the essential guide to inventory optimisation

5 Steps That Guarantee You Have The Right Stock, At The Right Time, In The Right Place...

Supply Chain Secrets THE ESSENTIAL GUIDE TOINVENTORY OPTIMISATION

Peter ClarkeChief Technology OfficerIBS Asia Pacific

www.ibsaustralia.com

2 • The Essential 5-Step Guide To Inventory Optimisation © IBS 2008 www.ibsaustralia.com

ContentsExecutive Summary

05 Step 1: The case for inventory optimisation – How to balance your inventory levels and lower costs• Meeting your customers’ service level expectations• Minimising stock holdings

11 Step 2: How to analyse your inventory performance• Measuring your sales, volumes and delivery performance• Measuring your supplier performance, fill rates and times

15 Step 3: How to classify your products and define your strategy• Segmenting products according to value, movement and lead times• Strategising each product segment for optimal service levels• Applying different rules for different segments

19 Step 4: How to calculate your product forecast• Detecting repeatable demand patterns for accurate statistical forecasting• Demand planning to meet sales and marketing initiatives

21 Step 5: How to optimise your product replenishment• Streamlining collaboration with suppliers• Increasing supply chain efficiencies

25 Conclusion: Inventory Optimisation in the Real World

3 • The Essential 5-Step Guide To Inventory Optimisation

It is an essential requirement for almost every company to be able tomeet customers’ requested service levels with a minimum amount of inventory.This means having the right products in stock and virtually nothing else. Excessstock means excess capital outlay, which has a massive impact on bottom lineprofitability. However, this aim has to be balanced against the potentialdamage of having insufficient stock leading to lost sales, lost customers and a negative impact on bottom line profitability.

In theory, it all sounds rather simple, but in reality of course, it is rather trickier.With the diversity of products held in many inventories and across differentindustries, each with different needs and potential, allied to changing marketconditions and customer demand, inventory management is a complex andpotentially expensive function. At the same time, there are also internalchallenges – even differing priorities – within the organisation. CEOs want to improve customer service, sales want more products to sell, and CFOs wantto reduce inventory.

This series of articles gives an overview of the concept of inventoryoptimisation. Surprisingly, while this is the area where most ERP softwareimplementations normally get their highest and fastest return on investment, it is also true that many companies that have implemented ERP have not yetadded a dedicated inventory optimisation module. There is huge potential forcompanies to maximise the value of their IT investment for a relatively smallincremental expense.

The Essential 5-Step Guide To Inventory OptimisationEXECUTIVE SUMMARY

© IBS 2008 www.ibsaustralia.com

The benefits of inventory optimisation are felt throughoutthe organisation – in the warehouse, in sales and marketing and in the finance office: • Enhanced customer service through increased competitiveness, improved

fill rates, fewer shortages, and on-time deliveries;• Reduced working capital requirements through reduced amount of stock

and less obsolete stock;• Lower transaction costs through more efficient processes.

To optimise inventory – to have the right item at the right time etc – is aconstant balancing act that consists of five different steps:• Analyse the current situation, see what items are selling and assess delivery

performance, etc;• Classify items into different categories that can be handled with ease,

and define the strategy per product segment that prioritises to maximumeffectiveness and efficiency;

• Calculate as good a forecast as possible, adopting different but relevantpolicies on different segments;

• Control costs by optimising replenishment, adopting different replenishmentpolicies on different item segments; and

• Replenish with the best possible collaboration with suppliers.

Inventory optimisation is no longer optional but an economic and logisticsnecessity. It offers the potential to save on space, time and costs, as well asfreeing up working capital that could be more effectively used for otherprojects and activities.

The objective of any inventory management system is to provide the bestpossible customer service within the restraint of the lowest practical inventorycosts. Inventory optimisation offers the tools to help you achieve those aims.


This article covers the first step in your inventoryoptimisation program – looking at current inventorypractice, and putting the case for inventory optimisation,so that your inventory process is as efficient and effectiveas possible.

