Supply Chain Planning Blog

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 Management 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, Sales & Operations Planning, S&OP

What is a Profit-Driven Supply Chain?

Posted by Cyrus Hadavi on Tue, Oct 27, 2009
Profit Driven Supply ChainsSupply chain decisions impact internal operations, customers, suppliers and, at the end, revenue levels and profits.  The complexities of all the interactions in the supply chain makes it very difficult to understand the true impact of your decisions even if the decisions made are consistent with your previous ones. How would you know what the consequences are under today's circumstances? How would you measure the impact in different areas?  

A Supply chain is really one big inter-linking Jigsaw puzzle.  Let's say demand is going through the roof for red iWidgets, then should you build more of them at the expense of green iWidgets? If so, which key customers are now going to receive their green ones late, as a result?  How much effort should you make to avoid the lateness?  Should you reallocate your inventories going to the distributors? Or should you add a shift at the plant to increase production capacity? If so, can you count on your current raw-material inventories at the production sites, or can the suppliers get the components to you fast enough? And so on.  I am sure you know what I am talking about here.  Operational managers have to make tough decisions like these on daily basis to preserve the flow of the supply chain.  But can they make the right decisions consistently, time after time, especially when it come to what is best for the Company's bottom-line?  Usually these complex supply chain decisions are made based on which customer is screaming the loudest, the experience of an "old timer," or sometimes a person who is only worried about his or her own bottom-line.  But can you blame them?  Since in many cases, their planning capabilities are based on disparate spreadsheets and their visibility is limited to separate organizations with different incentives. Sales people want to increase customer service and have abundant Just-in-Case inventory, Production people want to decrease inventory and reduce cost, but the financial Side of the business wants to increase profit and decrease working capital. How do we resolve these conflicts and make a decision which is right for the Company?

Supply chain planning technologies have evolved a great deal in the past decade.  The right planning system can now model and define competing objectives, such as higher efficiency vs. higher customer service, and calculate the impact of specific decisions in terms of cost, revenue, and profits.   In that way, every major supply chain decision becomes "optimized" for all the interrelated pieces that it touches, rather than just one.  In Adexa, we call this a Profit-Driven Supply Chain©.  In PDSC's, you have the visibility to see the problem, capability to analyze your decision's impact, and then take the best course of action, knowing for certain how it affects the entire picture.  Keep in mind, the "best" course of action may not always be the one with the highest short-term profit, but at least you will know how your profit levels were affected by keeping your best customers happy.    

Profit Driven Supply Chain is more than a concept! It's defining the future of planning technology, since in most progressive enterprises, the finance people are becoming more and more involved with sales and operational decisions, rather than dealing with its aftermath.  For the past two years Adexa has focused its direction on developing PSDC-based planning solutions to marry critical supply chain processes such as Demand Planning, Operational Planning, and Inventory Planning, with full financial visibility.  So we have a number of resources available to you if you would like to learn more about this topic.   I highly recommend to start by reading an important S&OP benchmark study of 214 companies, by Aberdeen Group, entitled Sales and Operation Planning: Integrate with Finance and Improve Revenue.  We also have a great paper entitled: Demand Planning for Profit Driven Supply Chains.  Enjoy the reading, and feel free to comment on this blog with any questions, as I will personally answer you back.  

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

Topics: Supply Chain, Demand Planning, Inventory Planning, Operations Planning, S&OP

Multi-Echelon Inventory Planning — Is it for you?

Posted by kameron hadavi on Tue, Oct 06, 2009

Inventory PlanningInventory is insurance against the unknowns in the supply chain. It protects you if surprises occur with demand or supply. Just like the insurance you buy for yourself, it is important to spend the right amount of money in the right points of your supply chain in the form of inventories (i.e. safety stocks).

