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DEALING WITH CHANGE
The business intelligence and supply chain management challenge
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ashions change, seasons change and so does your supply chain. So, when was the last time you
looked at your entire supply chain process to determine whether it is keeping up with the times? Recent sup- ply chain management developments have dramatically changed how your business can compete, supply chain versus supply chain. Yes, your supply chain can be a
competitive advantage and a source of business value to your company. But, if you have not examined your inventory and supply chain “drivers” in some time and have not fully rec- ognized the value of new “business intelligence” applications, then maybe it’s time to take a look at how some new innovations can impact profit, service level and working cap- ital improvement. Fortunately, even small companies can look and act big, challenging their thinking about their supply chains and implementing practical and realistic solutions.
A business intelligence approach You may be familiar with the pricing
and gross margin analytical software available today that allows you to drill down into how you price products, de- velop “what if” scenarios and see the potential results of your pricing policy decisions and their impact on the goal of maximizing gross margin. If so, consider this: What margin is
to pricing optimization, service levels is to inventory optimization. Inven- tory optimization is a subset of the broader analytics — business intelli- gence — which, in the process of col- lecting, storing, and analyzing data enables more intelligent supply chain decisions to unlock working capital, while maintaining or improving your desired service levels.
IO views inventory as a strategic asset, not as a problem Inventory optimization (IO) is a
hot area of new software and supply chain discussion right now, although, at “first thought,” some immediately think of it as just another term for a
• Inventory Optimization the current thing
• Carefully set and monitor I/O ‘drivers’
• Replenishment not simply reordering
• Change in thinking might be needed
strategy or goal. If your goal is to have the right in-
ventory, at the right place, at the right time, at some level, of course, you are trying to “optimize” your inventory investment. No one I know intention- ally orders too much or too little in- ventory as a strategy. But sometimes you have to find some other unique, new and different ways to conserve working capital —and maybe even gain some other benefits too. IO software, applied to your inven-
tory and supply chain decisions, is meant to perform a rigorous analysis to your inventory, then to use this analysis — the business intelligence you obtain — to identify specific changes to inventory stocking and re- plenishment processes and decisions and changes to the distribution net- work and to correlate inventory in- vestments to product revenue and profit generation opportunities. I recently heard IO defined and
then stated in a few different ways that seem to make a lot of sense. Sim- ply stated, it is “aligning your com- pany’s inventory with your go-to-market strategy.” In broader terms, for multi-location
distribution networks (known as multi-echelon), the inventory level in one location can affect the ability to achieve inventory and service level goals in another. For instance, if you set inventory levels at location A to X, what do you need to set inventory levels at location B to achieve Y, when B is the source of inventory for A? The only way to correctly answer this question is to determine the total inventory for all locations simultane- ously, taking into account all the var- ious dependencies and sources of variability within the distribution net- work. In other words, identifying smarter inventory replenishment poli- cies and holding rules. So, that’s what an inventory opti-
mization software approach is pur- ported to address; deliver desired/ user specified customer service levels at minimum total distribution net- work inventory cost and allocate in- ventory most strategically among the stocking locations. The word simultaneously is a key
word, considering the impact that in- ventories have at any given level, or echelon, i.e., on upstream locations (a distribution center or your supplier) and downstream locations (your stocking branches). Advocates of IO say, “Look at the total distribution network.” Traditional ERP systems
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often just look at the inventory re- quirements at each location, or eche- lon, separately, in a “transactional based look.” So, IO is an interesting proposition,
considering that there are so many companies out there that don’t even seem to be able to find the time to re- view and/or update basic safety stock decisions (Lots of money tied up there!), review their demand and lead-time supply variability on a reg- ular basis, or are still “ball-parking” their inventory buying decisions re- lated to paying freight or hedging against commodity price increases — and what the cost versus inventory trade-offs really are. So, maybe a more “scientific” ap-
proach does have merit, one that en- hances and leverages your ERP investment.
The rationale Additionally, through the IO ana-
lytics, you can drill down to specifics and discover a lot of things you didn’t know before. In particular, if you
BY HOWARD COLEMAN Special to TheWholeSaler
tion concept enters the picture. The inventory drivers
The challenge of inventory opti- mization can be even more daunting in multi-echelon distribution net- works (Figure 1), where you have product stored at a central point (a distribution center or hub) and where the DC is the internal supply to your branches (the customer-facing loca- tions). We know this as the “hub and spoke” distribution model. The nuts and bolts of inventory op-
timization involve carefully setting and monitoring the specific “drivers” of inventory management, which are interrelated and which use informa- tion gathered from each other. These drivers are desired service levels,
•THE WHOLESALER® —MAY 2011
Figure 1
need to provide differing service lev- els, by product or group or location, or when adding a branch or two changes the game, or when different markets require different approaches, etc., this serves to increase the com- plexity of supply chain management decisions. Your stocking strategies become very important, particularly if you relate them to your business objectives, to specific item/product attributes (i.e.; fast movers, slow movers, new products, critical prod- ucts, etc.), demand expectations and supply characteristics. In today’s environment, it’s just not
enough to monitor inventory control efforts by running reports from your computer system to measure inven- tory turns. Why? These actions are not directly concerned with trans- forming inventory management into a profit and service level enhancer. This is where the inventory optimiza-
forecasting, replenishment order fre- quency and lead time. Consider desired service level.
This involves setting and monitoring the desired service level performance of the inventory itself, down to each SKU. Most ERP systems, alone, don’t provide service level analysis and reporting. Rather, you must peer into demand history, demand varia- tion, GMROI and lost sales. Next is demand forecasting, which
requires that you have an understanding that goes above and beyond simply hav- ing knowledge of recent sales history. It requires an understanding of “demand- pull” and “continuous flow” concepts (see our White Paper, Lean Thinking in Wholesale Distribution Supply Chains – Do You Pull or Push? available at
www.mcaassociates.com) and their use, to develop appropriate target inventory levels for each and every product. (Turn to Inventory... page 94.)
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