Supply Chain Planning Blog

Spreadsheets and Planning

Posted by Cyrus Hadavi on Wed, Apr 06, 2016

Givspreadsheet.jpgen that more than 90% of the enterprises in the world use spreadsheets in one form or another, one may conclude that spreadsheets are the most desirable and successful enterprise software in the world! So, why would you want tospend so much money and effort to invest in planning software? The justifications to use spreadsheets are that they are simple, easy to manipulate and they “do the job!”  There are a number of reasons, discussed below, that make spreadsheets inadequate for planning purposes. Mostly the fact that just an ad hoc plan can be far inferior to other more optimized plans; and in the absence of suitable systems and algorithms, one cannot tell one from the other. I am sure you have heard of the expression: good is the enemy of great! In case of spreadsheets, it is merely the perception of good that is preventing companies to do something exceptional and distance themselves from their competition! It is amazing that companies invest hundreds of millions of dollars in people and equipment and then rely on a simple spreadsheet to run their business and make use of the resources that they have so heavily invested in. Every one percent improvement in plan can translate into millions, if not tens of millions, of dollars in inventory savings and higher utilization of resources. In fact, it is more than just savings that need to be considered; it is more relevant to know that there are opportunities for increasing revenue and market share, by deploying adequate planning systems. More recently companies have been investing more heavily in supply chain execution systems such as warehouse management and logistics or even shop floor sequencing. The problem is that executing without a good plan results in a more efficient way of doing the wrong thing! What is the point of building and delivering the wrong goods to the wrong place in an “efficient” manner? Planning prevents making costly mistakes, it makes companies more responsive, it shows where to spend money before it is spent and it creates opportunities to expand market share by having the right product at the right place at the right time. A multinational CPG customer of Adexa with over 100distribution centers reduced inventory by 33%, reduced material cost by 5% and improved delivery performance by deploying planning systems that enable optimization and improve visibility of the entire supply chain. ROI for the project was over 2100% realized within half a month! The point is that before deploying Adexa, they were running a successful and profitable business but could not see the hidden potential of their supply chain and opportunities that could be exploited using a more sophisticated system.

There are many reasons that make spreadsheets less than ideal for planning purposes. Spreadsheets cannot account for mix of products (different mix results in different capacity needs and different lead-times). They assume fixed lead-time whereas in reality lead-times are variable depending on the mix. In addition, they do not take into account availability and synchronization of material and capacity at the same time. Furthermore, there are myriads of other constraints such as tool availability, setup times, batching possibility, process and product attributes etc. that all need to be accounted for that spreadsheets cannot model. Many users are fond of spreadsheets because they can manually manipulate the plan.  The question is why is there a need for manual interaction? The answer lies in the fact that the plan that is being created is not accurate enough to execute therefore requires manual adjustments.  The planning systems create an accurate and near-optimal plans such that little manual effort is needed.  Finally, spreadsheets cannot perform incremental planning, dynamic allocation and ATP/CTP, and the underlying models are static, deviating from reality the more they are used. As an example, one of our clients used to take up to two weeks to figure out delivery dates of orders to respond to its customers. It would take about a week of spreadsheet planning in their HQ in US and another week with their subcontractors in Asia. After they started using Adexa’s planning engine, the commitment dates to their customers have been practically instantaneous and more importantly accurate and reliable.

With the recent innovations in processor speed of computers and advances in programming and Artificial Intelligence, we are now in a position to accurately predict inventory requirements at every level of the supply chain by considering the probability of usage of every part# from raw material to WIP to finished goods. This allows companies to keep the right amount and mix of inventory at different stages of supply chain to maximize responsiveness at lowest cost of inventory. Such disruptive technologies help to save tens of millions of dollars in inventory cost and improving responsiveness dramatically.