If spent wisely, inventory dollars will have a beneficial impact on a company's ability to service its customers properly and help keep direct and indirect costs low. Too much inventory wastes capital, and increases the risk of obsolete goods.  With too little inventory, you are risking lost sales, stock outs, and increased direct costs from disruptions in operations.  There are many stakeholders that worry about inventory positions at many different levels of the supply chain, and their objectives are not always the same; in fact it may be contradictory.  For example, sales people love to cushion themselves with lots of inventories in order to make sure they will always have product to sell, while the CFO wants to cut inventories as much as possible in order to save capital and improve the Return-on-Asset ratio.  So optimized management of inventories can be become a very difficult issue and its complexity can skyrocket as the number of tiers in your supply chain increases.   

In the recent past, a whole new breed of supply chain planning solutions have been developed and dedicated to better management and optimization of inventories.  They are called Multi-Echelon Inventory Optimization (MEIO) systems and there are a handful of vendors that provide them.  Of course different systems use different algorithms and techniques to address this highly complex issue, so you definitely need to do your homework before jumping into purchasing one.   

Adexa includes multi-echelon inventory planning as an option in its Sales & Operations Planning (S&OP) platform. We like to think we have a distinct advantage in this area due to our holistic approach to planning the entire supply chain, not just parts of it.  Naturally, that is very important since inventory planning is not done in isolation.  It should heavily consider factors such as demand forecasts, manufacturing capacities, and supplier capabilities, within one integrated planning environment.  But Adexa actually throws in one more advantage.  We tie all of this planning data to key financial measures.  That basically means, you can review your supply chain planning decisions based on their financial impact, especially when it comes to revenue, profitability, and return-on-assets.  

Many supply chain managers are looking to learn more about MEIO and trying to understand if their company should be utilizing this type of inventory planning solution. The simple answer is if your enterprise has a multi-tier supply chain (e.g. more than one plant, DC feeding regional DC's or customer hubs, etc.), or if your products have key components that are used commonly across multiple end-items, then you should be considering MEIO as a way to cut costs and increase customer service levels. 

For more information you may want to check out one of our latest webcasts on this topic by visiting our Supply Chain Planning Webcast Library.

Topics: Supply Chain Planning, Demand Planning, Inventory Planning, Planning Data Integration, Sales & Operations Planning, S&OP, Multi-Echelon Inventory Planning

Is Your Profit-Driven S&OP Solution Market Ready?

Posted by kameron hadavi on Tue, Sep 29, 2009
S&OP Report Adexa Co-Sponsors Aberdeen's S&OP Benchmark Report--(read below for your complimentary copy)

Adexa, Inc. has co-sponsored Aberdeen Research's premier benchmark report, entitled "Sales and Operations Planning: Integrate with Finance and Improve Revenue," for a second consecutive year. The study highlights the result of 214 companies participating in a survey on Sales and Operations planning-related initiatives. The goal of this study is to compare and contrast the view points of supply chain and finance organizations relating to S&OP processes, and puts a special emphasis on implementing the ability to express the S&OP plan in terms of financial impact.  Adexa makes a complimentary copy of this report available by visiting: 

Managing supply chains have become much more complex with further volatility in the markets, and the growing global expansion of manufacturing.  It's more difficult than ever for companies to plan what, when, and where to make and store their products, while meeting their financial objectives.  Most manufacturing companies utilize the S&OP process, which encompasses Demand Planning (for orders), Supply Planning (for production), and Inventory Planning, to manage a very tough worldwide balancing act between supply and demand--but the financial planning is done separately. 

"This Benchmark study confirms Adexa's direction for the past two years toward Profit-Driven S&OP© solutions, which facilitate for a tight integration between supply chain planning and financial visibility." stated Kameron Hadavi, VP of Global Marketing & Alliances, at Adexa.  "Now you will know the financial consequence of every move made, or more importantly about to be made, in your supply chain. This is the key in achieving high levels of customer service, as well as profitability," continued Hadavi. 

