Supply Chain Planning Blog

Not Your Father’s Inventory Management System

Posted by Cyrus Hadavi on Fri, Apr 30, 2010

Inventory Management SoftwareWhen it comes to an Inventory Management system, we have moved to a whole new level of solutions called Multi-Echelon Inventory Optimization systems (see previous posting on Supply Chain Planning Blog).  This technology brought about a big change to the all-critical inventory planning function.  To that end, it has evolved quickly like anything else in technology today. So in this posting, I want to touch on some of the major differences between the MEIO solutions that were initially introduced into the market, and the ones that are available today.
 
Operations research and mathematical programming techniques are great at finding answers but fail to explain why.  This is like your boss telling you what to do without telling you why you are doing it, what the consequences are, and how the decision was arrived at.  As wise as your boss might be, he may fail to see all the different angles, and his "good" decisions are only relative to what he is trying to optimize.  For example, your boss may ask you to increase production of XYZ Widgets since the demand is high.  In his mind he is meeting the customer service goals, increasing revenue, and keeping the production line fully utilized.  So what's wrong with that?  He is optimizing for all of the above criteria, except that XYZ is not a high-margin product.  In fact based on competitive pricing, it is losing money in certain regions, meaning that the more you produce the more you lose!  So by doing this, not only he's hurting the profit levels, but also taking away opportunity to make and sell other high-margin products.  Another simple example, a new line of product is launched and you are wondering how many should be made based on current market demand?  The strategy is to make as many as possible based on supply capacity, in order to capture market share. However, by selling the new line you are cannibalizing the sales of the old inventory-- wrong timing and inventory policy, costing you millions!
 
This process has some deficiencies:
 
1- How do we know that the boss has looked at every criterion that is relevant?
2- What are the alternatives and consequences that may lead to better results for all, rather than a few.
3- Unless you know why a decision is made how can you justify it, and not put the company at risk?
 
First generation MEIO systems were kind of like your boss. They would just say what to do without telling you why you are doing it and what the repercussions are.  Many of Today's MEIO systems have the capability to go much further to explain the results, allow "what-if" analysis, show you alternatives, and most importantly tradeoffs-all at your finger tips, in real-time!
 
When designing an inventory strategy, transparency is needed to evaluate the different alternatives and to examine the impact of the decisions on your enterprise, as a whole.  For every gain that is expected, there might be a sacrifice of other products, as well as customer delivery performance tradeoffs.  The new MEIO systems are no longer that "black-box" that tells you here are your two choices-take it or leave it.  Just like a brilliant analyst, your MEIO system should tell you what happens when you increase production of one line vs. another, show why you need to make more of this and less of that, and explain how you can set your inventory targets to make the best of both customer service levels and reduce cost, at the same time.  But more importantly, it should walk you through your decision scenarios and its financial consequences.  Now this does not sound like an inventory planning system that our father's used...does it?  Don't even get me started on spreadsheet-based systems.    
 
By the way, I am very interested to get some feedback on what you are using in your enterprise for Inventory Planning, today?  And how it's working for you?  So feel free to comment on this posting and I am sure others will share too.
 
If you are interested to follow up on in this topic, there is an informative ePaper called Demystifying MEIO that I highly recommend, at: http://web.adexa.com/multi-echelon-inventory-planning-epaper/ .  Feel free to click and read it at anytime.

 

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, Inventory Planning, MEIO, Inventory Management Software