Demand for Inventory Management Technology Rises with Supply Chain Complexity

In this new paradigm, the financial implications of even small disruptions in inventory planning and execution are substantially magnified.

With several investments in supply chain and logistics technology over the past 15 years, LLR has seen the industry transform from pen-and-paper processes to software-supported workstreams. We’ve partnered with innovative companies like Quintiq, FleetOne, Magaya and PCS Software to help supply chain planners, fleet managers, freight forwarders and other stakeholders face the challenges of supply chain complexity head on.

Yet despite advancements in technology, we believe the supply chain is currently facing some of its biggest challenges in recent memory. Here’s our take on what’s happening in the space and why we believe that inventory management technology, in particular, will be critical to the manufacturers, retailers and distributors facing this new paradigm.

Greater volatility, expectations and costs

Over the past 18 months, the challenges impacting the supply chain have intensified, creating deeper and more systemic problems for manufacturers, retailers and distributors.

Supply Chain Disruptions. Between geopolitical events, capacity constraints, labor shortages, economic volatility and extreme weather events, disruptions have become the rule rather than the exception. Over the last three years, manufacturers and retailers have faced periods of severe under and over stock. At points of peak demand, retailers and distributors were left waiting for inventory without visibility into progress and limited ability to identify and onboard alternative suppliers. After increased ordering and lengthened lead times, these stakeholders now find themselves grappling with an oversupply of inventory. This situation has led to mounting holding costs and decreasing storage capacity.

Increasing eCommerce Penetration and the “Amazon Effect.” The pandemic fundamentally transformed purchasing behavior, prompting a swift shift from offline to online consumption. While retail consumption has returned, ecommerce penetration has remained elevated at approximately 22% of retail sales compared with approximately 17% pre-pandemic.¹

This substantial shift has had massive implications for the supply chain. Influenced by Amazon’s industry-leading practices, consumer expectations for inventory availability and swift fulfillment have soared. According to a 2022 survey conducted by Digital Commerce 360², the top three selection criteria for consumers are free shipping (70%), speed of delivery (43%) and product in stock and ready to ship (35%). Sales suffer when these expectations aren’t met, evidenced by the fact that the most frequent reasons for cart abandonment are related to shipping and availability. Moreover, eCommerce orders are returned up to two-to-three times more frequently than retail purchases, adding to the costs and complexity of inventory management.³

Rising Interest Rates and Inflation. While facing heightened volatility and increased expectations for inventory availability and speed, the overall cost of holding inventory has skyrocketed. With both interest rates and inflation at recent highs, manufacturers are paying significantly more to produce inventory. Warehouse capacity remains limited in key markets, resulting in the cost of storage outpacing overall inflation.⁴ The financial implications of even small disruptions in inventory planning and execution are substantially magnified under these conditions.

Early indications of ROI and embracing change

These challenges underscore the critical need for stakeholders to modernize the tools they employ for demand forecasting, network and capacity structuring, and inventory flow management. These disruptions have highlighted the insufficiency of managing with spreadsheets and legacy processes.

At the same time, stakeholders can see the ROI that early adopters have enjoyed. Leading inventory optimization solutions have demonstrated compelling results, including a reduction in inventory of over 30%⁵, a reduction in stock-outs of over 60%⁶, an improvement in on-time delivery of over 40%⁷, and a reduction in product lead times of over 20%⁸. It is estimated that supply chain optimization at scale can reduce overall supply chain costs by up to 25%.⁹

As a result, companies across the board are embracing change. In 2022, McKinsey found that 71% of companies expect to revise their inventory policies¹⁰, and 90% of executives plan to overhaul their supply chain planning technology stack within in the next five years¹¹.

Where we see the growth opportunity for inventory management technology solutions

As stakeholders turn their attention to the inventory management technology solutions that can help them address these challenges, we’re focusing on three key areas early in the supply chain lifecycle. We believe they have the potential to mitigate the inventory and fulfillment issues the modern supply chain faces.

Planning. Solutions that foster rigorous, agile planning capable of identifying and adapting to fluctuating customer demands and supply capacity. Legacy budgeting processes left stakeholders flat footed as markets rapidly shifted over the last few years. Platforms that organize disparate inputs within the organization and supplement these inputs with third-party signals can help build the informed and flexible plans needed in this challenging environment.

Execution. Tools that help enhance visibility and flexibility in managing components, suppliers and in-process inventory. Network organization tools, digital twins and supplier management capabilities can ensure that manufacturers quickly identify bottlenecks and adjust supplies and production accordingly. Disruptions and delays can be quickly met with alternative sources and rerouted capacity.

Optimization. Solutions designed to aid producers in maximizing ROI most efficiently and effectively, through adjustments in price and availability in response to evolving market conditions. To manage stock more effectively and reduce the opportunity costs and reputational costs of inventory shortages and warehousing overstock, there is a need for tools that help optimize sales through merchandising, promotions and discounting.

Here’s the bottom line.

The supply chain’s historically slow embrace of technology has been accelerated by the dramatic surge of disruptions and costs encountered in recent years. In this new era characterized by more frequent and severe disruptions, heightened costs and escalating consumer expectations, we believe the improvement of inventory management will be central to the resilience of future supply chains and logistics service providers. We are excited to leverage our long-term experience as supply chain investors to support and partner with the next wave of technology innovators in this space.