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6 Keys to Inventory Optimisation

August 8, 2013 • Business Process, Finance & Economics, OPERATION, Strategic Spotlight, STRATEGY & MANAGEMENT, Supply Chain, Supply Chain Management

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Many companies around the world have adopted inventory optimisation and those without a formal process are falling behind their competition. Effective companies must factor in the global nature of their business when thinking about reducing inventory. Karin Bursa, a Vice President at Logility, discusses the six factors that can lead to Inventory Optimisation success and place you ahead of your competitors.

Inventory optimisation is a discipline that has become crucial to many companies in the past few years. Following the broad inventory slashing policies from 2008 to 2010, organisations realized they required a more strategic method to free up working capital with minimum impact to service levels. The ideal would be to actually increase service levels while reducing or maintaining inventory investments—which many companies are doing right now.

Many companies have adopted inventory optimisation and those without a formal process are, in many cases unknowingly, falling behind their competition.

Multi-Echelon Inventory Optimisation (MEIO) goes beyond managing inventory at a single location, modeling instead the entire network to determine interdependencies between locations and calculate the ideal inventory targets from raw materials through work-in-progress to finished goods. Benefits range from 5 to 30 percent reductions equaling from several million dollars in inventory to several hundred million dollars.

Many companies around the world have adopted inventory optimisation and those without a formal process are, in many cases unknowingly, falling behind their competition. Keep in mind these six factors that can lead to Inventory Optimisation success and place you ahead of your competitors.

 

Factor One: Air Cover
‘Air cover’ for a supply chain professional means solid support at the executive level. Even a senior staffer needs the backing of peers in supply-side procurement, manufacturing, distribution, sales and marketing, finance, and even strategic planning.

 

The rising tide lifts all boats: working together.
Stakeholders in the supply chain come from diverse, often isolated, functions, ranging from purchasing to 3PL’s, from sales to inventory planners, and so on. The organisation that succeeds is the one that realizes it has much more to gain by generating a shared understanding (vision) of the shared supply chain. Making inventory-related key performance indicators (KPIs) visible, comparable and available amongst all business units will create a sense of internal competition and achievement.

 

Getting educated about inventory optimisation.
There are significant, proven benefits for just about every large or mid-sized manufacturing company that adopts an inventory optimisation program. This is not in dispute – just read any recent supply chain report from industry analysts like Gartner, IDC, or Aberdeen. They basically assume every manufacturer with revenues of US $500 million or more is already using inventory optimisation technology to raise the performance of its ERP and supply chain infrastructure.

If you’re just starting, you need to foster an attitude among senior management that it’s crucial to learn about inventory optimisation because leading companies—probably your competitors—are taking it very seriously.

Here are some ideas to consider:

• Clinging to a rule-of-thumb inventory methodology, such as ‘30 days of supply across your portfolio’, will absolutely erode your competitiveness. The complexity of today’s global supply chains and the need to be demand-driven has thrown those old concepts out of the window.
• Supply chains have stages and locations, called ‘echelons’, that interact in complex ways that always produce excess inventory. This excess can be scientifically counteracted without resorting to crippling brute-force reductions.
• Uncertainty on the demand side and volatility on the supply side can be managed to produce vastly better business results, but not by execution systems like ERP and advanced planning systems (APS) alone.

Clinging to a rule-of-thumb inventory methodology, such as ‘30 days of supply across your portfolio’, will absolutely erode your competitiveness. The complexity of today’s global supply chains and the need to be demand-driven has thrown those old concepts out of the window.

Factor Two: Inventory Optimisation Must Match Your Orga-nisation’s Planning Process
Your organisation has a planning process which dictates how you’ll go about the job of gaining support and successfully implementing your inventory optimisation initiative. As Gartner notes, it operates on three levels: strategic, tactical and executional.

Supply chain strategy (inventory plans and policies), tactics (individual inventory target setting down to the SKU level), and execution (ERP) are like separate gears that mesh together to perform the work of managing your inventory wisely. They should be thought of as three facets of a single entity—strategic course setters take the long view, while those who care about day-to-day decisions need a dedicated, easily adopted mechanism for maintaining inventory and service at optimal levels.

If you’re just starting, you need to foster an attitude among senior management that it’s crucial to learn about inventory optimisation because leading companies—probably your competitors—are taking it very seriously.

Your organisation plans at the strategic, policy-setting level – establishing aggregate plans such as where products will be manufactured, which locations will store inventory and policy-related decisions such as postponement, vendor-managed inventory and target customer service levels. It then uses those policies to develop plans at a tactical level – how much of each product do we build, when and how much do we need to hold as safety stock. Finally, those plans go into action – the execution phase. ERP executes the plan.

