Inventory optimisation is increasingly seen as a competitive issue. So are you falling behind your competitors?
In times of plenty inventory optimisation might have been seen as desirable – but there might well be other priorities. But when times are tough it is a vital competitive weapon.
Brian Templar, chairman of Davies & Robson, points out that poor inventory control drives stock financing costs, stock holding cost and the cost of obsolescence.
“Availability and short order fulfilment times have become critical to many market segments. If you can’t get the colour of paint you want you won’t buy the brushes and white spirit,” he says.
“Many organisations now depend on their suppliers to provide immediate fulfilment. Car repairers now receive several deliveries in a day. Small builders assume they can get everything they need the morning of the job.”
Hugh Williams, managing director of Hughenden, says: “Perhaps the greatest root cause of poor inventory management is that so many different groups, people, who are measured on completely different KPIs, are involved with inventory decisions. Procurement people are driven by pricing, so may buy goods in bulk to get discounts. Many manufacturing people still want to produce items in large batches. Commercial people like the security of holding excess inventory so they don’t let customers down. Finally, finance people want to streamline inventory to free up working capital. When you combine these conflicting motivations with the fact that most people have little formal understanding of how to calculate the right inventory levels, it is no wonder that few companies manage this process optimally. Most companies call us in because they have reached an impasse internally over how much inventory they need.”
Key battleground
And Jan-Paul Boos, vice president sales EMEA at RedPrairie, points out that: “There is growing evidence that inventory will become the key battleground for retailers. Leaders in multichannel selling have grown rapidly on the basis of superior inventory management. Amazon has taken this a step further by delegating large amounts of inventory management to the individual supplier, taking the proceeds up to a month before settling the supplier’s account. This is profitable business indeed.
He points out that at a recent industry conference, analysts from Forrester and Gartner estimated the amount of inaccessible inventory in retail organisations is at least 60 per cent. This inventory is either in the wrong DC or store, owing to variations in local demand, or has become invisible to waiting online and mobile shoppers.
“In practice, most consumers have very little product visibility. Most struggle to find inventory in an alternate store, typical websites give few delivery options and freeze these options once an order is placed, and warehouses and transport remain completely opaque, providing no direct information to customers on the location or condition of stock.
“What benefits are there in moving from enterprise inventory visibility to customer inventory visibility? The advantage comes from the spending patterns of the multichannel customers themselves.
“Studies have shown that multichannel shoppers spend three times more, with more than 10 per cent opting for services such as buy online/pick up in-store. This may not be too surprising, given that multichannel shopping appeals most to individuals who have money but lack the time to spend it,” says Boos.
Ian Roper of Access Delta says: “Inventory management is always most effective when it is embedded in an ERP environment and aligned with SOP, MRP and other business processes, 24/7.
“The warehouse used to be a stockholding, storage area. The objective was to be able to store as much stock as possible, and to be able to find it. Now, today, the warehouse has become a short-term buffer, from receipt of stock from production or import, to dispatch to the customer – and the stock turn has to be as short as possible. In short, warehouse and inventory management requirements have changed. Next generation WMS technology will do away with the traditional warehouse system limitations on product and location definition, process mapping, stock recording and other workflows – allowing user definition of an unlimited number of stock attributes and their variances.
“Changes of this kind will ensure that WMS becomes a highly influential link in the supply chain, punching well above its weight and, increasingly, driving SCM best practice,” argues Roper.
Stephen Szikora, IT director at NFT points out that inventory strategies vary across and within all sectors. “Over the years, many strategies have been devised, including push, pull, based on Kanban, JIT, VMI, call-offs, imprest stock and quite a few others. Without efficient processes underpinning flow in the supply chain, inventory is necessary to guarantee the delivery of the product to the required service level, but this is at an additional cost. Therefore, the margin on a product can have extreme effects on how it is planned.”
And then there is the desire to get the best of both worlds. Jan-Paul Boos points out that organisations are looking to achieve not only lower levels of on-hand inventory at the same time as lower levels of out-of-stocks, which in turn maximises customer service levels.
Working capital
For many organisations, working capital is a key business concern – followed by the investment requirements to hold inventory.
But Hugh Williams warns: “Inventory optimisation has become a euphemism in many companies for inventory reduction. Without doubt, reducing excess inventory is an objective, but not so much that it compromises service. Very few people actually understand the role of inventory, which is to protect the company against market volatility.
“The drive to release working capital is often what prompts many companies to decide they need to optimise inventory. Many companies pluck an arbitrary goal out of the sky, like to reduce inventory by ten per cent. This approach rarely works and is a particularly dangerous practice for companies that sell a diverse product range with different demand levels and lead times.