When it comes to efficiency, use of spreadsheets to perform planning function is probably as good and efficient as using a bicycle to travel from Los Angeles to New York city! It gets the job done but …

Topics: Supply Chain, Supply Chain Planning, Inventory Planning, Excel, Spreadsheets, WIP, Manufacturing Planning, Inventory Optimization, CPG, Factory Planning, Material Planning, Scheduling, Business Planning, MRP

Inventory Optimization is like Baseball's Moneyball

Posted by kameron hadavi on Wed, Oct 10, 2012

iStock Baseball Money XSmall resized 600

How do the Oakland A’s achieve results like this at a fraction of cost of a team like the Yankee’s?

2002 New York Yankees: Team Salary $126 million; 103 Wins 59 Losses; Division Winner
2002 Oakland Athletics: Team Salary $ 40 million;   103 Wins, 59 Losses; Division Winner
2012 New York Yankees: Team Salary $198 million; 94 Wins 68 Losses; Division Winner
2012 Oakland Athletics: Team Salary $ 55 million;   93 Wins, 69 Losses; Division Winner

You have most likely seen or heard of the story behind the movie “Moneyball”.  In 2002 the Oakland Athletics had a very limited budget to “carry” their team roster through the season, and they still had to compete with topnotch teams in their league.  Some of the teams they had to compete with, like the Yankees, spent up to four times (4x) as much as they did on their “inventory” of ball players (i.e. “products” in baseball).   The A’s turned away from traditional thinking on how to allocate their budget to field a team, which meant relying on the gut feel of managers and buying the highest priced players.  Instead, they started to rely on “Sabermetrics”, the use of statistical analysis to determine the most cost-efficient baseball players based on measure of in-game activity/history.  Hence, based on mathematical models, the A’s figured out how to best optimize the team at every position on the field.  The result was that Oakland won 103 games in 2002, made it to the playoffs, and tied with the Yankees for most wins that season. Again, Yankees spent more than three times (3x) of what Oakland paid for its team, in the same year.

 
Coming back to the manufacturing world, in the same manner that Sabermetrics can help optimize the baseball players on a team, Multi Echelon Inventory Optimization (MEIO) can optimize your inventory that is deployed throughout your supply chain, in order to achieve target customer service levels, and maximize profit.  There are obvious parallels in taking the Moneyball philosophy to the optimization of inventories.  Instead of the General Manager in baseball using statistics to determine the best players to have on a baseball team, the Supply Chain Manager can use statistics and mathematical models in a MEIO system in order come up with the highest profitable scenarios.  By examining these scenarios, the Supply Chain Manager can decide how to right-size the inventory levels at different locations, and achieve targeted customer service levels, at the highest margins.


Of course, instead of baseball metrics (e.g. RBI’s, on base%, ERA, salary), there are statistical supply chain metrics (e.g. Demand variability, supply variability, BOM, Inventory value, etc.) that can be used to objectively calculate the value of each unit of inventory that you plan to place at a given “position” in your supply chain (e.g. Raw Materials, WIP, Finished Goods, etc.).  This would make it possible to optimize inventory deployment for meeting certain customer service objectives, and squeeze the most profit out of your supply chain, while not exceeding the budget allocated for working capital. 

 
The Oakland A’s are back in the playoffs again this year, with a budget that is one-third of the Bronx Bombers.  Not surprisingly, the use of statistics (i.e. the right system) is helping them get the most out of their small budget.  


Adexa has the equivalent of Moneyball’s Sabermetrics for your Supply Chain, it’s called the Inventory Optimizer to ensure each dollar of inventory is spent in the best possible way.

 

About the Author:  Bill Green is the Vice President of Solutions at Adexa, for more information about him please visit William Green profile link.    

