In these times of seemingly endless disruption, one powerful strategy for riding the waves is inventory optimization.
To learn more about the why's and how's of this, I invited Robert Olszak from global consulting firm RGP to come on the podcast to talk about it.
We had a fascinating conversation covering the different inventory optimization options, best practices in inventory optimization, and where to from here.
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What it comes down to is the cost of goods sold. The balancing act between, as prices increase globally for raw materials and as shortages continue to be a pressing issue, creating supply chain disruptions, how do we become more resilient in the supply chain environment, to offset supply shortages rising costs at the same time, maintain a competitive position in the marketplace based on pricing?Tom Raftery:
Good morning, good afternoon, or good evening, wherever you are in the world. This is the digital supply chain podcast. The number one podcast, focusing on the digitization of supply chain. And I'm your host global vice-president at SAP Tom Raftery. Hi everyone. Welcome to the digital supply chain podcast. My name is Tom Raftery with SAP and with me on the show today, I have my special guest Robert. Robert, welcome to the podcast. Would you like to introduce yourself?Robert Olszak:
Yeah. thank you, Tom. My name is Robert Olszack. I'm the VP of Global Supply Chain Optimization with RGP, which is a consulting firm that operates in 48 countries around the world. Uh, offering a portfolio of services ranging from finance and accounting to business transformation, to project and change management, human resource intelligence, and then obviously global supply chain with tech and digital.Tom Raftery:
Okay. And you said supply chain optimization is your area of expertise. What aspects of supply chain are you keen on optimizing?Robert Olszak:
Great question. So, you know, in today's modern world, and as a result of COVID, I think optimization, resilience, terminology, like that has become commonplace, but means something different to every organization. But I'm very privileged to work with, uh, two colleagues, Ron Rod and Jessica Harrison, really between the three of us, we kind of divide and conquer and obviously provide, solutions that support more than 3,400 clients globally and range everything from full end-to-end supply chain, including a lot of your procurement and sourcing functions, category management. And then my specialization area of expertise and oversight resides mainly in manufacturing, distribution, logistics, and supplier managementTom Raftery:
Okay. And you mentioned in the prep call that, the area of inventory optimization is one that you're particularly keen on at the moment. Why is that? What's what's wrong with inventory right now and how, how best to optimize it?Robert Olszak:
It's, it's interesting because when I first started in this industry more than 30 years ago. And you would tell somebody that you work in supply chain, they kind of would look at you with a puzzle look and not everybody really understood what that meant, today as a result of the pandemic and a lot of the mainstream media attention given to supply chain, especially on a global scale. I think everybody understands it. And I credit Amazon really with kind of bringing that to the forefront because when I talk to laymen, you know, a lot of times I just use the Amazon analogy. It's like you go online, you order something two days later shows up your doorstep, that is supply chain. But I think supply chain really has become a much broader, domain, if you will. And the levers that drive it have become more expansive in the process. So, it's far greater than just moving a product from point a to point B and what we've seen with the globalization, you know, with economic globalization, and then subsequently supply chain globalization is the interdependencies in so many different peripheral or external influences that really drive how commodities and goods get purchased and moved and manufactured and delivered around the world. So what you see in supply chain now is a much more integrated and holistic approach, versus maybe what we saw when I first started in the industry about 30 years ago. So when I talk about supply chain, And when we talk about supply chain optimization, and when we're speaking with clients who are dealing with, you know, relevant and pressing supply chain issues and barriers to performance, it really encompasses a lot of different things ranging from, you know, how they source suppliers, how they manage contracts with suppliers, the types of technology or technology, enabling tools that they're employing, how they're managing customer service levels. And then most recently. This, you know, accelerated emphasis on data management and data governance, how we're capturing data. So obviously as the world continues to evolve, as we become, as customers become much more keen on getting product faster in having real time visibility to how product is moving from the point in which they place the order, it's really putting a significant burden on companies. You know, whether it be the retailer the distributor, the whole seller, the manufacturer, or the final mile delivery to, to really meet and exceed those expectations. But in doing that, it really comes down to product life cycle management. So how do we, anticipate demand? How do we go about the demand forecasting process? And that becomes in particularly a unique challenge in today's landscape with the, uh, current inflation, with all of the disruptions that we've been experiencing for the last two years related to COVID you come outta COVID you think there's some level of normalcy. And then next thing you know, we have the war in Ukraine, which is a very unfortunate experience. And then on top of that in recent months, you've had manufacturing, shutdowns. You've had geopolitical tensions that have kind of shifted the emphasis on tarriffs and how products are moved across borders, port congestion. Uh, so there's just so many different things that are really driving this conversation around inventory optimization. And as a result of that different companies within different industry segments or approaching how to best plan for inventory, how to manage inventory levels. How to anticipate consumer demand, how to better allocate working capital. And then more importantly, as it would apply to the nature of this podcast, what technology enabling tools and how fast can they accelerate the maturity of their digital ecosystem to provide a better customer experience without it's without jeopardizing profit margins at the same time without passing the rising costs onto the consumer.Tom Raftery:
