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Managing inventory is not a one-time event. Because the business environment is continuously changing, adopting the right supply chain posture must be an ongoing pursuit.
Is Inventory Optimization an Unending Pursuit? (Part 3)
Think of it as an ongoing process that reflects and responds to changes in the business environment. The answers to the five questions discussed previously are a moving target. For example, today’s micro-segmentation strategy may not make sense tomorrow. For this reason, inventory optimization leaders are those companies that have created an ongoing capability to monitor conditions across the supply chain — from rising transportation costs to dramatic shifts in demand — and adjust inventory levels accordingly.
This is the area of performance that separates the leaders from the followers. Best-in-class inventory strategists continuously monitor and re-align their supply chain posture so that it reflects current business conditions. How many business failures could have been averted in the last two years if companies had responded more proactively to changing conditions?
Leading organizations are implementing a number of end-to-end process changes — including the use of interactive process playbooks and weekly plan-do-check-act cycles — to keep the inventory strategy on track. In the case of missed sales targets in one specific region or store, inventory strategies based solely on math algorithms might sense a forecast error and recommend short-term fixes such as shifting products within the supply Obviously this is an expensive proposition, especially in today’s environment of rising logistics costs.
Instead, best-in-class businesses have instituted a continuous process in which issues like regional sales declines due to poor stock management are not only addressed in the short term, but also eliminated in the longer term through an exhaustive root-cause analysis.
Drilling down through the supply chain, inventory strategists work to understand the reason for a local drop in sales by asking such questions as: What are the unique buying patterns in this region? How do prices and margins compare with other stores or geographic areas? Would a different SKU sell better? Can we shape demand through promotions?
With the advent of sophisticated modeling and analytics tools, inventory managers are also better equipped than ever to anticipate demand changes before they occur, and adjust inventory accordingly. By gathering data and insight from across the global, end-to-end supply chain, leading businesses can quickly sense and respond to changes in consumer behavior that are likely to have a significant impact on inventory levels.
For example, the swift and unprecedented drop in demand for high-tech consumer products in 2008 caught many suppliers unprepared. Saddled with high inventory levels and associated carrying costs that significantly eroded their gross margins, these businesses, as a result, will face long-term financial challenges. Not only did they lose money in the short term, but they will also have a hard time supporting the product innovations, consumer promotions and other initiatives that support future success.
For many businesses undertaking the challenge of inventory management, the journey ends at generating optimum inventory targets — and checking performance against these targets once or twice a year.
Defining a strategic supply chain strategy starts by addressing these key issues.
Is Inventory Optimization an Unending Pursuit? (Part 2)
Product segmentation. Most businesses today have recognized the 80/20 rule and are making some attempt to distinguish the inventory needs of their significant few products versus the trivial many. In today’s increasingly diverse global markets, product segmentation must be even more sophisticated, taking place at a new micro level that dissects the entire portfolio by each product’s significant characteristics across multiple dimensions. In a diverse marketplace, segmentation cannot be merely an act of simplifying or modeling assumptions. It should instead focus on developing an increasingly greater understanding of how to serve individual customers and market segments in a way that is consistent with both top-level business goals and worldwide supply chain constraints.
Inventory Levels. Following the economic downturn of the last several years, no one is debating the importance of risk minimization. For every product segment and customer channel, companies need to determine the right supply chain strategy to deliver consistently high service levels while also minimizing their financial exposure. In working to balance service and cost levels, it is critical to remember two important facts: (a) there is no single math algorithm that works for every business, segment and channel; and (b) calculations must always consider the total landed cost of inventory — including transportation expenses, handling charges and holding costs — which can change dramatically and swiftly in today’s volatile environment. Businesses must also consider more subtle costs such as channel liabilities.
Customer demand. Inventory strategists should always bear in mind this simple fact: Everything begins with the customer. Today, supply chain leaders are working hard to understand and interpret actual buying behaviors, using enterprise resource planning (ERP) historical transaction data and point-of-sale (POS) data to generate individual customer profiles. Based on this real-world insight, the supply chain posture can be aligned with unique customer expectations.
Postponing inventory decisions. Based on these specific customer insights, businesses can postpone their inventory decisions to place the right amount of inventory at the right level in the supply chain to meet each customer’s expectations for service levels and timely delivery—while also minimizing overall inventory costs and financial exposure. Given today’s volatile economic climate, postponement remains an extremely important strategy to minimize risk across the supply chain.
Replenishment strategy? There is proven value in lean and just-in-time replenishment strategies but these initiatives cannot be pursued in isolation, especially in an era of rapidly fluctuating transportation costs. The businesses that are succeeding in this volatile economic climate are balancing low inventory goals and fast delivery targets with a range of alternative replenishment strategies that consider total landed costs — including en-route transportation charges, as well as warehouse handling expenses — and create the best overall results for the supply chain as a whole.
