The two most durable, work-related, technology-driven changes to come from the COVID-19 pandemic will be a lasting transition to remote work and a wholesale reconfiguration of global supply chains. The former trend is patently obvious to most office workers, who are more accustomed to chatting with their dog or cat than with a coworker at the watercooler, but the latter is only beginning to be understood.
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The perils and pros of inventory
It doesn’t take a CPA to question the perils of holding an excessive amount of inventory. If you’ve ever walked through a warehouse and noticed racks of dusty raw materials or semi-finished goods, you’ve probably wondered how much money was tied up in that material. Continuing that thought process, it’s easy to quickly realize that warehouse space, worker time to move and manage the inventory, and the risks of the inventory spoiling or becoming obsolete further add to the costs of maintaining inventory.
It’s relatively easy for a new manager or executive who wants to make his or her mark to start culling inventory. With the aid of technology, it became possible to run even a complex manufacturing operation with essentially zero inventory. Companies like Toyota pioneered “Just in Time” manufacturing and lean techniques that used the power of technology to create increasingly accurate forecasts that allowed companies to hold near-zero inventory. Data and automated connections to suppliers kept their operations running at full capacity by providing them with to-the-minute updates of their inventory needs.
In the more advanced examples, suppliers own the parts and raw materials until the second they’re assembled, allowing the manufacturer to have that part on their books as inventory for milliseconds rather than months.
These techniques rely heavily on technology to automate the forecasting and complex information flows between manufacturer and suppliers. To an extent, they also push an obligation onto suppliers to maintain similarly complex systems. As the intent is to drive cost out of manufacturing, many suppliers also adopt low-inventory standards. The major risk, of course, is that a tiny ripple in this complex system causes significant disruptions.
Near-zero inventory was generally a beautiful thing, until the COVID-19 pandemic caused demand for everything from toilet paper to automobiles to go haywire, and in the span of six months, we’ve seen commodities, consumer products and everything in between rocket between massive shortages and massive oversupply.
Companies like Ford Motor Company recently announced that it will take a $2.5 billion hit to earnings due to the global semiconductor shortage, and presumably, there are more than a few people at Ford pining for a warehouse full of chips. Ford’s Kentucky Truck Plant has hundreds of trucks sitting in parking lots, waiting for chips as the shortage wears on. Where excess inventory once seemed like the corporate equivalent of a messy kitchen, a sign that you weren’t advanced enough to clean up your own proverbial house, inventory now looks like a cheap insurance policy in the face of still-uncertain supply and demand.
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The answer to these challenges can’t simply be more inventory everywhere. However, the initial response may indeed be a renewed interest in safety stock, adding additional suppliers and developing more robust procurement systems and analysis to avoid demand-driven price shocks. As this shift gains momentum, IT has a critical role in sensing and predicting supply chain disruptions and adapting inventory levels accordingly.
Tech leaders will again be supply chain leaders
While it might seem like inventory management and supply chain optimization were topics for a dozen years ago, if you haven’t already started having conversations in these areas, they will likely start happening soon. In the immediate term, IT leaders will be called on to update software systems to better manage inventory and safety stock and rework various processes and reporting to carry additional inventory.
The longer-term fix will likely involve using analytics and artificial intelligence to determine the right inventory to carry, and preemptively build stock before disruptions occur. In extreme cases, companies may even dust off old concepts like vertical integration and seek to own most aspects of their production processes and the associated resources, rather than relying on complex supplier networks that serve multiple customers.
As technology leaders, it’s important we understand these macro trends. Ideally, you’re already considering the implications of a massive and wholesale rethinking of global supply networks and your company’s role in adjusting. Arriving at these conversations prepared with thoughtful potential approaches makes you a valued leader, not just the person to call when it’s time to implement.