The inventory in your warehouse or factory is both an asset and a liability. In either case, if it just sits there, it is worse than worthless – it’s of negativevalue. Whether it’s pens in the stationary cupboard or multi-million dollarmachine tools in the dockside warehouse, inventory must be stored andcleared in as cost-effective and efficient a way as possible.

Inventory optimisation is about managing what is in the warehouse and howthose contents flow into and out of the warehouse. It is the area where mostERP software implementations normally get the highest and fastest return oninvestment. It is therefore surprising that many companies that haveimplemented ERP have not yet added a dedicated inventory optimisationmodule, as it offers a huge potential for companies to maximise the value of their IT investment for a relatively small incremental cost.

It is a fundamental requirement for almost every company to be able to meetcustomers’ requested service levels with a minimum amount of inventory. Thismeans having just the right products in stock in the right amounts and virtuallynothing else. Excess stock is excess capital outlay, which has a massive impact


Step 1 – The Case for InventoryOptimisation: How To Balance Your Inventory Levels And Lower Costs


on bottom line profitability. However, this has to be balanced against the potential damage of inadequate stock leading to lost sales,lost customers and a negative impact on bottom line profitability.

If you could precisely predict what your customers will buy in the future,inventory optimisation would be very simple. But, in reality, it is rather tricky.Deciding on the correct inventory level is a major issue, and the answers will vary from industry to industry, and from organisation to organisation.

The danger lies in either overstocking or understocking.

Overstocking results in a range of negative impacts:• Organisations become inflexible, and difficult to manage• There is an increased amount of funds tied-up in non-productive goods• Consequently, there is an increased number and value of write-offs• More goods become obsolete or expired• Storage needs to increase exponentially as less stock is removed than is

brought in• Overheads increase due to all of the above.

On the other side of the coin, understocking also has negative impacts:• Service levels are low because of inability to meet demand• Customers are disappointed, to say the least• Organisations are subject to rush charges and express delivery fees

to ensure the availability of inputs• Business opportunities are lost.

To make the picture even more complicated, getting accurate forecast figuresbecomes equally problematic as the supply chain becomes more complex.

In the days following the Second World War, demand was larger thanproduction. Companies were focused on making purchasing andmanufacturing more efficient, as you could always sell what you produced


or purchased. Today it’s the other way around. Production is greater than demand and customers have become more and more demanding.

That’s why an agile supply chain is vital, one that can react when customers suddenly demand a new version of an item, and that can deliver with shorter lead-times.

Inventory challenges facing organisations therefore include:• Complex global supply chains, with potential outsourcing of

manufacturing to low cost countries which increases freight costs• Supply chain integration/visibility is limited, especially if dealing with

low cost countries that do not have advanced IT systems• Customers driving demand which can be broad and unclear• Complex products, with broad and detailed configuring• Subsequent stock-keeping requirements, potentially for a wide range

of components required for configuration• Shorter product life cycles• Uncertain future market directions and trends.

To make it even more complex, different industries have different challengesthat need to be addressed, which is why agile solutions that meet business-specific needs are required.

For instance, one example of a vertical industry dealing with inventory issues is paper merchants and distributors. Here, customers handle very large andheavy goods, and because of weight and volume it is essential to have directdelivery from the supplier to the customer. Delivery needs to be just-in-time, as a printing business cannot store a lot of paper. Paper stocks could be heldat any one of a number of locations, including the mill, external warehousesowned by the mill or the merchant, the merchant’s central or regionalwarehouses and even at the printer. This stock holding and the subsequentdistribution requirement incurs costs for every member of the supply chain


and should be reduced wherever possible, particularly where there is unnecessary duplication. Quite simply, whichever party can distribute stock in the most cost-effective manner to the required service level should be encouraged to do so. Implementing best practice at this stagerequires mills, merchants and printers working together to establish theoptimum distribution. This will eliminate the costs of empty warehouses and unnecessary journeys.

