High-Tech Industry:
Finished Goods Inventory Practices

High-tech manufacturers today are under pressure from continuous new product introductions. In turn, this often drives rapid price changes through the product life cycle.

Heightened competition in key markets and a high volume of special pricing agreements – emanating from both direct and channel customers – can have major impacts on revenue and margins. Consequently, the high-tech industry has been forced to adopt greater flexibility and learn more quickly from other industries or players within the same industry. As a result, high-tech companies share and implement best practices faster than those in other industries.

Finished goods inventory is a double-edged sword. Not having enough inventory could mean lost opportunity, with a dissatisfied customer base, or eventual customer defection. On the other hand, having more inventory than you need could mean potential excess, with obsolete stock locking up working capital and causing cash flow challenges. High inventory levels have also been found to mask other problems and can delay improvements in operations.

A classic question which still baffles many companies is: Which organization should be responsible for setting up targets, managing, owning, and driving improvements for finished goods inventory? In the Supply Chain Consortium’s recent survey on finished goods inventory practices for the high-tech industry, on the focus was on understanding current industry practices and plans for the future.  The responses to this survey were very insightful, as shared below.

Inventory Responsibility
The survey found that companies share inventory responsibilities across multiple functional areas, including: 

All of the companies responding to the consortium survey indicated that driving improvements in inventory performance is shared across multiple departments.  Therefore, it is up to each and every department to be continuously looking for ways to make improvements.  Shared responsibility is evident based on the following results:

• Inventory Performance – 100% Shared
• Setting Inventory Targets – 90% Shared
• Maintaining Inventory Levels – 80% Shared
• Owning Inventory – 80% Shared

Key Insights
Review of the survey results highlighted a few key insights into industry best practices.  Use these key findings to see how your company aligns with industry practices:

Finished Goods Inventory Status
The majority of companies surveyed use more than one performance measure to monitor finished goods inventory status.  The top three methods include inventory turns, on-time shipments and inventory accuracy.  The following chart shows the percentage of respondents who use each method of measurement:

Inventory Reductions
The results of a survey conducted by Modern Materials Management and Robert W. Baird Co. in April 2010 suggest that there have been extensive efforts to reduce inventory over the past 18-24 months. The survey captured inputs (illustrated below) from high-tech companies relating to their results of inventory reduction efforts.

Customer Satisfaction

Another study conducted by REL, a division of The Hackett Group, shows that companies were able to reduce absolute inventory levels by 10% from Q3/2008 to Q3/2009. At the same time, the consortium survey results indicate that the reduction in inventory levels has had minimal impact on customer satisfaction levels, as measured by the companies.

Calculating Inventory Turns
Some key factors that were identified for calculating inventory turns were Cost of Goods Sold (COGS) and average inventory dollar value.  This was consistent across all of the survey respondents.

Future Improvements
Our survey also touched upon high-tech companies’ future potential for finished goods inventory improvements. Only 10% of the respondents believe that improvements would have major impact on inventory dollars, while 70% believe that the impact on inventory holding cost would be minor. Thirty percent think they would feel a major impact in inventory turns, and 50% believe that there will be a minor impact on customer satisfaction. Complete results are shown in the table below:

Internal Processes

Survey participants were asked about other industry best practices as they relate to their internal processes.   Summarized key responses include:

• Sixty percent of respondents have a formal SKU discontinuation process compared with 30% who do not have a similar process. Ten percent were unsure.
• Overwhelming, 90% of the high-tech companies surveyed have formal service supply chain (also referred to as reverse logistics) processes.  This is especially notable when compared to the overall survey results of 55%.
• In order to improve forecast accuracy, 70% of the companies use product hierarchy.
• Point of Sale information considered critical to forecasting is accessible to 70% of the participants.
• Ninety percent of the companies surveyed have a formal Sales Inventory and Operations Process (SI&OP).  This shows how the high-tech industry is ahead of the curve.  The overall survey results indicate that 74% have a formal SI&OP and 18% do not.

When the survey participants were asked to select areas where changes needed to occur in order to improve finished goods inventory performance, nearly all companies indicated the need for simultaneous involvement of multiple functional areas.  At first glance, the tables below look very similar; however, there is more focus on logistics across all areas for the high-tech industry, with a secondary focus on processes.  Given this response, it is clear that companies are looking at all areas of operations for possible improvements; however, they will be more focused on internal process and logistics as opposed to an equal focus on all areas

Takeaways and Conclusion
Consider these key takeaways as a result of the survey.  Do they align with your own?

• Most companies have finished goods inventory responsibilities shared across multiple functional areas.
• The high-tech industry is relatively consistent on how they measure their finished goods inventory performance.
• Close to 40% of companies saw a 1-9% drop in finished goods inventory as a result of extensive effort to reduce inventory over the past 18-24 months.
• Overall, 60% of companies noticed no change or showed improvement in customer satisfaction during the same period.

In conclusion, the recent consortium survey results indicate that the high-tech industry is indeed examining finished goods inventory with flexibility and shared responsibilities. In a period when inventories are actively being reduced, the majority of companies (60%) saw either no change or an improvement in customer satisfaction. 

Although all companies in the survey will be looking across all areas for potential change, the high-tech industry is more focused on logistics and processes.  This indicates that they have the right mix of people, customers, suppliers, and policies and now will continue to refine their internal processes and logistics.

Tompkins Supply Chain Consortium is the premier source for supply chain benchmarking and best practices knowledge.  With more than 500 participating retail, manufacturing and wholesale/distribution companies, the Consortium sponsors a comprehensive repository of 17,000-plus benchmarks complemented by search capabilities, online analysis tools, topic forums and peer networking for supply chain executives and practitioners.  The Consortium is led by the needs of its membership and an Advisory Board that includes executives from Campbell Soup Company, Ingram Micro, Kraft Foods, Limited Brands, Miller-Coors, The Coca-Cola Company and Target.  To learn more about how your company can become a member of the Supply Chain Consortium, contact John Foley, 919-855-5461 or visit http://www.supplychainconsortium.com/Welcome/.

This article is available for re-print with attribution. If you would like more information or an interview, please contact Keri McManus, (919) 855-5516.