Supply Chain Planning Blog

Reducing Supply Chain Risk With Better Inventory Planning

Posted by kameron hadavi on Tue, May 10, 2011

Supply Chain Riak ManagementIn our last blog article, we talked about how today’s advanced planning technology can help with managing risk in a supply chain (read: Use Advanced Planning To Manage Supply Chain Risk). More importantly, we talked about how uncertainty (i.e. risk) in the supply chain, most often, leads to imbalances in the inventory levels. The following table was used to show how common supply chain issues lead to either too much, or too little, inventory at different points in the supply chain.   

Inventory Planning Issues

The good news is that many of the most frequent risks, and their impact on the inventory levels, are quantifiable.  For example, most companies have a good idea as how reliable major suppliers are, how often certain machines breakdown, or how accurate are their demand forecasts. Furthermore, the negative effects that indirectly  propagate to other parts of the supply chain can also be considered.  For example in Japan, many of the suppliers who were not directly damaged by the recent earthquake, still felt the ripple effects of difficulties in procurement of raw material, shipping Finished Goods, and other logistical problems.  These too, can all be calculated with a proper supply chain inventory model.

Let’s talk about how supply chain planning technology can help.  Since risk and its effects on inventories can be measured then wouldn’t it be logical to manage supply chain risk from within your Inventory Planning system? In fact, today’s advanced Multi-Echelon Inventory Optimization (MEIO) systems are intelligent enough to be used for supply chain risk management.   Forecast streams, incremental costs, revenue factors, service impact, etc. can all be dynamically modeled in a MEIO system.  Supply chain risk scenarios can be simulated and their effects on inventory levels, profit margins, and customers can be closely examined.   Such a technology can make it a lot easier to decide whether it would be worth to operate at a higher cost structure (for example, by introducing alternate suppliers, or increasing buffer inventories), or consider other options to mitigate risk. In some cases, you may even realize that it would be too expensive to greatly reduce certain risk factors.  That is your choice, but as long as you can fully and systematically assess the consequences.

An MEIO system with supply chain risk management capabilities would be most useful in assessing the more frequent risks, causing the infamous inventory seesaw effects, rather than risks that may occur twice per century—such as Japan’s recent earthquake. Take Apple for example, which was in middle of iPad2’s launch, as the disaster occurred.  According to CNBC, some of the components of this device are built only in more advanced manufacturing countries, such as its unusually thin battery.  Chances are that Apple will not dramatically change this supply strategy due to a similar risk in the near future—even as it delayed iPad2’s launch date in Japan by two months, and the wait time for all online orders increased to 4-5weeks.  However, you can be sure that Apple has assessed many alternate supply strategies based on risks of much higher probability.      

Risk assessment can never be too accurate.  A Multi-Echelon Inventory Optimization system can be your best tool in simulating, assessing, and mitigating risk factors, and their full impact on your supply chain.   Feel free to use the comments section to tell us what tools you are currently using to manage risk in your supply chain.

For more information about MEIO, use the following links:

Download this ePaper: Demystifying Multi-Echelon Inventory Optimization

Youtube video: Inventroy Planning Defined As Part Of S&OP


Kameron HadaviAbout the Author:  Kameron Hadavi is the Vice President of Marketing & Alliances at Adexa, for more information about him please click here.

Topics: Multi Echelon Inventory Optimization, Supply Chain Planning, Inventory Planning, Enterprise Risk Management, Risk Planning