The pharmaceuticals and healthcare industry is another area for inventory optimisation. Distributors need to move and manage large volumes of items with speed and accuracy. This means that thereception, storage and picking of thousands of sales order lines has to bestreamlined. Radio frequency identification and barcode support can give real-time inventory control and minimise paperwork. Pharmaceuticalswarehousing must also meet strict regulations for narcotics and hazardousgoods. In other words, the pharmaceuticals industry needs a system thatsupports large volumes of items. Most of the purchasing and planningactivities need to be automated as much as possible to react and deliver on constantly changing demand.

Finally, when talking about stock keeping units, electrical componentdistributors are among the hardest hit. Some of them have more than 100,000 stock keeping units. It is essential that the information in the item file is correct and easy to maintain. They need to collaborate with suppliers,which means that they need a system that can easily import new prices. Theyalso have to be able to handle extensive and complex agreements in order topurchase items at the right cost and at the right time. They need a solutionthat supports cross-referencing so that they can define alternative andreplacement products; inventory segmentation so that product lines can be defined as high-turnover, low-margin, high-value, slow-moving, etc; and dynamic demand forecasting, replenishment suggestions, cross-docking,over-the-counter sales, and seasonal fluctuations. Warehousing requires real-time control to assure timely deliveries, without overstocking.


The fact is, more and more industries and verticals are facing the same problem as the electronics industry, as companies continue tocollaborate and consolidate. This means that the supply chain runs at ever-faster rates and with greater volumes. Information requirements and ways to connect systems and use information become more critical for processes, while reporting, analysis and planning are becoming increasingly important for everyone.

At the same time as there are complexities in the supply chain, there are also internal challenges – even differing priorities – within the organisation. CEOs want to improve customer service, sales want more products to sell, and CFOs want to reduce inventory.

The best and truly the only way to adequately handle this conflict of interestand complexities of systems is the old slogan: Order the right product, at theright quantity and quality at the right time. The objective of any solid inventorymanagement system is to provide the best possible customer service within therestraint of the lowest practical inventory costs.

Optimising inventory is a constant balancing act. Once you’ve made your initialdecision to undertake an optimisation program, there are four different stepsyou will need to follow:• Analyse the current situation, what items are selling and how is delivery

performance, etc• Classify items into different categories that can be handled with ease and

define strategy per product segment• Calculate as good a forecast as possible, adopting different policies on

different segments• Control costs by optimising replenishment, adopting different replenishment

policies on different item segments; and replenish with the best possiblecollaboration with suppliers.


Then … you do it again. Inventory optimisation is a constant process of fine-tuning inventory and analysing performance: are there other item segments that can be improved, how effectively can they be improved and at what cost?

It’s simple, when you know how.

It is just important that you follow a formal structure that gives you accurateand timely information, and that allows you to make tactical and strategicdecisions about your inventory flow. The next step in this process is todetermine how you stand at the moment – analysing your performance.

Step 2 – How To Analyse Your Inventory Performance

This article looks at the second step in your inventory optimisation program – analysing yourperformance to see how well you currently do, and whereyou can improve.

Traditionally, it has been understood that to improve customer service you haveto have high levels of inventory. This ensures that orders are filled quickly. Butit also means that the value of your inventory is high, to the detriment of yourorganisation as it ties up cash and warehouse space that could be put to otherand better uses.

The aim of inventory optimisation is to decrease stock while increasingcustomer service levels. This can be difficult, particularly as it sounds like a contradiction in terms. However, it can be achieved either by:• reducing your overall inventory while maintaining the same level of high

service, or• improving customer service levels without an increase to your investment

in total inventory.

In order to optimise inventory, you will need to know what the current state of your inventory performance is, to act as a reference point. Then, continuedperformance analysis at later stages ensures that performance is improving and that inventory activity is being effectively optimised.


This analysis – both initially and at later stages – highlightsareas where improvement is required. It also assists you in measuringservice levels and focusing on delivery performance to customers, fill rates and order fulfilment times.

Some key areas that you can measure include:• Delivery performance for customers• Fill rates for customers• Order fulfilment lead-time for customers• Delivery performance per supplier• Fill rate per supplier• Order fulfilment lead-time per supplier• Stock level• Inventory days of supply, in other words stock turnover• Safety stock and seasonal demand.

