segments, but other replenishment