Okay. that's a lot to digest there. Thank you.Robert Olszak:
Yeah, it is. It's a lot to unpack.Tom Raftery:
Yeah. Yeah. Yeah. So let let's unpack it a little. I mean, we've seen, as you said, rightly lots of disruptions and increasingly we're seeing more due to things like the war Ukraine and the zero COVID, uh, policies outta China, et cetera. What kind of advice are you giving customers on ways to deal with that?Robert Olszak:
I really believe it depends on the organization and the industry that they're in. So for example, and I, as much as I'm an academic and a data geek, I'm also very practical. I don't like having these types of conversations necessarily in a theoretical environment, but you know, the things that we're seeing in the market today, even though universally common. So for example, supply shortages, we heard early on about the semiconductor issues and then out of the war with Ukraine, we've seen additional agricultural delays and shortages there. As a result of the rising gas prices and going back even to the freeze a couple years ago in Texas, we've seen significant shortages in packaging. So there's this convalescence or, you know, this coming together of multiple variables have created kind of this perfect storm, but it impacts every organization and every type of commodity a little differently. So just last week, as, as an example, I was on a call with, the head of supply chain for a major pharmaceutical company. And one of the things that they're challenged with is, how do they keep up manufacturing production to satisfy demand, especially with antivirals around COVID gene, cell therapy and, and new products that are coming to market as a result of, you know, biopharma, R and D. And one of the things we're seeing in the pharma space for example, is the concept of postponement distribution. So what, what that essentially means is that they're producing larger quantities of medicines or antivirals or, this even applies to some degree with the medical device industry as well, but we're seeing a larger surplus of inventory being produced, just not packaged for distribution until the orders come in. So whether I'm shipping in the us or I'm shipping to Brazil or I'm shipping to Asia, there's different FDA compliance regulations, different packaging requirements. So one of the ways that they're managing inventory and, and helping to better reduce the working capital cost is by using a postponement strategy. On the flip side, when you look at retail, and if you pay attention to some of the things that have been published here recently, for example, there was just an article that came out within the last two weeks, regarding Walmart and Target specifically where, you know, they were responding to demand shock. And if you go back two years at the beginning of COVID, I think one thing that caught everybody by surprise was the shortage of toilet paper. You know, nobody would've anticipated that you're gonna go to your local grocery store and you're not gonna be able to buy a toilet paper. And, you know, as the pandemic continued and as manufacturing facilities shut down as borders shut down, as people went into quarantine, you saw different consumer behaviors start to unfold. And so one of the things that we've seen and when we talk to different clients and the reason I say it's industry specific is you have to look at really some of the psychology of the behaviors and the consumer base, it's impacted a lot of different organizations. So another example would be, despite all of the issues, uh, with people being laid off, working remotely, being furloughed and then different things that impacted the workforce. We saw an increase oddly in the construction industry, home prices went up, we saw more people doing renovations at home because they're spending more time at home. We saw, more adoption of pets or, purchasing of pets. And so there were like these weird kind of niche markets that grew at an accelerated rate year over year. That kind of was unanticipated. So when you look at things now, fast forward two years, You see companies like Chewy and companies like, in the pet food industry in particular that are doing more bulk buying to keep that consumer demand satisfied and they're stocking at higher levels within their warehouses. Then we've seen other companies in the retail market where now they have a surplus of inventory and they're trying to figure out how to get that to market, but what's happening is now they're having to sell it at a lower cost, which is impacting profit margins in part throughout all of this we've also seen because of the supply chain shortages and port congestion. We've seen a significant change in the distribution models. and I'm gonna call it a hybrid model. So traditionally, in many instances you have this kind of hub and spoke model where you have large DCs. Now we're seeing more region regionalized, DCs, we're seeing smaller warehouses, some of that's capacity constraint driven. Some of that is trying to get product closer to the end customer, which is, a part of inventory segmentation. And then in your larger retailer consumer product industries, we're seeing, things like SKU rationalization, how can we improve the manufacturing capacity? How can we be provided better and more responsive and more timely customer experience by carrying less SKUs or consolidating SKUs So there again, it's, a very interesting subject to unpack because there's so many different approaches to the concept of inventory optimization, depending on the industry vertical that you're talking about.Tom Raftery:
Sure. Sure, sure. A lot of what you're saying, if I were to boil it down, though, talks to the requirement for organizations to become more agile in their approach, right?Robert Olszak:
