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Copyright 2010 SCDigest and
The Supply Chain Television Channel
The Fundamentals of
Inventory Optimization
Full Videocast Link:
http://www.sctvchannel.com/webinars/Videocast3.php
?cid=3469
Supply Chain VideoCast™
Broadcast Made Possible by:
Demand-driven Inventory Optimization
Fundamentals of Inventory Optimization
Session 1: Catching Up on the BasicsJoe Shamir, CEO, ToolsGroup
Key Questions to be Answered
• What’s the difference between Inventory Management and Inventory Optimization?
• What are the different types of Inventory Optimization?
• When is each type critical? Industry-by-Industry
5
ToolsGroup Summary
• Leader in demand-driven inventory optimization, successfully deployed in 31 countries at 200+ companies worldwide
• Innovation partner for companies who want to achieve excellent service levels with less global inventory
• Extended offering includes “Rapid Inventory Rightsizing”
• 95% of customer licenses ever purchased still in operation today, under maintenance
• Integrates to numerous ERP systems
Offices in Boston, Toronto, Mexico City, Barcelona,
Milan, Paris, London, Amsterdam & Cape Town,
plus partners worldwide
SupplyUncertainty
& Variability
Inventory Buffer
Demand Uncertainty
& Variability
Inventory Management
Retailers
DCs
Manufacturing
Transport
Single SKU/L
SupplyUncertainty
& Variability
Inventory Buffer
Demand Uncertainty
& Variability
Inventory Modeling: Classic Inventory Management
What Changed?
Service Level Pressures
Product
Proliferation
Global Sourcing
(Longer Supply Lines)
Cost of Working Capital
Daily
Replenishment
SupplyUncertainty
& Variability
Inventory Buffer
Demand Uncertainty
& Variability
Inventory Modeling: The Real Modern World
The First Step to Inventory Optimization
“Plan your service, not your inventory”
SupplyUncertainty
& Variability
Inventory Buffer
Demand Uncertainty
& Variability
Three Types of Inventory Optimization
Retailers
DCs
Manufacturing
Transport
What is the right mix to carry? Where should inventory be staged?
(Multi-Echelon)
What lot size?
Mix Optimization
Mix Optimized
Customer Service LevelIn
ve
nto
ry
“One Size Fits All”
10-15%
Reduction in Inventory Cost
Multi-Echelon Optimization(Stage Optimization)
Postponement Optimization
West
Multi-Packs
East
South
Toothpaste
Toothbrush
Packaging
Assembly
One size fit all coverage:
Hold inventory everywhere
Postponement:Delay assembly of
long lead-time toothbrush
Toothpaste
Toothbrush
Packaging
Multi-Packs
East
South
West
Distribution
Lot Size Optimization (EOQ)
Industry by Industry
Scalability, Product
Perishability
Automated Solution,
Product Substitution
Launch and End of Life
Profiles
Inventory Modeling,
Lumpy Demand
Mix Optimization,
Promotions
Out-of -StocksOffshore supplies
creating longer, less flexible lead
times
Trade off in-season lost
sales and end-of-season
discounting
Complex multi-tier distribution
environments
Large #s of SKUs, Complex
multi-echelon Networks
ScalabilityWrong inventory
crowding out needed
inventory
Large #s of
SKU-Ls
Part criticality
(service level policy)
Product
obsolescence and freshness
Lack of good inventory data
High customer service levels
Short product life cycles and
seasonal collections
Slow movers & lumpy demand
Customer service issues
(SLAs)
RetailWholesale
Distribution
Fashion/
Electronics
Aftermarket
Parts
CPG
Summary
• Inventory Management optimizes inventory only for a single SKU/L in the network, and even then does not reliably deliver target customer service levels
• This issue become more pronounced with higher service
levels, longer lead times, scarce or expensive working capital or lumpier demand (proliferating products, more frequent replenishment)
• Inventory Optimization reliably delivers target service
levels and understands the “big picture”, to optimize all SKU/Ls, across multi-echelons, and optimal lot sizes
• Inventory Optimization needs vary depending on industry and company circumstances
Demand-driven Inventory Optimization
Fundamentals of Inventory Optimization
Session 2: Implementation ConsiderationsMartin Woodward, Managing Director - UK
CONFIDENTIALCONFIDENTIAL 1919
Key Principals to a Successful Inventory Optimization Implementation
• Reducing the Bullwhip
• Calming Supply Chain Nervousness
Volatility
Constant Expediting
SC Noise!