Topics: Multi Echelon Inventory Optimization, Supply Chain Planning, Inventory Planning, MEIO, Inventory Management System, Manufacturing Software, Inventory Optimization, Inventory

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

Use Advanced Planning To Manage Supply Chain Risk

Posted by Cyrus Hadavi on Thu, May 05, 2011

Supply Chain Risk ManagementThe biggest risk in any supply chain is having either too much inventory, or too little, at different points in your supply network. Too much of it leads to additional cost, as well as waste of capacity and space for products that are not selling. On the other hand, not enough inventories would obviously lead to less revenue, and in many instances loss of valuable market share.  After 3 years, GM is most likely to reclaim the title of the world’s largest automaker from Toyota, the father of best supply chain practices in the industry--due to the Japan’s earthquake’s devastating effect on its production and inventory levels. Could it happen to you? You bet!

Some may argue that there are many more risks other than the two specified above.  Our experience shows that all the other factors lead either to availability of inventory, or lack of it.  Consider the following scenarios:

Inventory Planning Issues

As you can see, every one of the above issues can create a risk that would ultimately lead to either too much, or too little, inventories at different points of the supply chain. So, you should consider adjusting inventories based on what risk level is best for you. Conversely, each potential risk would have an impact on availability of inventory. The amount of impact can be estimated by its relative importance. For example, a delay from a key supplier of Boeing, for a critical part, can cause months of delay in delivery of the Dreamliner—this is a much bigger risk factor than bad weather forecasts in some parts of Asia, during the monsoon season.

For each one of the potential issues listed above there is empirical data as to how often it happens. Most companies keep track of their supplier performance and supply chain issues with respect to delivery and quality. Based on this data, you can determine what the financial consequences of such events would be using advanced planning technologies that are now available to you. The use of this technology allows a more holistic approach, taking into account the entire supply chain’s risk rather than pockets of exposure, such as the supply process, design issues, forecasting errors, or manufacturing glitches.

An unfortunate disaster, such as the recent earthquake in Japan, can cause many supply chain problems for a myriad of companies.  By simulating an event such as this in a supply chain risk management system, you can estimate the potential loss as well as what it would have taken to avoid such a loss. If the cost of avoiding such a loss, which happens, say, once every 50 years does not justify it, then a number of steps can be taken to mitigate risk rather than building just-in-case inventories. For example, many automotive companies could have a standby supplier at a slightly higher cost, which can step in and mitigate the risk of supply disruption.  Thus, the higher cost structure would be justified by removing the risk of halting the entire supply chain, when frequent risk factors materialize into supply problems.

In general, risk and cost have an inverse relationship; the higher the cost, the lower the risk, and vice versa. The idea is to know where the trade off is and at what cost the enterprise is willing to mitigate certain risk potentials. Of course, this does not mean that every time you increase the cost, you are necessarily lowering risk. 

In summary, use advanced supply chain planning technology for a speedy answer on when to take a risk, and when not to, based on objective financial consequences. All it takes is a holistic process to risk assessment, and the right planning system.  The technology is ready. Are you?

 

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

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

Supply Chain Planning for South Africa's Largest Processor of Chicken: News Release

Posted by kameron hadavi on Tue, May 03, 2011


Supply Chain Planning for FoodLos Angeles, CA, May 3, 2011—Adexa, Inc., the global provider of Supply Chain Planning and Demand Planning solutions, announced today that Rainbow Farms (Pty) Ltd, South Africa’s largest processor and marketer of chicken, has selected Adexa as its supply chain solution provider.  The first module, Adexa’s Collaborative Demand Planner will be implemented at Rainbow and Vector Logistics, one of the country's major 3rd-party logistics service providers for the CPG/food industry, and also for Rainbow.

The management teams of both companies are determined to improve and automate their joint Sales & Operations planning processes.   The goals of the project include reduction and optimization of inventories throughout the supply chain network, and creating a fully collaborative platform that drives the supply chain through more accurate and intelligent customer forecasts.  

“We want to make better use of our infrastructure, reduce inventory and working capital, and further improve on our high standards of customer service,” said Chris Creed, Managing Director for Vector Logistics.  “To that end, we needed collaborative tools to get closer to our customers, and more advanced planning systems for production and profit planning.  Tools provided by our own ERP system, and the spreadsheets, did not take us nearly far enough, but Adexa will.”