I agree. And I think what, you've seen and from my experiences with clients globally, and, and again, this is not just a domestic issue. We see this in Europe. We see this in Asia. We see this in Latin America is. The volatility of consumer behavior and, oddly enough things like social media influence. I heard this strange story the other day where, this one lady who owned a boutique shop closed the boutique shop during COVID and then started this online business outta social media, and is particularly watching social media trends in terms of what people are buying and then would buy large surpluses of this and then sell it. And these are just, one offs obviously, but so much of what we're seeing is really within the small business to middle tier market driving, a lot of the consumer purchasing and, satisfying consumer buying, behaviors. However, interestingly enough, those are the same segments that don't really manage inventory. Don't use automated tools. I read a, a statistic recently that I think 43% of what they classify as technically small businesses don't reconcile inventory or manage inventory manually. They don't have an automated tool to do so. And these are, companies or, businesses that are trying to prevent going bankrupt, trying to navigate COVID trying to navigate the, tight labor market where compensation is becoming a driving factor in how people decide who they want to work for. So it's interesting I think that's where you're gonna see a lot of acceleration. And we've seen a lot of acceleration kind of in that middle tier market towards inventory optimization tools. But at the same time, I think what it comes down to is the cost of goods sold. The balancing act between, as prices increase globally for raw materials and as shortages continue to be a pressing issue, creating supply chain disruptions. How do we become more resilient in the supply chain environment, to offset supply shortages rising costs at the same time, maintain a competitive position in the marketplace based on pricing?Tom Raftery:
Okay. And you mentioned social media, interestingly, is that being used by any of your customers to forecast demand swings?Robert Olszak:
Yeah. So what you're seeing, what we're seeing in the marketplace, and I think what you're gonna continue to see over the next several years is more dependency on AI tools. and one of the things that I read just recently. I, I don't have a specific dollar amount associated with it, but the inventory op what they call the inventory optimization tech market is expected to grow threefold probably between between now and I think 20, 25 or 2028. Nonetheless like a lot of other supply chain technologies, track and trace, realtime visibility, artificial intelligence, intuitive models, scenario based modeling, predictive analytics. All of these things are, are now being sought after. And what a lot of people don't understand who are not supply chain practitioners, but who are now somewhat supply chain savvy because of social media and media exposure in general is that it's a ripple effect and the technology piece, everything we're dealing with today, we've been dealing with for decades. It's only been exacerbated because of the last two years with COVID and then the subsequent events, you know, in the last several months. But what I've seen is this, you know, probably a lot of organizations taking that, five to seven year digital plan, technology plan and accelerating it into a two or three years. So it's become very compressed. It's become a much narrower focus for a lot of organizations and circling back to your comment on social media. What these and technology enabling tools attempt to do is draw data from multiple sources. Albeit be it social media or, online purchasing, or in-store purchasing, or historical data and looking at significant market trends and fluctuations and shifts, and then, you know, consolidating and presenting all of this information in a way that's digestible. Uh, so you can make real time decisions. And I think that's the next big hurdle that we're seeing in the marketplace is the technology is there. The ability for that technology to be used, but it's like, I'll equate it to a smartphone. My smartphone doesn't have a hundred apps on it. I use it to look at emails, maybe check LinkedIn once in a while, make a phone, call. My kids on the other hand, they have every app that's known to man. And so even though the tech, these technologies exist, what's interesting. And what we're seeing is, and some of them have existed for quite a while is they're not as, as robust as they can be. So now there's a migration to how do we bring this data in from multiple channels? How do we consolidate it? How do we have access to it to create real time decision making so that organizations can be more agile, more, responsive, but even more proactive in some cases in managing working capital so that they're aligning their demand, forecasting patterns, their sourcing strategies, the procurement of raw materials and the entire product life cycle, to prevent, inventory obsolesce and shrinkage, and then ultimately loss of revenue at the end of the year. An interesting statistic that I just saw came out from 2021 is somewhere in the neighborhood of $1 trillion globally gets written off in between inventory obsolesence, shrinkage, nons sold goods, and that's a lot of money. So when you're become, when what COVID has done is, and what the current inflationary environment is doing is really forcing organizations become more fiscally and financially savvy. And one of the ways they're doing that is how do I control the end to end supply chain? How do I leverage the technologies to have some sort of intuitive intelligence so that I can at the end of the year offset or mitigate what I'm writing off from an inventory level?Tom Raftery:
Okay. Just to play devil's advocate for a second. If the disruption that we've seen in the last two years settles down. In the next two years is the money I've sunk into buying some of these tools wasted. I mean, if supply chains go back to me more, uh, stable, less disruptions, have I gained anything?Robert Olszak:
