Supply Chain Planning Blog

Supply Chain Inventory: Good or Evil?

Posted by Cyrus Hadavi on Mon, Mar 15, 2010
Inventory Planning What do all manufacturing companies, regardless of industry, have in common? Inventory! It's the lifeline of every company that sells goods. How can it be evil?

Inventory to a supply chain is like water to people. Too much of it would drown you. Too little makes you dysfunctional. So how much is enough? Just as in people, the real question is how fast are you running? Hence, the amount of inventory you need has to do with how fast you can move it. In addition to knowing how much is needed, you also need to know when and where you need the inventory. The fact is that, just like energy, inventory does not get destroyed but transforms from one type to another. And the decision is yours as when you want to transform it from Raw inventory to Work-in-Progress, to Finished-goods; or to decide when to bring it to your site, or move it to another location. These are tough decisions to make, with potentially big impacts on your supply chain. You see, inventory planning is based on a very large number of potential configurations of product types, locations, and timing based on demand and supply factors. So making good decisions about what to do with your inventory can be very complicated! But wait I am not done yet! On top of all these factors, you also have to worry about Acts-of-God, Mother-Nature and even "luck". Yes, luck! In our customer base, we have a major brewery with demand that swings heavily based on weather during the holiday weekends. We also know of a major food processing company in South Africa that is already planning for spikes in demand for "chicken" during the 2010 World Cup. Other examples, SARS in Asia caused shortages of high-tech semiconductor components, and H1N1 Vaccine was in serious shortage, just recently. .

So back to the question: How much, where and when? Most supply chains have many different layers of inventory or echelons. Examples are raw material, buffers in between sites, WIP, finished-goods, distribution centers, consignment locations and more. At any given time, for each layer of the supply chain, decisions need to be made regarding how much, and what type of inventory is needed to maximize your service levels, and minimize your cost. A simple question like that for even a few products can be complex, for hundreds or thousands of products can be mind-boggling, especially when you bring in chance and probability.

OK, here is the good news: MEIO. Multi Echelon Inventory Optimization is designed to do precisely what we have talked about, i.e. minimize your cost of reaching targeted service levels. MEIO deals with the elements of chance and probability at every layer of the supply chain and keeps a tight-eye on cost factors. It knows that Raw material costs a lot less than Finished-goods and has the potential to transform to what the market needs. In other words, MEIO takes into account postponement strategies and the potential to deliver a certain level of service. As the user specifies higher service levels, the system shows the potential increases in cost and recommends what to get, and where to keep it, in order to protect against surprises. It is really cool. And the good thing is that it will save you a significant amount of money in a short period of time.

So you owe it to your company to ask: Do we have enough of what it takes to deliver what we need? Are we losing money for keeping too much or losing opportunities, and market share, because we don't have enough? If you know the answer to these questions, do nothing and you are in great shape. If not, take a look at what MEIO can do for your company.

Inventory is GOOD only if there is the right amount, in the right place, at the right time! MEIO shows you what the "right" is for you.

Cyrus HadaviDr. K. Cyrus Hadavi is the president and CEO of Adexa, for more information about the author please click here.



For more information about different types of Supply Chain Planning systems visit: Demand Planning, Inventory Planning, or Sales and Operations Planning.

Topics: Multi Echelon Inventory Optimization, Demand Planning, Inventory Planning, MEIO, WIP, Finished Goods, Inventory Optimization