“Rainbow and Vector are very important and strategic customers to Adexa,” said Cyrus Hadavi, Adexa’s CEO.  “As a result of their selection, we have established new sales and support channels, in partnership with Sizwe Africa Business Consulting, to better serve them and our upcoming customers in that region.”

About Rainbow Chicken and Vector Logistics  

Rainbow Farms (Pty) Ltd, is South Africa’s largest processor and marketer of chicken.  Vector Logistics (Pty) Ltd, a division of Rainbow, is a specialist third-party logistics service provider (3pl) for the food and food-related industries within southern Africa across the retail, wholesale and food service sectors.  Visit: www.rainbowchickens.co.za and www.vectorlog.com

For more informaiton contact:

Ron Wilson

Marketing Director

888-300-7692 (Ext. 3)

rwilson@adexa.com

 

South African partner:

Richard Harris

Director, Sizwe Africa Business Consulting

+27 82 805 3360

Richard.harris@sizweafrica.co.za

Topics: Supply Chain Planning, Demand Planning, Inventory Planning, 3pl Logistics, Food Industry, S&OP

Risk Management: Run Your Supply Chain Like An Insurance Company

Posted by Cyrus Hadavi on Thu, Apr 14, 2011

Supply Chain RiskEveryone is aware of potential risks in running a supply chain but what is the process by which you evaluate that risk? And, figure out the alternative solutions to lessen or eliminate it?

I bet most companies, if not all, have no real objective risk management process in their supply chains. At best, they have processes in place for different organizational pockets within which risk is mitigated. Some examples are evaluation of suppliers by the Purchasing Department to ensure supply continuity, or redundancies in capacity, and even building too much, or too little, inventory—which proves more costly.

The fundamental question: what is the damage, when something goes wrong? And, what price are you paying to avoid such inevitable risks? Payment of an insurance premium is exactly that. You pay for a service that allows you to recover from a financial disaster or lawsuit. Insurance companies do their risk assessment very well and ask for a premium that makes them profitable even though every now and then they have to cough up the cost.   Are you doing the same with your supply chain? What is the premium you are currently paying (within your own supply chain) to avoid a potential disaster? What is the potential cost of that disaster? And, is it worth the premium?

A common example of this is delivery performance vs. inventory (mix) at hand. I am sure you are familiar with the exponential operational curves that imply doubling your inventory for a 5% improvement in your delivery performance, from 92% to 97%. Does this make sense? How much is really enough? And, what is the actual cost of missing delivery rather than cost of holding inventory?

Management teams are encouraged to avoid risk. In other words, their incentive is to deliver rather than miss delivery. So, the employees will go out of their way to ensure delivery at company's cost! Again, does this make sense? Example: “sand-bagging” the forecast and “padding” the supply to avoid shortages are steps taken by two different organizations and processes, Sales vs. Production. Furthermore, supplier selection, cost turbulence, and delivery issues are also padded in an isolated way, adding to the overall inefficiency of risk management.   How do you really assess the risk of one supplier over the other, especially as it impacts your bottom line and customer service?  Consider the recent unfortunate disasters in Japan, as many of the car makers are struggling for alternate resources to get their parts delivered;  earthquakes in Taiwan, SARS epidemic in China, dock worker strikes at Los Angeles ports are all other examples of supply risk.

Some element of risk avoidance is built into the jobs of each person, or department.  However,  if each person avoided risk in all the steps to deliver the goods, it would create too much cumulative redundancy--which would cause much higher additional cost in the final product.  This can be avoided with a more holistic approach.

We believe that objective risk assessment must be part of the supply chain planning process and systems, so that objective decisions are made based on financial consequences rather than protecting select customers, or individual employees. To this end, a holistic approach offers more than just  a simple spreadsheet-based S&OP process, but a Financial Sales & Operations Planning solution. The key word is “Financial”, that is integrated into the rest of the enterprise’s operations. Cost, revenue, profit, and risk become part of the supply chain equation, along with customer delivery and supplier management.

