Optimization of inventory
A new wave of planning tools sets the stage for nimble inventory and order reallocation.
By Roberto Michel, Editor at Large -- Modern Materials Handling, 9/1/2006
Management by exception may be the mantra for real-time supply chains. But if a company simply automates its ability to react, rather than combining that with better planning, real-time practices could fall short. That's why more companies are looking to a new wave of applications that optimize inventory, as well as systems for distributed order management, experts say.
In a 2006 study of the supply chain technology priorities of 208 enterprises by Aberdeen Group (800-577-7891), inventory management software ranked with demand management applications as the top two investment areas. According to Beth Enslow, a senior vice president with Aberdeen, the top priority within inventory management is multi-tier inventory optimization, so called because it can assess optimal inventory targets across an entire network of partners and sites.
"We see multi-tier inventory optimization as capable of removing 15% to 25% of inventory for companies that have complex, multi-tier supply chains," says Enslow. "That percentage—for most of the larger companies that deploy these systems—can translate into multiple millions of dollars."
The goal of multi-tier inventory management, also known as multi-echelon, is to optimize inventory positions throughout a network of trading partners. When this form of optimization is paired with tactical event management, as well as order management systems that tap real-time inventory information regardless of who holds the inventory, companies have a better ability to service customers without building up safety stocks.
|
|
Multi-echelon inventory optimization — which optimizes how much and where to hold inventory across multiple tiers in a supply chain — tops the priority list for companies within inventory management.
|
"There is growing complexity in the supply chain, but at the same time, a tightening up of requirements by customers who want more frequent deliveries and yet don't want to pay more," says Enslow. "So companies either have a choice of increasing inventory so they can serve these higher requirements or figuring out a better way to handle inventory. That's why inventory management is such a high priority."
All in the network
The new inventory optimization solutions differ from traditional inventory solutions, says Enslow. Not only are they able to look at multiple sites, but they can also model demand and supply scenarios. "The new tools can assess areas like lead time variability, whereas previously that was not considered in any type of detail," says Enslow.
A.J. Brohinsky, a senior vice president with SmartOps (412-231-0115), says a multistage inventory planning and optimization (MIPO) solution can determine the best possible inventory and product availability plans. They are built on customer service goals and inherent uncertainties, such as time-variances or multi-location complexities. MIPO users, he says, typically reassess targets on a weekly or sometimes daily basis and then integrate recommendations with transactional systems such as enterprise resource planning (ERP) or warehouse management systems (WMS).
"That tie back to the execution and transactions systems is key to being real time." Brohinsky says. "If you only have static inventory targets in your systems, frankly, that doesn't cut it today in terms of getting to the next level of performance."
Deere & Company's Commercial & Consumer Equipment Division—which manufactures and markets John Deere-branded lawn and turf care equipment—has used MIPO to automatically develop recommended stocking levels at 2,500 North American dealer locations, plants and warehouses for more than 300 commercial and consumer equipment products. According to SmartOps, the deployment has led to a $1 billion inventory reduction since deploying the software in 2003.
Inventory optimization is typically performed under a longer time horizon than factory planning, agrees Sean Willems, chief scientist and co-founder of Optiant (781-238-8855). One solution is geared toward this typically weekly optimization. Another is geared toward long-range network design. When done at both levels, he contends, the stage is set for agile execution. "How you make yourself responsive is by putting the right inventory at the right place, at the right time," he says.
With network design, says Willems, a key question becomes: Where is the cheapest point to hold inventory given the responsiveness needed? Larger enterprises often have a central planning group that perform this design, and may combine that with facility design changes such as creating crossdock facilities.
There are many parts that create the whole of flexible order and inventory reallocation. Crossdocking is one of them because it keeps finished goods inventory flowing straight to customers. The automation for crossdocking such as high-speed sortation and materials handling controls systems has been around, says Dan Nasato, a systems sales manager with FKI Logistex North America (877-935-4564). Until recently, however, electronic visibility into supply and demand necessary for crossdocking has been difficult to achieve.
"But now with more immediate access to demand data and better communication on the supply side with advance ship notices (ASN) and other technologies, more companies have the information to establish crossdocking facilities."
Mike Matacunas, vice president of product strategy for Manhattan Associates (770-955-7070), says one of the main benefits of multi-echelon planning is a reduction in the bullwhip effect. That's a phenomenon in which people at each stage in a supply chain buffer against forecast uncertainty with more inventory. "Everyone is adding variability, so a small flick of the wrist can create a huge variance at the end of the whip," says Matacunas.
But the bullwhip can be overcome. It requires improved inventory optimization and demand-planning software that assesses the ideal inventory position at each echelon and enforces a single view of demand from the lowest point of consumption, says Matacunas. "It's all about taking unnecessary safety stock out of the higher echelons of the supply chain," he says.
Karin Bursa, vice president of marketing with Logility (800-762-5207), says dynamic deployment functionality helps companies decide where to stage inventory for flexible, yet low-cost fulfillment. "What you want to able to do is to dynamically deploy the inventory to a needed location, while best utilizing the inventory that's in the network."
While helpful, such inventory optimization functionality, says Bursa says, it's also important to have a WMS with wireless data capture to ensure real-time inventory accuracy. "You have to have a reliable inventory count," she says. "WMS is key to that at the warehouse level."
Integration challenge
Planning sets the stage for nimble reallocation, but the need to reallocate is triggered by customer orders. That's where distributed order management (DOM) systems come in.
A DOM solution, says Enslow, takes a more dynamic, network-wide view of where a company can fill orders from, rather than preset rules on which sites have the goods to fill an order. A challenge with DOM solutions, says Enslow, is that they require an integration component to more easily link with disparate systems.
"They have to integrate into the WMS or ERP systems to understand how much inventory is on hand so that they can do the allocation and order promising off of that," Enslow says.
Ken Ramoutar, director of product marketing with Sterling Commerce (800-299-4031), advocates that a DOM solution can connect with back-end systems using a range of methods and also provide a business process modeling component that maps out the workflow and decision points involved.
"You need good process models with distributed order management," he says. "We are talking about managing to customer needs and that requires the ability to manage all the way down the supply chain, then make decisions based on that information."
View All On-Demand Webcasts