Most certainly. So Tom. You're with SAP. You understand the market, I've listened to the podcast. They're all great. You have a lot of great, very intelligent supply chain, people that have been guests on your show. And so I, I think if you took the totality of everything going on, this is not just a kneejerk reaction to the disruptions. When it comes to inventory planning, for example, and you go back to let's say the 1990s, early two thousands. It's always been a mathematical exercise. There's always been algorithms, even though they may have been done by hand or on an Excel sheet back in the day that have helped to try to drive accuracy and forecasting. Okay. Now, with these technology tools, it makes that much faster. It's an automated process and it also prevents, what we've seen historically in the past where you've had. Some individuals who've been doing this for the last 20 years and they have that tribal knowledge and that person decides to retire all that knowledge and all that ability goes away with them. Right? Interestingly enough, I was talking to the head of a global supply chain for a company and he asked me a very pointed question. He's like, what do you think the supply chain professional of the future is gonna look like? And my first response in the response of one of my colleagues was they're gonna be technology saavy. Because so much of supply chain in all functions is really going towards automation. You know, whether it be RPA, AI, or just understanding how to use these systems. And the challenge for a lot of organizations is not just the system itself, but how do I socialize that system within my organization? How do I integrate that with all of the other systems that are out there, whether internal or external. And that's where, our firm, for example, is seeing a lot of activity and work right now is in system integration in system adoption because even one of the things that came out of COVID for example, is when people started working remotely, one of the unfortunate and unintended consequences was that we saw more and more activities taking place outside the system, because they were not intentionally trying to shortcut it, but because there was so much pressure on getting product into warehouses, getting product to the final customer, whether it be B2B or direct to consumer. And so when you have a, remote workforce things became not siloed, but a little bit fragmented and disjointed. So what organizations are doing now is how do we get people back into the system because data is important. And then how do we grow and mature those systems to keep the scalability of the growth of the organization since some organizations and industry segments are seeing faster growth than others. So I don't think the technology is ever a waste. Technology's always gonna continue to evolve. What I do see is a departure, if you will, from systems based models to more cloud based solutions.Tom Raftery:
Cool. Cool. Cool. We're coming towards the end of the podcast now Robert. Is there any question I haven't asked that you wish I had, or any aspect of this we haven't touched on that you think it's important for people to think about?Robert Olszak:
I would just say that as we continue to move forward, nobody has a crystal ball. And no matter what you hear in mainstream media, no matter what you read online. And, and there's a lot of literature out there and some of it is very, very good and some of it can be misleading and I don't, by any means intend for this to be a political commentary. I would just say that, you know, be cautious of what you read, because what I do fear is that as we've seen with the initial early stages of COVID and depending on how long the war in Ukraine goes. Or the next major environmental disaster, whether it be a hurricane, an earthquake, you know, something is going to trigger another crisis moment. That's gonna create a level of supply chain disruption. That's inevitable. I think a lot of organizations have learned from COVID and are working very diligently to mitigate those risks, be more pro proactive, uh, have a quicker response rate and really are doing a lot of things to combat or offset some of the lessons learned. Having said all of that, it's still a fluid model and nobody's gonna understand, or, or fully appreciate how long inflation's gonna last or, you know, is there a potential recession or what types of supply shortages may exist in the future? However, I do believe that we are in a better position holistically. If you look at supply chain on the broader scale, across multiple countries to manage and mitigate those risks because of what we've experienced over the last two and a half years. And that comes from the adoption of technology, enabling tools, more mature digital systems, a really much more intelligent workforce that has really heeded the lessons of COVID. And so I think that primes us to better manage disruptions moving forward.Tom Raftery:
Excellent. Excellent. Robert, it's been really interesting if people would like to know more about yourself, Robert Olszack, or about RGP or any of the things we discussed in the podcast today, where would you have me direct them?Robert Olszak:
Well, obviously there are, uh, some really good articles. I just wrote one on inflation and inventory that might be of interest to your audience on LinkedIn. And then our RGP insights page has a lot of thought leadership, not just content created by myself, but by our executive leadership team on a number of different topics. I think that would resonate with your audience.Tom Raftery:
Okay, shoot me those links and I'll put them in the show notes and people will have access to them. Cool. Robert that's been great. Thanks a million for coming on the podcast today.Robert Olszak:
Tom it's my pleasure. Thank you.Tom Raftery:
Okay, we've come to the end of the show. Thanks everyone for listening. If you'd like to know more about digital supply chains, head on over to sap.com/digital supply chain, or, or simply drop me an email to Tom dot Raftery @sap.com. If you like the show, please, don't forget to subscribe to it in your podcast application at choice to get new episodes, as soon as they are published. Also, please don't forget to rate and review the podcast. It really does help new people to find the show. Thanks, catch you all next time.