When was the last time you took a risk in your supply chain? What was the consequence? How much did the company benefit from it or lost because of it? Would you have liked to have a better optimization and analysis tool to evaluate your options? We invite you to join us in creation of the next generation of supply chain tools, integrating Financials with Sales and Operation Planning (FS&OP).

 

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

 

Topics: Supply Chain Planning, Risk Management, Supplier Management, Inventory Planning, S&OP

Fabless Semiconductor Planning: Between A-Rock-And-A-Hard-Place!

Posted by kameron hadavi on Tue, Oct 12, 2010
Fabless Semiconductor PlanningMost fabless semiconductor companies are stuck between a rock-and-a-hard-place.  On one end, they have big customers demanding what they want, when they want it; and on the other end, they have big suppliers manufacturing their products—some 16 time zones away.    Synchronizing and managing capacities and deliveries through a complex supply chain like this cannot be easy.  Compounding the complexity is the short life-cycle of such products and the long manufacturing lead-times through outsourced Fabs.  With every new product, you basically have to revamp a good part of your supply chain, quickly.    The common theme to all of these challenges is time and uncertainty

Now let’s break the time and uncertainty factors down to their components.  When it comes to manufacturing anything, there is always a Planning cycle-time, and a Manufacturing cycle-time.  The latter, is the pure production time it takes to manufacture a product.  Fabless companies don’t control the manufacturing lead-time, since all of their production is outsourced.  However, they do have the opportunity to manage the suppliers’ capacity that is committed to them—which becomes part of the Planning cycle-time.  They also have to worry about the uncertainty of what they will order with the amount of capacity that they have been promised.  This makes the Planning cycle-time, and accuracy of the plan, twice as important to a fabless enterprise.   Planning cycle-time, is the amount of time a company needs to plan, react, and/or rollout a new plan based on market demand, inventory positions, and supplier capacity commitments.  Its reduction translates into less uncertainty and increased accuracy.  To that end, reducing planning cycle-times is a colossal competitive factor in this market.  Imagine cutting weeks out of your planning lead-times, which would directly impact your customer service, market share, and competitive positioning—amongst other things.  

How can you battle time by achieving shorter lead-times?  Or in terms of fabless, how can you reduce your Planning cycle times and increase plan accuracy?  Before I answer that, let me ask you a question, how can a manufacturer produce goods faster?  The simple answer is: better technology, and faster machines.  The same thing goes for planning systems.  If you want to fundamentally do it faster then you will need a new technology that can help you plan faster, collaborate more, and give you more visibility, thereby enabling better plans.  There are many processes that need to have faster planning times such as demand planning, operations planning, inventory optimization, and of course supply planning.  In picking the right system for your enterprise make sure you consider all these processes and how well the system adheres to your supply chain.   After all what’s the use of faster delivery times, if your inventories and cost is going through the roof.   

Adexa is one of the providers of such technologies and systems, with a great deal of focus on the fabless industry.   Below, one of our fabless customers talks about how they are using our systems to deal with fabless industry's tough challenges.   Also, For more information on this topic download: Overcoming The Shortcomings Of Fabless Planning Systems ePaper.

 

 


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

Topics: Supply Chain Planning, Demand Planning, Inventory Planning, Fabless, Operations Planning, Cycle time, Semiconductors

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

Inventory Planning | What Does It Mean To Optimize Inventory?

Posted by Bill Green on Thu, Apr 22, 2010

Inventory Optimization

Many companies say that they want to Optimize Inventory, but they often have different things in mind when they say it. 

 

Of course, they are all looking to make better use of the inventory on-hand, and they all have the goal of keeping customer service high and inventory low.  However, what makes them different is that each company may have a dissimilar root cause as to why they are not doing better with it.

