-By Tom Schaumburg

Twenty-plus years of supply chain thinking have helped shape our current operating environments, applications, and perceptions. Retailers want more frequent, smaller deliveries from CPG companies. In turn, those suppliers want the same from their suppliers and so on -- in short, that's the model of the highly effective, demand-driven supply chain.

But wait a minute. Perhaps it's time to rethink these ideas seriously, and ask: Is inventory really the "bad" actor we've all declared it to be? I would suggest that, in these days of dramatically rising fuel costs, inventory can earn its way back into our good graces as an enabler of greener, lower-cost operations.

At the GMA Information Systems and Logistics & Distribution Conference, held in Palm Desert, Calif. this past April, many of the presenters touted supply chain management improvements that include, at least in part, inventory performance -- addressing the maxim of improved service levels through reduced inventory. One presentation, a case study of Kimberly-Clark working with a retailer, illustrated how collaboration, store resets, and forecasting had improved service levels, leveled shipments, and improved working capital performance.

More broadly, however, the content at the conference spoke to dual themes: forecasting to improve the demand-driven supply chain, yes, but also the concept of sustainability.

Both are relevant right now. Just since the GMA conference, the price of oil has gone up another $10 dollars a barrel. And diesel fuel -- depending on where you operate -- is now hovering around $3.50 to $4 per gallon. Environmental sustainability has come to the forefront of many business agendas, with companies touting their green programs and green citizenship, and inundating us with advertising for green products.

Meanwhile rising gas prices have prompted many of us to change our behaviors. We're using more mass transit, or carpooling to work. Many of us now "chain" our shopping trips, making fewer runs and loading up during each one. The goal in all cases is to lower gas consumption and/or our carbon footprint. Shopping online is another way we're reducing trips to the store.

This is why we in the industry must re-examine the role of inventory in our extended supply chain, perhaps in ways that are contrary to our original beliefs.

An example may be helpful. Consider the value of only one fewer delivery per week to a store. At $4 and six miles per gallon, you can save $133 per trip based on a 200-mile round trip, and that's not including the costs for the driver and other factors. Clearly, the longer the trip is, the greater the benefits of avoiding the trip.

Expending less fuel

Consider coast-to-coast travel. There were times earlier in my career when the cost of transporting produce from the West Coast exceeded the value of the commodity. I suspect this happens more frequently today, even given the increases in commodity costs we're seeing.

One way to address the impact of these rising fuel costs is to consider holding inventory at the store, and revising shelf sets to correspond to velocity rather than pack-out, as a good thing. This would enable us to expend less fuel by delivering well-cubed-out loads less frequently.

Incremental inventory also enables somewhat slower delivery methods that are highly efficient in their fuel use (such as rail, intermodal, and boat) but perhaps require a bit more variability in their schedules.

Further, shouldn't we begin to look at inventory as something that should be at the store and ready to meet the needs of retail customers when they make their less frequent but larger-sale shopping trips?

This will still require end-to-end supply chain collaboration, enabled by technology -- technology that can help you cut costs and become greener. Here are some applications:

Forecasting at a granular level can help you cube out trucks with "peak shaving" to make sure every time you ship -- either from warehouse to store, or CPG supplier direct to store -- you go full. Virtual reality applications can help you visualize new shelf sets that address additional shelf-holding capacity based on velocity. You can try out new looks and arrangements for the store, without the expense of physical changes. Investments in inventory can allow slower/less frequent shipping methods. Although this will prompt safety stock and on-hand quantities to increase as order intervals change (based on your individual situation), it's a trade-off you should examine closely, given the interest rate environment.
An investment in inventory would lower costs, improve customer service, and reduce our environmental footprint, so we wouldn't be forced to choose between being lean and being green.

Tom Schaumburg is a senior industry consultant at EDS, addressing supply chain strategy and transformational outsourcing for retailers. He can be reached at tom.schaumburg@eds.com.