"Best-in-Class companies are focusing more towards a holistic consideration of supply, demand and financial plans whereas the vast majority of the market place is still grappling with the traditional supply chain issues such as managing demand forecasts within the S&OP plan," Said Nari Viswanathan, VP/Principal Analyst, SCM Practice, at Aberdeen Research.  "Without financial optimization, scenarios cannot be compared on an apples-to-apples basis.  Adexa's S&OP solutions have shown one of the highest levels of market readiness in this area."



About AberdeenGroup, a Harte-Hanks Company

Aberdeen is a leading provider of fact-based research and market intelligence that delivers demonstrable results. Having benchmarked more than 30,000 companies in the past two years, Aberdeen is uniquely positioned to educate users to action: driving market awareness, creating demand, enabling sales, and delivering meaningful return-on-investment analysis. As the trusted advisor to the global technology markets, corporations turn to AberdeenTM for insights that drive decisions. 

Topics: Supply Chain Planning, Demand Planning, Supply Chain Performance Management, Inventory Planning, S&OP, Benchmark Report

Why A Global Electronics Company Replaced i2 with Adexa's Supply Chain Solutions?

Posted by kameron hadavi on Wed, Jul 01, 2009

A top Supply Chain innovator has replaced their entire i2 Technologies' planning software, which had been in use since 1999, with Adexa's suite of Supply Chain Planning solutions.  This particular company is a globally-known multi-billion dollar manufacturer of Electronics.  In respect to the privacy of this client, Adexa is abstaining from the use of this clients name in a public forum (For more information Contact Adexa).  However, in this posting we will provide you with detailed information on what solutions were replaced, and for which critical supply chain processes.  We will also highlight the main client interests in the solution that was selected. 
Sales and Operations Planning

  • Revenue and Margin optimization.
  • Collaborative, role based capability to drive consensus.
  • Provides subcontractor sourcing allocations based on optimal margin.
  • Through the use of what-if scenario's can facilitate decisions on when/where additional subcontractor capacity would be required to meet forecasted demand profile.
  • Models the complex supply chain considering each alternative routing to determine optimal sourcing ratio's and supply routing.
  • Considers available starting inventory, WIP, in-transit supply and open PO balances in determining production starts.
  • Respects defined subcontractor quota arrangements.
  • Generates optimal product mix considering expected demand, supply and real-time constraints.
  • Determine best levels to hold intermediate inventory.

Demand Planning

  • Generates a statistical forecast that can form the baseline for further review
  • Viewing and analyzing multiple data measures from multiple vantage points
  • High ease of use leveraging configurable, role-based graphical user interface

Supply Chain Planning

  • Provide Just In Time (JIT) solution / postponement
  • Constrained and Unconstrained planning modes
  • Provides supply plan considering expected binning (WIP Flush)
  • Respects supplier contracts
  • Soft and hard constraint modeling
  • Considers tier allocations as well as customer within tier allocation

Plant Planning

  • Considers demand priorities
  • Considers current WIP and inventory allowing the model to be reactive, so planners can be proactive

Available-to-Promise / Order Fulfillment

  • Attribute-based Available-to-Promise capability
  • User defined business rules
  •  "What-if" analysis allows planners to consider reallocation of supply and demand with multiple scenarios including full product re-pegging.
  • Secure multi-user allocation management with views, alerts, and reports.  

Multi-Echelon Inventory Optimization

  • Allows end-users to set time phased inventory targets for each end item or intermediate item.
  • Allows various methods to set inventory targets (days of coverage, statistical safety stock, service level targets, hierarchical analysis)
  • Enables view in units, or dollars with aggregated analytics.
  • Considers MRP when calculating forecast distributions for intermediate supplies.
    For more information about the details of this replacement and how Adexa can serve your Supply Chain Management needs contact us or visit

Topics: Supply Chain, Supply Chain Planning, Demand Planning, Inventory Planning, Electronics Supply Planning, Announcements, Electronics Supply Chain, S&OP