 Inventory Planning

There are four main areas of supply chain planning to focus on when trying to get more from your inventory investment.  From top to bottom, and with different time-horizons, each one is critical to get the whole picture right, so it’s important to target them individually:

 

1) Reduce forecast error with better Demand Planning

2) Establish better inventory target levels with Multi-Echelon Inventory Optimization (MEIO)

3) Further synchronize supply flow with better Sales & Operations Planning

4) Improve daily Inventory Management

 

Reducing Forecast Error

The two key factors that will impact the amount of inventory that is required in a supply chain are lead-times and demand uncertainty.  Although, forecasts will always be wrong, there is a great deal that can be done to increase their accuracy with improvements in process and technology.  Remember, you have to do everything possible to be less wrong.  Forecasts and “consensus demand” (i.e. aggregation and agreement on one forecast number, by all departments) are also used to determine forecast error.  So, if a company does not have a strong process in place to facilitate collaboration, they will not be able to do well in any of the other areas. 

 

Demand Planning is a critical component of inventory management.  We have a new ePaper on this topic entitled: Planning Demand for Profit Driven Supply Chains.  Feel free to download it by clicking on the title.

 

Multi Echelon Inventory Optimization

The amount of inventory buffering should increase along with the value of a product, the amount of uncertainty in demand relative to the sales volume, and a company’s response time to deal with supply chain surprises. 

 

Where to place inventory can be very difficult to figure out in an end-to-end supply chain with many products.  There are many ways to rebalance how inventory budgets are allocated, inventory pooling and production postponement strategies can be complex and hard to execute, as planned.  A Multi-echelon Inventory Optimization (MEIO) system will enable a company to consider all of these in deciding where in the supply chain and how much inventory to have.  If your company is using a manual system, and pretty much guessing at how many days of coverage to have for each product, or does not have a good process in place to calculate statistical safety stock values and its “What-if” impact on customer service, then you should be looking into how an MEIO system can help your supply chain. 

 

If you would like more information on Inventory Managment and its "Optimization", I recommend reading this paper: Demystifying MEIO.

 

Sales and Operations Planning

As part of the S&OP process a company needs to determine how to meet the inventory demand that comes from buffer stocks, forecasted demand, and backlog.  Or it may be that capacity or material constraints, or other operating efficiency concerns, drive a company to purchase or build inventory ahead of when it’s actually needed.  Regardless, the supply planning process that feeds a consensus S&OP plan is the place that these decisions are made.  If a company does not have a good S&OP process in place, then it will not be able to make good decisions around inventory.  Furthermore, if the S&OP system in place does not consider the effects of finite capacity, materials, and operating constraints, then control over inventory levels will not be achieved.

For more information about S&OP process, I suggest viewing this recorded webcast: S&OP 101: For all manufacturing executives

 

Inventory Management

Even with a perfect plan, a company cannot keep inventory low and customer service high unless they can execute on moving inventory through the supply chain to meet customer orders.  Better Inventory Management will give improved visibility of inventory through the supply chain and create the orders to move the inventory when required.  Inventory Management gets the target levels from the MEIO system, and then executes as orders and forecasts are received.  If a company does not have good visibility into inventory, forecasts, and orders then an improved Inventory Management system will surely help. 

 

A last thought, there are many areas of supply chain planning that can have an impact on reducing inventory and improving customer service.  Typically a company will focus on Demand Planning first, and then Inventory Management, while putting in place simple ways to set inventory target levels.  They would then focus on better inventory targets with MEIO systems and better supply side S&OP planning.  Each company is different, and it is important to address each area based on your needs.

 

About the Author:  Bill Green is the Vice President of Solutions at Adexa, for more information about him please visit his profile link.     

 

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, Supply Chain Planning, Inventory Planning, Inventory Management, Inventory Optimization

Multi Echelon Inventory Planning Demystified!

