Inventory is insurance against the unknowns in the supply chain. It protects you if surprises occur with demand or supply. Just like the insurance you buy for yourself, it is important to spend the right amount of money in the right points of your supply chain in the form of inventories (i.e. safety stocks).
If spent wisely, inventory dollars will have a beneficial impact on a company’s ability to service its customers properly and help keep direct and indirect costs low. Too much inventory wastes capital and increases the risk of obsolete goods. With too little inventory, you are risking lost sales, stock outs, and increased direct costs from disruptions in operations. There are many stakeholders that worry about inventory positions at many different levels of the supply chain, and their objectives are not always the same; in fact, it may be contradictory. For example, salespeople love to cushion themselves with lots of inventories in order to make sure they will always have a product to sell, while the CFO wants to cut inventories as much as possible in order to save capital and improve the Return-on-Asset ratio. So optimized management of inventories can become a very difficult issue and its complexity can skyrocket as the number of tiers in your supply chain increases.
In the recent past, a whole new breed of supply chain planning solutions has been developed and dedicated to better management and optimization of inventories. They are called Multi-Echelon Inventory Optimization (MEIO) systems and there are a handful of vendors that provide them. Of course, different systems use different algorithms and techniques to address this highly complex issue, so you definitely need to do your homework before jumping into purchasing one.
Adexa includes multi-echelon inventory planning as an option in its Sales & Operations Planning (S&OP) platform. We like to think we have a distinct advantage in this area due to our holistic approach to planning the entire supply chain, not just parts of it. Naturally, that is very important since inventory planning is not done in isolation. It should heavily consider factors such as demand forecasts, manufacturing capacities, and supplier capabilities, within one integrated planning environment. But Adexa actually throws in one more advantage. We tie all of this planning data to key financial measures. That basically means, you can review your supply chain planning decisions based on their financial impact, especially when it comes to revenue, profitability, and return-on-assets.
Many supply chain managers are looking to learn more about MEIO and trying to understand if their company should be utilizing this type of inventory planning solution. The simple answer is if your enterprise has a multi-tier supply chain (e.g. more than one plant, DC feeding regional DC’s or customer hubs, etc.), or if your products have key components that are used commonly across multiple end-items, then you should be considering MEIO as a way to cut costs and increase customer service levels.
For more information, you may want to check out one of our latest webcasts on this topic by visiting our Supply Chain Planning Webcast Library.