You will need to learn how your organisation manages through each of these phases. Strategic planners need different tools to evaluate step-change improvements in the supply chain, while day-to-day planners benefit from having a common process in place (instead of disparate spreadsheets).

 

Factor Three: Avoid the Black Box
Most inventory target planners will not use a solution unless and until they believe in it. It’s simply not possible to put a ‘black box’ into the supply chain organisation and expect everyone to follow its lead.

Basically there is no substitute for—or shortcut around—using the knowledge of planners who are ‘in the trenches’ on a day–to-day basis. These planners must have at least a basic understanding of the data that goes into the process and accept the results that come out.

The ongoing optimisation takes into account transaction data as well as uncertainty in demand, volatile supply, costs and delivery timetables, inaccurate or inconsistent forecasts, replenishment cycles, manufacturing considerations, and more. Even though the algorithms and analytics have been extensively validated by academics and practitioners across industries and around the world over years of successful use, it is still crucial that your users have a chance to validate results, not only during the initial launch, but on an ongoing basis.

When planners are comfortable with the results of optimisation recommendations—if they take ownership of the numbers—they become confident and will not revert back to old static and simplistic methods.

 

Factor Four: Move Fast!
Every supply chain is characterized by an ‘efficient frontier’ curve, which represents the trade-off between inventory cost and service level performance. You are in the process of moving your entire supply chain from one frontier curve to a new ‘efficient frontier’ that achieves higher performance at lower cost.

The most important factor in reaching this new level is to organize and mobilize your key resources quickly. Long, multi-year rollouts are vulnerable to shifts in focus and budget. You may lose key resources. And of course, there is always the impact of stakeholders changing jobs. So ‘optimise your optimisation initiative’.

 

Don’t let ‘integration intimidation’ slow your initiative down.
Some executives may believe the extensive and expensive ERP or advanced planning infrastructure recently deployed should handle inventory optimisation, and adding MEIO would require a major integration effort. This is a misperception. Execution-oriented ERP systems cannot do analytical inventory optimisation. MEIO works ‘alongside’ your transaction systems and does not require a massive enterprise integration project. Using pre-built templates, time-to-value is typically measured in weeks, not years. Integration project timeframes need not exceed a few months, start to finish.

The work of the supply chain team is to ensure the master data, assumptions and inventory components are properly configured in data sets, not to manage a complex or lengthy implementation project.

MEIO works ‘alongside’ your transaction systems and does not require a massive enterprise integration project. Using pre-built templates, time-to-value is typically measured in weeks, not years. Integration project timeframes need not exceed a few months, start to finish.

Factor Five: Avoid the ‘One System Fallacy’
No matter what stage of an ERP implementation you are in, the truth is that multiple systems still run most businesses. Even in a firm that has standardized on one ERP platform, often multiple ‘configurations’ and ‘instances’ exist that effectively comprise separate systems. Your IT department needs the flexibility to use data from multiple platforms and systems to drive the right business policies. As an example, companies implementing in emerging markets like Brazil, India and Russia face diverse business and supply chain networks: their distribution channels could be vast and numerous; the data may not be available uniformly across all entities; coverage in the ERP/APS may not be adequate. All these realities necessitate a built-in flexibility regarding the configuration, implementation and setup of the inventory system. Rigid assumptions on data integration and usage of systems will almost always have to be revised if the benefits are to be extended across this diverse and complex environment.

You must factor in the global nature of your business when thinking about reducing inventory. Powerful analytical engines have been developed that can reliably reduce end-to-end inventories across functions and facilities.

Factor Six: Think multi-tier

Today’s leading supply chains have left their old, facility-centric viewpoints behind. Your supply chain is a multi-stage, international (probably global) network of nodes and interdependencies. It is bound to shift and change in reaction to acquisitions, consolidations, as well as evolving transportation, distribution and supplier relationships. You must factor in the global nature of your business when thinking about reducing inventory. Powerful analytical engines have been developed that can reliably reduce end-to-end inventories across functions and facilities. Best in class companies use these systems to gain – and maintain – the edge in their industry.

Inventory optimisation is a proven vehicle to gain competitive value through reduced safety stock, freed-up working capital and improved service levels. Ensuring that your organisation’s inventory optimisation initiative is successful takes more than understanding its cost savings and customer service improvement potential. Set up your team for success: let multi-echelon inventory optimisation become central to your supply chain performance improvement strategy and your ongoing S&OP process.

About the Author
Karin L. Bursa
is a vice president at Logility, a provider of collaborative supply chain management solutions. Ms. Bursa has more than 25 years of experience in the development, support and marketing of software solutions to improve and automate enterprise-wide operations. You can follow her industry insights at www.logility.com/blog. For more information, please visit www.logility.com.

 

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