removing barriers to inventory optimization · mathematical tools and business processes in order...
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REMOVING BARRIERS TO INVENTORY OPTIMIZATION
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Supply chain executives worldwide face an ongoing imperative: improve customer service levels. They also face an ongoing risk: don’t create excess or obsolete
inventory at the same time.
It’s a double-edged sword for supply chain performance. Because of variability in demand and supply, increasing customer service levels can lead to higher levels of safety stock. Improving cash flow by indiscriminately reducing working capital dollars can result in slashing the wrong inventory, resulting in lower customer service levels.
While many leading supply chain teams have conducted inventory optimization (IO) initiatives to raise service levels while lowering inventory cost, others worry that they won’t be successful in the effort. Two common barriers that can prevent an organization from reaping inventory optimization benefits are:
• Technology Barrier: IO success can be undermined by reliance on limited tools (such as modules built into, or bolted onto, existing ERP systems) or inadequate ones (e.g. error-prone, hard-to maintain spreadsheets). These tools are unable to effectively analyze and model the required amount of inventory.
• Complexity Barrier: An internal perception that understanding and implementing proven mathematical tools and business processes in order to streamline the creation of optimal inventory policies and targets is too difficult for the team to take on.
Overcoming these barriers is easier than you think. Companies that embrace multi-echelon inventory optimization (MEIO) achieve, on average, a 28% increase in inventory turns. This paper presents a simple three-step approach that helps remove barriers to inventory optimization success and shows how leading supply chain organizations use powerful business process and technology enablers to achieve and sustain improved inventory performance.
Inventory
Optimization
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Asimple three-step approach can remove barriers to achieving a successful MEIO initiative.
First, assess your organization’s capabilities from the perspectives of:
• Inventory performance • Business process and inventory management expertise • Technology and organizational readiness.
Understanding your current state on these critical dimensions lays the foundation for a solid business case that delivers real-world benefits.
Second, create a future state inventory optimization capability—process, technology, organization—that provides your supply chain team with a roadmap to success.
Finally, continue to drive fundamental strategic changes that create greater resiliency and agility throughout the supply chain and establish a cycle of continuous improvement for years.
Figure 1. A three-step approach to Inventory Optimization
A Three-Step Approach
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Helping an organization begin the MEIO journey starts with a small-scale assessment that captures the current state of the organization’s inventory
performance, process, technology and organizational capabilities, as well as profiling existing inventory, and analyzing key business and supply chain drivers.
Questions to be asked at this stage are:
• What is our current inventory performance? Use key metrics such as inventory days on hand, service levels, and responsiveness levels to identify how large a gap separates the current state from industry leading performance.
• What is our business process for planning inventory levels? This lays the groundwork to move from simple rules of thumb that are manually entered into ERP systems to advanced inventory optimization processes that are integrated into a broader Supply Chain Planning capability.
• How does our inventory plan fit within our sales and operations planning (S&OP) process? Analyze the inventory plan as it relates to operational, tactical and strategic horizons.
• What technology do we use to enable inventory planning? Traditional operational systems use techniques such as min/max, single echelon safety stock, Kanban, etc. Advanced inventory optimization techniques consider demand uncertainty, supply variability, service level targets, and supply chain network constraints to create robust inventory plans that can be fine-tuned for an organization’s risk and agility profile. Additional considerations include integration, and application architectures that may introduce additional constraints.
Starting Small: Assess MEIO Readiness
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• What does our inventory planning organization look like? Multiple organization models can be leveraged (COE, centralized planning, planning within the business). Understanding your organization’s human resources strategy (career path strategy to keep top performers) helps you build a highly capable and engaged team.
After capturing the organization’s current state capabilities, a business case is developed to document the reasoning behind the inventory optimization initiative and the expected benefits. In addition to estimating cost, it outlines the key value proposition, including both one-time improvements, reductions and savings, as well as long-term recurring benefits gained from having a strategic platform for modeling inventory scenarios.By spanning immediate tactical benefits and strategic wins, this document provides both a justification and a blueprint for all stakeholders and senior management to work from. Components of the business case include demonstration of a return on investment, expected gains in working capital, and benefits flowing from service level improvements.