Posted by Cyrus Hadavi on Fri, Apr 16, 2010
 

Inventory PlanningInventory is a very interesting phenomenon! You never know exactly how much you need until you actually need it or you know you have excess until it is too late! The major problem, or should I say opportunity, is that inventory is a function of both time and randomness. Randomness has to do with your competitors pricing, quality, weather, economy, acts of God, contagious disease, strikes, etc.  All of these factors and many others have an impact on your demand. For example Toyota's quality problems lead to increase in demand for other auto makers, warm weather increases demand on beer, N1H1 outbreak increased the demand for certain type of medication.

So you ask yourself, how often do we have such events and should I care? The answer is Yes! Because the weather maybe more predictable than your competitor and your customers' forecast!  In other words, it is very hard to tell how your competitors are going to change the game and take market share from you, or how your customers can change the demand based on how they feel and market conditions. So it is a constant game of balance between Supply and Demand. If you play the game long enough then you should become an expert.   Just like chess you can develop strategies to make the right move and be prepared no matter what your competitor does or what the changes in demand are. Being prepared is what the science of inventory planning is all about. We refer to this as Inventory Optimization. It allows you to decide how much inventory is enough, where and when. The two factors that you need to be concerned about are Cost and Service Level. On one hand you can have every possible item available in Finished Goods which is inconceivable. Or keep no inventory, another unlikely scenario. People talk about "zero" inventory; I am not sure what this means?  Does it imply that every time I want to buy a note book, somebody needs to go out and chop a small tree down and put it through the paper mill?  But one thing is for sure, your optimized inventory level is some place between those two points.

Inventory planners, like any other type of planners, need to have their slide rule (some of you may not be as old as me to know what these are!) or their calculators, to figure out where and when they should keep inventory up and down the supply chain. This is a very complex problem even without the randomness that we talked about. There are many different products each with their own Bill-of-Material and different production routings and capacity requirements. Shared resources and inventory buffers, as well as raw materials, are needed to build and store intermediate products at different stages of production. Very often subcontractors, distribution centers, consignment locations, and hubs are also part of the equation. I think you all agree that spreadsheets are too simple and rigid to do the job even-though it is of the most widespread tools. Now let's add randomness and seasonality to this. Are we having fun or what?

Here is the good news, an MEIO (Multi echelon Inventory Optimization) system is designed to be the tool that inventory planners need to deal with exactly the kind of problems that we just talked about. It has the capability to model different layers of supply chain, take randomness into account at every stage, look at the cost and service level requirements, and then come up with how much of what needs to be kept at every critical point of the supply chain. And if you don't like what it proposes, you can change the parameters and run it again and it will give you other alternatives so that you can make a wise decision. Think of it like what a structural engineer does when she designs a high-rise. The load at every floor can be different, the structure may have to be resistant to winds of up to 60 miles an hour, and there might be earthquake and fire hazards to consider.  Given all these potential "random" events the structure needs to deliver certain level of safety (i.e. service level) to its residents. The optimization programs that Structural engineers use resembles very much the MEIO system that we described above. It shows you how to build a supply chain that can be resistant to changes at lowest cost. The only difference is that in our building analogy you do it once, hoping that it will last forever.  However, using an MEIO system, you have the opportunity to re-design your inventory plan on weekly or monthly basis so that your supply chain can withstand new conditions. That is the beauty of a system which allows you to have enough flexibility to change with your demand, business conditions, management objectives, and moves of your competitors!

Multi Echelon Inventory Optimization systems are fairly new in the market but picking up a lot of momentum by helping to solve a common and complex supply chain problem--as Demand Planning systems did starting a decade ago.  The right MEIO solution can make your supply chain a lot more efficient, save a bunch of money, and most important of all make your customers very happy.

We have a comperhensive ePaper on this topic, just click on: Demystifying MEIO.

 

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, Inventory Management System, Finished Goods, Inventory Optimization