“Another common mistake is when companies overstock on fast-moving products because emotionally it feels better. These are exactly the products a company does not need to overstock on because the demand for them is so predictable. This can be a very expensive mistake as even one day’s cover can add up to a very big number over a year,” he says.
Szikora points out that: “At the execution level, constraint planning within the supply network is the key to unlocking the value. It mustn’t be forgotten that the whole chain is only as strong as the weakest point, which could be anywhere from pre-production to available (retail) shelf space. The goal should be to build in capacity options throughout the entire network, to remove pinch points.
“Alternative sourcing strategies are also very much in evidence, giving organisations a turn on/off capability as feedback indicates. This can apply to logistics services as well as to the product itself. This is why cost-to-serve modelling and measurement have become the norm.”
Templar highlights a number of key planning considerations: forecast demand, probability of forecast accuracy, classification of products according to importance of availability, minimum order size, manufacturing lead time, delivery lead time, known range changes, and competitor activity.
Boos says: “The expansion of global supply networks and markets has made supply chains multi-tiered and much more complex, involving more partners, with more hand-offs between providers and carriers and with more opportunity for disruption and failure along the way.
“At the same time that internal and external supply networks grow longer and more complex, they must react more quickly through more channels and they must provide better service.
Security fears
“In this context, the need for collaboration, visibility, agility and control across extended trading networks has never been greater, especially with suppliers. Historically, however, along with fears concerning security and competitive advantage, technology issues have limited the ability of companies to share information easily, accurately and securely with trading partners (and often even internally).
“There are just too many disparate systems within enterprises and across trading networks, which cannot talk to each other without difficult, time-consuming and costly integrations. Multiple ERPs, distribution systems, release levels and communications protocols, along with different technology capabilities at different points in the supply chain, cause companies to lose visibility of inventory within their network, often forcing them to re-identify it at each receiving point.
“This creates a ‘half-blind’, dated view of supply chain operations with no real-time view of supply chain inventory, and no ability to detect and react to events and disruptions in the network as they occur. However, the advent of cloud computing and its related technologies has broken down barriers to sharing data across your supply network, without sacrificing security,” says Boos.
Ensuring that an organisation has the right level of visibility of its inventory is not simply about good forecasting – although that is important.
Brian Templar highlights the importance of a closeness and understanding of future customer demands, as well as closeness and understanding of its supplies production processes, batch sizes, reliability and quality. “This is where many companies have come unstuck with supplies from the Far East,” he points out.
And Stephen Szikora says: “A planner has to understand which signals are important to monitor, as noise across the whole range can distract from the most important signal. Aggregating signals (trending) is also vital in monitoring.
“Signals come from a number of sources, including sales, planning, WMS, weather forecasts, and sales forecasts. Modern day signals start from social media data, which acts as a barometer to how a product will move and thereby how the plan should adjust to meet this expectation. The signals are automatically generated by alerting mechanisms and work flow triggers as events roll out, or don’t, in certain cases.
“All of this is rolled up into the execution plan, which can be monitored and controlled in real time. The ability to monitor activity in real time is invaluable in the field of chilled food and drink logistics, in which NFT operates. This is a challenging arena working with extreme time constraints and we have to operate seamlessly and efficiently to ensure we can deliver for our clients.”
Planning is a core function across thousands of disciplines, says Szikora. “Software is an absolute pre-requisite. This is the holy grail for a significant number of organisations and many have spent millions on commercial and proprietary algorithms to solve the planning problem.
“Good planners and good planning tools can make a substantial difference to the bottom line. Technology investment over the years has seen advancements in software, from humble MRP/DRP to complex, multi-agent optimising algorithms designed by learned establishments, featuring input from research into planners’ methods and knowledge.
“As well as the software tools, other examples that can be quoted include weather forecasting satellites, RFID smart tagging and shelf inventory technology.”
Barloworld SCS has developed CINO (combined inventory network optimisation) software designed to combine advanced sourcing and routing techniques with multi-echelon inventory optimisation to enable companies to manage the balance of service performance targets with operational costs.
By considering the details of all sourcing, transport and processing alternatives and taking into account lead times, capacities, constraints and service level targets across the entire network, CINO can determine optimal inventory flow and stocking policies for every SKU at every location. It provides early visibility of potential issues and enables companies to collaborate with their suppliers and customers to meet service performance targets efficiently and reliably.
This planning approach is designed to ensure that service targets are achieved at the lowest possible cost.
“CINO software enables organisations to maximise the performance of an existing network, identify any weaknesses and model the impact of planned and unplanned events” says Nick Newby-Ricci of Barloworld SCS.