Figure 2. MEIO achieves higher service levels at lower safety stock levels
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The ultimate success of your MEIO effort depends on more than implementing the right software tool. An effective and sustainable inventory optimization capability must become a core competency of the organization. There are several important steps you can take to begin developing it as an intrinsic “supply chain way of life.”
Start by creating a future state inventory optimization process that provides your supply chain team with a roadmap to steer them through five activities:
• Prepare data for inventory planning (inputs and outline to inventory planning policies)
• Define inventory drivers based on inventory strategy (and corporate goals)
• Conduct inventory modeling and scenario analysis
• Finish and publish
• Monitor inventory management performance
Building and Sustaining Your MEIO Capability
Figure 3. Inventory optimization process
Prepare data for inventory planning
Define inventory drivers based on inventory strategy
Conduct inventory modeling and scenario analysis
Finalize and publish Monitor inventory management performance
Review and maintain master data
Incorporate inventory drivers based on mfg./supply strategy
Generate safety stock plan Incorporate adjustments to safety stock targets
Review inventory performance and monitor Key Performance Indicators (KPIs)
Review and maintain transactional data
Incorporate inventory drivers based on service strategy
Review safety stock results & alerts
Incorporate feedback from DP/SP Planners into safety stock plan
Perform root cause analysis
Review and maintain IO parameters
Incorporate inventory drivers based on distr. network strategy
Run “what-if” scenarios Finalize and publish safety stock plan
Action plans to resolve safety stock issues
Maintain Phase-in/Phase out
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Action: Review all elements of master and transactional data on a regular basis. Ensure that inputs to the Inventory Optimization tool are accurate.
Why it is important: Inventory optimization results are driven by accurate data. It is important that key elements such as item, location, time-phased sourcing, bill of materials, demand forecast, inventory on hand, lead times and holding costs are accurate and up-to-date.
Understanding the form and function of inventory will help define policies and model alternative scenarios. After the causes, amounts, and locations of existing inventory are discovered (finished goods, raw material, work in process, cycle stock, pipeline stock, pre-built, etc.), the stage is set for optimizing where to hold inventory and when to postpone product differentiation.
Technology enabler: Logility Voyager Inventory Optimization™’s web interface and intuitive design allow for easy viewing of all master and transactional data.
Prepare data for inventory planning
Review and Maintain
IO Parameters
Review and Maintain
Transactional Data
MaintainPhase In/Phase Out
Review and Maintain
Master Data
Prepare datafor inventory
planning
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Action: Define specific inventory drivers for the type of business your organization operates. Why it is important: Various drivers, or causes, of inventory rise and fall as an organization makes changes to:
• Manufacturing and supply strategies (Make-To-Order or Make-To-Stock, frozen/ slush/liquid production horizons, postponement strategies, off shore and near shore suppliers)
• Customer service strategies (Segmentation strategies, service level requirements, precision by division, product family or geographic needs)
• Distribution strategies (Cargo and truckload considerations, VMI, customer replenishment requirements)
Technology enabler: Logility Voyager Inventory Optimization features attributes that segment inventory optimizations, creating the appropriate inventory response for each channel and sub-channel. Simplifying the management of groups of items lets planners focus on important inventory drivers and strategies.
Define inventory drivers based on
inventory strategy
Figure 4. Drivers of inventory
Incorporate inventory drivers
based on distribution
strategy
Incorporate inventory drivers
based on service strategy
Incorporate inventory drivers
based on manufacturing/supply
strategy
Define inventory drivers based on inventory strategy
7,000,000.00
6,000,000.00
5,000,000.00
4,000,000.00
3,000,000.00
2,000,000.00
1,000,000.00
0.00
Inventory Due to Vendor Uncertainty
Inventory Due to Demand Uncertainty
Inventory Due to Lot Sizes
Inventory Due to Replenishment Cycle
= hold mainly FG inventory = spread inventory across tiers
Procurement Subassembly DistributionProduction/Assembly
DemandFulfillment
Scen
ario
ASc
enar
io B
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Action: Generate a multi-echelon safety stock plan based on the inputs and parameters defined in Step 1 and 2. Use scenario modeling and “what-if” analyses to determine the best course of action. Use sensitivity analyses to evaluate the robustness of various scenarios.