Answering these five critical questions will help organizations adopt the right inventory policies and processes that address customer needs and supply constraints, while minimizing risk. Taken together, these inventory practices comprise an overall supply chain posture that positions the business for long-term success.
Continued in Part 3
Inventory management can have an enormous impact on the overall health of a business in today’s volatile markets and fast-changing economic climates. Today, strategic inventory management requires a deep understanding of how the end-to-end supply chain is actually managed. From intelligently micro-segmenting their products to creating continuous inventory process improvements, advanced enterprise software systems—ERP systems with strong Supply Chain Management functionality-- have the capabilities and foresight to transform an organization’s inventory into a competitive advantage.
Is Inventory Optimization an Unending Pursuit? (Part 1)
In recent years, the topic of inventory optimization has taken center stage in the supply chain industry, but often for the wrong reasons. A great deal of attention has been focused on identifying the best algorithms or statistical models to solve the inventory problem and deliver quick returns in the form of freed-up working capital and other short-term improvements. Inventory optimization, however, should not be treated as a short-term problem that requires a one-time fix. It is a process-based discipline that helps companies continuously manage their increasingly complex, end-to-end global supply chains in the face of constantly changing market conditions, business objectives, risks and constraints. Just as every company has its own unique long-term corporate strategy for navigating today’s complex business environment, every enterprise must also have a unique inventory management strategy that supports that top-level vision.
Instead of focusing on short-term results, a number of leading companies have been working to create and leverage a long-term, sustainable competitive edge by aligning their day-to-day inventory plans with their top-level goals on an ongoing basis — and turning this component of their supply chains into a powerful strategic advantage in a challenging economic climate.
Companies in pursuit of inventory optimization need to start by developing inventory strategies. While inventory management is just one component of the global supply chain, it has a profound impact on overall business performance. How a company positions inventory across the supply chain defines an overall “supply chain strategy” that determines its ability to profitably and effectively meet demand in a dynamic marketplace.
Inventory policies and processes, working together across the global supply chain, define the overall supply chain strategy— and also determine how the business will respond to changes in market and supply conditions.
It would be easier if there were a single strategy that could be applied to all companies, at all times. Every business, however, delivers unique products to unique market segments. Within these segments are individual customers with different needs in terms of service levels, lead times, demand sensitivity, ability to absorb demand spikes, tolerance for excess stock and other characteristics — each of which impacts the inventory policies used to serve them. The overall supply chain posture must be flexible enough to meet these individual customer needs. It must also be very specific, defining what inventories to carry, where, in what form, and how much, taking into consideration the entire global procurement, manufacturing and distribution network.
It is critical that the supply chain posture supports the long-term health and profitability of the business, reflecting top-level strategic goals. Whatever the unique selling proposition of the company, the supply chain posture — and associated inventory policies — must reflect it.
Continued in Part 2
Manufacturing plays a big role in enterprise resource planning (ERP). Interesting enough, that’s where ERP got its start. And a big part of manufacturing is materials and materials resource planning (MRP). Before you can begin production you need to ensure that all of the required materials are obtained and you need to determine MRP cost. If you’ve got a project manager, he has to ascertain costs related to production. Working on an enterprise software system platform that includes all of the relevant application modules, the project manager can put together the supply chain particulars and plan for the materials needed. He will be working with application modules that link him to the accounting department, suppliers and partners,distribution, the warehouse, and others that are in the loop for securing materials. They will work in concert to fulfill the supply chain and prepare for production.
Discovering the MRP Cost
Materials management goes beyond just supplies and equipment. It includes such things as personnel, the amount of labor needed for the job and their scheduling; the shop floor and how it is laid out; the machines and their maintenance and scheduling; just-in-time-deliveries. All of these necessities come into play when preparing for a production project and materials planning.The system platform will include a module for cost calculations as well as one for suppliers. MRP is more easily calculated when you have the right tools. And working on a resource planning platform makes those tools accessible. This means that the process can be efficiently managed and the supply chain is in place when needed.
Good materials management also keeps customers in the know. When information is requested about materials or production, the project manager can provide real-time information and data, because he is working with a system that supplies information that is constantly updated. This is just another of benefits enjoyed with a resource planning software system. MRP cost can be tracked and monitored along the way so that insight can be gained as the project takes shape.
And the project manager can also easily share, collaborate and communicate information to other staff members as the project comes into fruition. Purchasing and procurement is in close contact with accounting, human resources, the warehouse and project management, to assure workflow is on schedule and the required materials are in place.
The materials resource planning system includes an application for materials planning that goes beyond a checklist. The planning application can act as a tracking mechanism to monitor such production tasks as parts and equipment movement, ordering and delivery status, time and scheduling of the labor load, equipment management and more. And with this software system everyone has access to the same information. So if there are any changes to the game plan, all will know about it in real-time. This is the type of visibility that is provided throughout the process.
With materials resource planning, you can always monitor the MRP Cost. And that is important when you need to bring production in on time and at the determined cost. Customers will appreciate the effort and attention to detail.