Many companies say that they want to Optimize Inventory, but they often have different things in mind when they say it.
Of course, they are all looking to make better use of the inventory on-hand, and they all have the goal of keeping customer service high and inventory low. However, what makes them different is that each company may have a dissimilar root cause as to why they are not doing better with it.
There are four main areas of supply chain planning to focus on when trying to get more from your inventory investment. From top to bottom, and with different time-horizons, each one is critical to get the whole picture right, so it’s important to target them individually:
1) Reduce forecast error with better Demand Planning
2) Establish better inventory target levels with Multi-Echelon Inventory Optimization (MEIO)
3) Further synchronize supply flow with better Sales & Operations Planning
4) Improve daily Inventory Management
Reducing Forecast Error
The two key factors that will impact the amount of inventory that is required in a supply chain are lead-times and demand uncertainty. Although, forecasts will always be wrong, there is a great deal that can be done to increase their accuracy with improvements in process and technology. Remember, you have to do everything possible to be less wrong. Forecasts and “consensus demand” (i.e. aggregation and agreement on one forecast number, by all departments) are also used to determine forecast error. So, if a company does not have a strong process in place to facilitate collaboration, they will not be able to do well in any of the other areas.
Demand Planning is a critical component of inventory management. We have a new ePaper on this topic entitled: Planning Demand for Profit Driven Supply Chains. Feel free to download it by clicking on the title.
Multi Echelon Inventory Optimization
The amount of inventory buffering should increase along with the value of a product, the amount of uncertainty in demand relative to the sales volume, and a company’s response time to deal with supply chain surprises.
Where to place inventory can be very difficult to figure out in an end-to-end supply chain with many products. There are many ways to rebalance how inventory budgets are allocated, inventory pooling and production postponement strategies can be complex and hard to execute, as planned. A Multi-echelon Inventory Optimization (MEIO) system will enable a company to consider all of these in deciding where in the supply chain and how much inventory to have. If your company is using a manual system, and pretty much guessing at how many days of coverage to have for each product, or does not have a good process in place to calculate statistical safety stock values and its “What-if” impact on customer service, then you should be looking into how an MEIO system can help your supply chain.
If you would like more information on Inventory Management and its “Optimization”, I recommend Reading this paper: Demystifying MEIO
As part of the S&OP process a company needs to determine how to meet the inventory demand that comes from buffer stocks, forecasted demand, and backlog. Or it may be that capacity or material constraints, or other operating efficiency concerns, drive a company to purchase or build inventory ahead of when it’s actually needed. Regardless, the supply planning process that feeds a consensus S&OP plan is the place that these decisions are made. If a company does not have a good S&OP process in place, then it will not be able to make good decisions around inventory. Furthermore, if the S&OP system in place does not consider the effects of finite capacity, materials, and operating constraints, then control over inventory levels will not be achieved.
For more information about S&OP process, I suggest viewing this recorded webcast:
Even with a perfect plan, a company cannot keep inventory low and customer service high unless they can execute on moving inventory through the supply chain to meet customer orders. Better Inventory Management will give improved visibility of inventory through the supply chain and create the orders to move the inventory when required. Inventory Management gets the target levels from the MEIO system, and then executes as orders and forecasts are received. If a company does not have good visibility into inventory, forecasts, and orders then an improved Inventory Management system will surely help.
A last thought, there are many areas of supply chain planning that can have an impact on reducing inventory and improving customer service. Typically a company will focus on Demand Planning first, and then Inventory Management, while putting in place simple ways to set inventory target levels. They would then focus on better inventory targets with MEIO systems and better supply side S&OP planning. Each company is different, and it is important to address each area based on your needs.