Extra Inventory
CONFIDENTIALCONFIDENTIAL 2020
The Most Important Things About Process Discipline
Key Processes:-
• Forecasting
• Blending market intelligence into a robust statistical forecast
• Inventory Optimisation
• Reactive segmentation – differentiating items and customers
• Replenishment
• More than placing an order – recognising price breaks and
building intelligent loads
CONFIDENTIAL
Case Study – Office Team
CONFIDENTIAL 21
CONFIDENTIALCONFIDENTIAL 22
Case Study – Office Team
CONFIDENTIAL
Case Study – Office Team
• £200m sales
• 5 RDC’s, 15 LDC’s
• 37,000 Stocked items
• 180,000 SKU Locations
CONFIDENTIAL 23
CONFIDENTIAL
Challenges
• Two semi-independent supply networks from historical mergers
• Forecasting – no forecasting process
• Inventory planning – simple re-order point set historically.• Not sensitive to forecast trends or seasonality
• Logic lost over time
• Replenishment• Re-supply ordering not reliable
• Local stock controller frequently overriding suggested proposals and ordering alternative quantities
• Frequent stock outs in one location satisfied by supply from other location
• Opportunity – to restructure the network (5 to 4 RDCs) and focus slow movers in a few key locations
• Imperative to maintain very high service levels throughout any change
• Burning bridge – absorb new recently acquired companies
• Future – flexibility to support ambitious growth
CONFIDENTIAL 24
CONFIDENTIAL
Solution
• Implement new inventory management processes and world class solution
• Forecasting – monthly process
• Create statistical forecast
• Identify exceptional demand (high and low) and trim outliers and add missed demand
• Inventory Optimization
• Review actual service level vs. target (twice a week)
• Replenishment
• Create replenishment orders
• Review - anything above recommendation referred to finance for approval
CONFIDENTIAL 25
CONFIDENTIAL
Solution (Con’t)
• Opportunity Buying - forecast demand to predict consumption and cover of bulk purchase opportunities
• Inter-depot Transfers – run periodic report to rebalance stock between warehouses to eliminate need to serve customers from wrong warehouse
• Future proofing
• Key element – capturing demand by post code enables demand to be transferred between RDCsand demand from new acquisitions to be integrated seamlessly ensuring correct products in correct RDC.
CONFIDENTIAL 26
CONFIDENTIAL
Results
2008
• Integrated two supply chains
• Reallocated customer demand to LDC’s, and LDC demand
between RDC’s
• Closed one RDC
• Absorbed two new companies
• No impact on service, no lost customers
2009-10
• 44% increase in stock turns from average of 11.7 in 2008 to
average of 16.9 in 2009
• Class A service level raised to 99.2%
• Class B service level raised to 97.4%
• Increase in planners (from 4 to 6) enabled a reduction in expediters (from 20 to10) – net reduction of 8 positions
• Significant reduction in inter-depot transfers
• Now ordering full mixed containers from Far East
- reduction on cost prices of £100k, with excellent burn ratesCONFIDENTIAL 27
®
Session 3:
Graduating To
Multi-Echelon
Inventory Optimization
Noha Tohamy
AMR Research
®
Inventory Management
• Is your first thought, “How do I minimize inventory?”
But If inventory is a dependent variable, how can we view
inventory issues in isolation?
• Better Questions…
• How can I increase demand forecast accuracy?
• How can I minimize latency of demand and planning information?
• How can I work with suppliers to manage inventory and costs?
• What options do I have for my network and/or postponement strategies?
®
Multi-echelon Inventory Optimization
• Single echelon: sequential approach – forecast demand for each of the echelons separately
• Single echelon: DRP: forecast demand for the distribution/downstream demand and then pass up that
requirements to the echelon above
• Multi echelon:
• solve one problem, taking into account the demand forecast at the lowest echelon.
• Takes into account lead time and lead time variations in all the higher echelons
• Demand forecasting and inventory replenishment decisions are made at the enterprise or network level in a single
optimization exercise rather than in a sequence of sub-exercises for each echelon.
• Benefit:
• Avoids multiple independent forecast updates in each
echelon.
®
Inventory Optimization vs. SCP
• The difference between inventory policy products and standard SCP products for DRP and deployment is the use of
• non linear stochastic algorithms to analyze demand and supply variability within a multi-tiered network,
• Service-Level Agreements (SLAs) as optimization parameters.
®
Inventory Optimization - One Size Can’t Fit All
®
Inventory Optimization Functionality
Key Functionality Requirements:
• Setting time-phased Inventory Targets: finding the optimal item, location specific inventory targets to reflect seasonal demand in
conjunction with production / supply capacity constraints
• Multi-Echelon Inventory Optimization: optimizing inventory
across all states (RM, WIP, FG) through the supply chain based on customer facing service targets
• Handling Items with Variety of Demand Variance Profiles: handling items that exhibit both a normal distribution as well as
other profiles, like lumpy demand and slow moving items
• Optimizing Service Level Mix: Determining the item-level targets
based on an overall service goal for a product family, customers, channels
• Supply Variance Calculations: handling supply variability parameters
• Tie to Demand Sensing: Refining the inventory decisions based on current needs and requirements
®
Inventory Management
When determining if your supply chain has the right level of inventory, keep these four items in mind:
1. Tradeoffs—Have you achieved balance in your supply chain with inventory serving as the right buffer between demand and supply variability?
2. Reliability—Inventory levels often rise when suppliers or operations are not
reliable. The more reliable your processes, the lower the level of inventory that can be obtained.
3. Total supply chain inventories—Are you taking responsibility for total supply
chain inventories and tradeoffs?
4. Reduced demand latency—The longer your supply chain and the larger the bullwhip effect, the more inventory will be in the system. Supply chain leaders
are building demand networks to see true demand in days.
Inventory choices need to be made from end to end supply chain perspective!
Resources
•• Joe Shamir, Joe Shamir, ToolsGroupToolsGroup
•• [email protected]@toolsgroup.com
•• Martin Woodward, Martin Woodward, ToolsGroupToolsGroup
•• NohaNoha TohamyTohamy, AMR Research, AMR Research
•• [email protected]@amrresearch.com
Web Sites:Web Sites:
www.toolsgroup.comwww.toolsgroup.com
www.amrresearch.comwww.amrresearch.com