- Why doesn’t planning software alone make you a supply chain leader?
- How do you optimize the inventory levels across supply and distribution network?
- How can you improve the financial return on the working capital you invested in inventory?
Supply chain teams need to jump new hurdles time and again in order to meet the demands of a world in constant change: product life cycles have become more dynamic, logistics processes are being re-thought and planning systems need to evolve quickly in support of increasingly complex challenges. Add to this disruptive digital trends, changing consumer behavior and new business models and it is crystal clear you have to continuously monitor your supply chain strategy and optimize the levels of supply and inventory.
Chances are you still carry sub-optimal volumes of inventory, as do most supply chains across various industry sectors. It’s a silent killer in times of increasing competition in a globalized market: working capital is stuck in inventory, while at the same time, for other products, customer orders cannot be fulfilled in time due to lacking inventory.
You can make the right adjustments to your inventory management with 5 very practical actions:
1. Gather all data, and clean it up
For starters, collect data. Gather all material information and data on customer demand, supply lead times, historical sales, costing… In order to assess and optimize inventory levels, you have to focus on gathering all core supply and demand information.
Be critical: assess how accurate your data really is (think of production lead times, packaging quantities, minimal order quantities, historical demand…).
Be tidy: clean up your data - it’s a fundamental first step in this process.
2. Statistics are good for you
Inventory management significantly improves if you follow a data-driven, statistical approach. To assess the inventory levels you need to carry of each product, you can use a number of proven statistical techniques. It is key you understand the historical sales patterns for each item. Demand may be stable, it may be sporadic or erratic, it may even be bulky. Whatever their manifestation, you have to understand the patterns of the past, since they are often a good indicator of future demand. The appropriate statistical models come in very handy to help you predict future patterns.
The same goes for supply information. What were the lead times? How reliable were your suppliers? These are fundamental drivers, indications of supply reliability, and clearly play a role in defining how much inventory you need to overcome the uncertainties in your end-to-end supply chain.
Statistical and mathematical techniques enable you to optimize your inventory coverage, safety stocks or reorder points. To give one example: you can use Economical Order Quantity (EOQ) to do a first stab at determining the order size (and frequency) for your materials.
3. Embrace digitization
Forecasting demand has always been a challenging part of supply chain planning. If you have a clear and accurate view on demand, supply gets a lot easier because half of your uncertainties are removed from the equation. The impact of digitization on supply chain planning is very promising.
In demand forecasting, programming languages and statistical tools such as Python or R prove to be very potent, especially when applied to improve forecast quality. Additionally, new data sources become available through the Cloud and the Internet of Things (IoT), where ever more products and appliances are connected.
All those new data sources provide real-time information on what’s happing in the field, in your warehouses, throughout the value chain. You can reduce cycle times and overall inventory buffers and provide a better and swifter service to your customers if you exploit the opportunities provided by the quicker access to data.
4. Write a policy
Old habits die hard, so if you want to embed your inventory optimization momentum and ensure your planning organization acts accordingly: make sure the rules are unambiguous and put them to paper. Write a formal policy or procedure.
Document the rules of Demand Segmentation: how is it done and how frequently? Describe the Supply Management Models for each segment (e.g. make-to-stock for high-volume, high-contribution items vs. make-to-order for low-volume items) – up to a level of detail that makes things very clear. Define target service levels for each segment in your customer/material classification, include how frequently inventory parameters need to be reviewed and what relative level of working capital your organization is willing to invest in each segment.
This is a must-do: set targets, formalize them in a policy and follow-up inventory evolutions closely.
5. Integrate and collaborate
Statistics and digitization are tremendous tools, yet they aren’t giving you pro-active insights into what might change in the future. Key information that allows you to look forward, is usually to be found with your salespeople. So make sure you build internal bridges in your company and move away from departmental silos. To drive an efficient supply chain, you need integrated processes. You also need to focus on collaborating with external businesspartners, such as 3PL, suppliers, distribution partners and key-customers.
Sharing insights on demand and having visibility on inventory levels across the value chain, are some of the best ways to do more with less inventory.