Why it is important: The multi-echelon safety stock plan sets optimal targets for inventory buffers across the entire multi-tier supply chain network. By modeling the end-to-end supply chain and taking into account how changes in inventory levels affect multiple tiers, MEIO provides real tactical benefits.
Technology enabler: Logility Voyager Inventory Optimization allows planners to review safety stock targets and manage inventory levels based on exceptions, focusing efficiently on deviations from plan. Logility’s transparency makes it easy for planners to understand policy recommendations and monitor results. Built-in advanced analytics provide monitoring and visualization of KPIs and plan performance. “What-if” scenario modeling explores and evaluates the benefits of alternate approaches, changes to network nodes, changes to lead times between nodes, policy changes based on new manufacturing/ service/ distribution strategies, and more.
Conduct inventory modeling and scenario
analysis
Figure 5. Explore alternative inventory scenarios
Run “what-if” scenarios
Review safety stock results and
alerts
Generate safety stock
plan
Conduct inventory modeling and
scenario analysis
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Action: Inventory Planners endorse the final plan, accepting or revising optimized inventory targets where required after reviewing the safety stock recommendations, and then review and gain consensus with the broader team of supply chain planning, customer
service, and logistics stakeholders. The deployment process is specifically paced to achieve a controlled release of optimization results, ensuring user acceptance.
Why it is important: Consensus is critical, as inventory targets impact multiple stakeholders when the consensus plan is published into downstream supply chain processes (distribution requirements planning, production planning, materials requirements planning) to be executed. Ease of publishing the plan is also important—if the act of updating safety stock targets is difficult it will lead to adoption issues.
Technology enabler: Logility allows for easy and seamless native integration between inventory planning, demand planning, and supply planning.
Finalize and Publish the Inventory Plan
Figure 6. Seamless interaction across supply chain management functions
Finalize and publish safety
stock plan
Incorporate feedback from DP/SP
Planners into safety stock plan
Incorporate adjustments to
safety stock targets
Finish andpublish
Transportationand LogisticsOptimization
RetailOptimization
DemandOptimization
SupplyOptimization
InventoryOptimization
Integrated Business Planning
Value Chain Collaboration
Manufacturers
Cus
tom
ers S
uppliers
Carriers Stores
AdvancedAnalytics
Logility Voyager Solutions ™
Powering the Collaborative Supply Chain
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Action: Automate the ongoing balancing between service and inventory by monitoring via dashboards and reports. Employ exception alerts to focus attention when high-priority KPIs deviate from accepted ranges (combine built-in metrics with custom-defined KPIs in line with specific business needs). Adjust inventory parameters and
targets as necessary.
Why it is important: Using key metrics to monitor the on-going performance of inventory optimization helps easily determine where root cause analysis is required for issues that arise.
Technology enabler: Logility’s easily customizable views allow you to add data streams for inventory, and calculated arrays based on these data streams, to determine Days on Hand, Turns, etc.
Monitor inventory management performance
Action plans to resolve safetystock issues
Perform root cause analysis
Review inventory performance and
monitor KPIs
Monitor inventory management performance
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After process and technology have been implemented, the supply chain team can assess the immediate tactical gains produced by MEIO. Near-
term improvements are seen very quickly in key metrics such as service level, reduced inventory costs, improved working capital, and improved raw material availability for production requirements.
Inventory optimization can also deliver many broader, long term supply chain improvements. Structural changes such as implementing postponement strategies can reduce finished goods inventory risk and increase supply chain agility. Opportunities range from the ability to identify and analyze the impact of reducing procurement lead times from vendors to reducing manufacturing and transportation lead times between DCs. Inventory optimization can also provide a simple network modeling tool to identify total costs with different plant or DC locations based on different costs of transportation, inventory holding and inventory handling.
Over time, the tradeoff between customer service and inventory cost (known as an efficient frontier) can be adjusted to meet the risk profile of the organization. Again and again, MEIO creates new, previously unavailable trade-off curves that deliver higher levels of service at lower inventory cost. This “virtuous cycle” drives continuous improvement for years.
Drive Strategic Value
Results
Figure 7. MEIO creates better trade-off relationships between inventory and service level
1ST MEIOImplementation Ongoing
MEIOProcess
Today
Service Level
Inve
ntor
y C
ost
90% 99.8%
Low
Hig
h
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Who: North American cosmetics department of a leading, multinational consumer goods company.
Goal: After reducing inventory levels through single-stage inventory optimization, the organization turned to MEIO to save cash and reduce obsolescence.
Challenge: The company’s large product portfolio, layered supply chain network, and customized packaging create large numbers of SKUs moving through the supply chain. Any location in the network could interact with one or multiple other locations across tiers of supply.
Solution: The management team implemented Logility Voyager Inventory Optimization solution for
multi echelon inventory optimization. On a monthly basis, data extracted from the ERP system is passed to Voyager Inventory Optimization, which maps and optimizes inventory targets across the network. Planners then review the recommended safety stock positions and upload them back into the appropriate ERP modules.
The Logility solution makes recommendations for changing levels and placements of safety stocks across raw materials, work-in-process and finished goods, while maintaining the company’s high service level targets. “What-if” analyses of current policies identify multiple opportunities for additional reductions over time.
350
300
250
200
150
100
50
0
Matls WP FG US FG CAN
Safety Stock Dollars ($000) Total Cosmetics Supply Chain Inventory
Single Stage Process
Multi Echelon Process
-11%Total Inv
-7%Total Inv
MEIOSingle Stage IO
Strategic Use
Future OpportunitiesIdentifed
Case Study
On top of an already strong base of inventory reductions, MEIO further reduced safety stock levels while maintaining the desired service level.
• Maintained service level at 99.5%
• Cut global safety stock by 30%
• Total inventory reduced by 7%
• Total improvements topped $100M, with ongoing annual reductions of 2%—3%
Results
Figure 8
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When the imperative is to reduce working capital trapped in excess and obsolete inventory while also raising service levels, leading supply chain
management teams turn to MEIO. But companies often face barriers to adopting a game-changing IO initiative. Perhaps they previously fell short using the limited IO facilities offered by ERP vendors. Some teams are stymied by reliance on error-prone spreadsheets that cannot scale to support an enterprise-wide optimization effort. Or perhaps there is a management-held conviction that inventory optimization is too complex and the organization is “not ready” to pull it off.
These barriers can be overcome by adopting a powerful three-step approach that takes a clear and easy-to-follow path to successful inventory optimization. Deloitte and Logility can help you:
1. Assess your inventory performance and deliver optimal inventory targets, along with a business case for change, in just six weeks.
2. Design and implement a world-class inventory optimization capability that encompasses people, process, and technology to achieve the business case.
3. Extend the capability beyond tactical safety stock targets to encompass strategic supply chain improvements.
Conclusion
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Combining the best technology tools with the best process, change management and project management techniques is the secret to overcoming
barriers, minimizing risk, and maximizing the positive business impact of MEIO.
The integrated Deloitte-Logility team takes a truly transformational approach, spanning process, technology, and organization:
• Project Management Managing the overall budget and timeline of the project delivery
• Process & Application Configuration Helping your organization understand current state, and working alongside your team to design a future state design (process and application) to meet your business requirements
• Integration & Data Management Documenting and completing all required testing to ensure a quality build
• Change Management Providing key stakeholders with necessary tools and documents to learn, manage and own the process and technology
Deloitte works with clients to develop strategies, define future solutions built on leading capabilities, and implement process and technology solutions. We are as strong in helping clients execute a plan as we are in crafting it.
Companies worldwide rely on Logility Voyager Solutions every day for advanced inventory optimization, as well as demand and supply planning; manufacturing planning and scheduling; retail optimization; transportation planning and management; sales and operations planning and end-to-end supply chain visibility. For more information on how Deloitte and Logility can provide a practical solution that’s easy to implement and execute, please reach out to the contacts shown at left.
Startremoving your barriers
Today
Deloitte Vinder Sodhi
LogilityCall 1-800-762-5207
or visit www.logility.com