By measuring these key performance indicators (KPIs), you learn where youstand relative to your previous performance. This is valuable information, as it indicates whether and how well you have improved performance over time.The better values you have, the less safety stock you need and the lowerquantity in stock.

However, you might have started from a low base (i.e. non-optimal or evenpoor performance). This could mean that any improvements you make mightvery well be marginal and your ultimate standing still poor compared withindustry standards.

Therefore, it is also valuable to compare your performance against that of your competitors (or even partners in the supply chain). To do this you willneed a common reference model for industry-wide KPIs in inventory value and service levels. Such figures give an idea of the potential improvements youcan make, as well as how much you could probably reduce your stock and/orincrease customer service even further. With these figures, it is also a simpler


task to build a return on investment (ROI) calculation withinthe inventory optimisation area.

There is already exists such a common reference model, called the Supply-Chain Operations Reference model (SCOR).

This model has been developed by the Supply Chain Council, a global, not-for-profit trade association open to all types of organisation which is dedicated toimproving supply chain efficiency.

The Supply Chain Council, headquartered in the US, is supported by morethan 1000 corporate members worldwide, representing a broad cross-sectionof industries, including manufacturers, services, distributors, and retailers.

The SCOR-KPI allows companies to examine and measure their supply chain processes. The SCOR model has been able to successfully describe and provide a basis for supply chain improvement for global projects as well as site-specific projects.

Key SCOR metrics include:• Delivery performance to customer committed• Delivery performance to customer requested• Delivery performance to supplier committed• Delivery performance to supplier requested• Customer fill rate• Supplier fill rate• Customer order fulfilment lead-time• Supplier order fulfilment lead-time• Inventory days of supply

By comparing those KPIs with those of your competitors, you would easilydetermine where weak links exist, and identify how to make improvements.This would help you improve inventory optimisation and give you a dramaticROI and savings.



Once you have performed a detailed performance analysis, you then have the indicators necessary to gauge the success of youroptimisation program. If you haven’t analysed performance, you will neverknow whether you have improved, or by how much, and later stages in theprogram will basically be performed in the dark.

Once you have performed an initial analysis, you can move on to the nextstage, which is to classify your products and define your strategy.

Step 3 – How To Classify Your Products And Define Your Strategy

This article provides you with information on the third stage in your industry optimisation program –classifying products and defining strategy accordingly.

To optimise your inventory, you need to know what you have, decide how best to move it around, and find out how well you are doing it.

That previous act – analysing your inventory performance – is difficult enoughconsidering the many variables that have to be considered. But analysing yourinventory performance, let alone good inventory management overall, is mademore complicated by the range of stock-keeping units (SKUs) that are involved.It would be simpler – in every respect – if you only had one item to keep trackof. But some industry inventories encompass hundreds, thousands or evenhundreds of thousands of different objects, and each needs to be taken intoaccount. Size, number, difficulty of storing and shipping, priority – all havedifferent values.

But you shouldn’t have to worry equally about all of them. The Pareto principlesays that 80 per cent of your work revolves around 20 per cent of the items.This means that some items are more important than others, particularly assome are shifted more frequently in higher numbers than others.

Each product line or SKU has to be treated differently. This means that your nextstep in optimising inventory is to classify your products and define your strategy.


The whole purpose of this step is to help you focus on theitems that are the most important, and let the system handle the lessimportant ones more-or-less automatically.

Typical classifications you can use for products include:• High/slow movers• High/low values• Long/short lead-time• Strategic/not strategic products• Profitable/not profitable• Bulky/non-bulky products• Dangerous goods• Products can also be cross-classified by where they sit in the supply chain

and what priority they have:• Item and warehouse• Item group• Supplier• High or low volume• High or low frequency• Strategic• Base default

Once products are classified, you can develop a strategy for each productsegment. You will need to base this on a range of decisions, such as whatshould be kept in stock, what items you should focus on and what inventorypolicies should be used so that you can calculate the forecasts that ensure the best service level and order quantities. Product segments (as opposed to individual product items or SKUs) can be used as the basis for policy andstrategy development, as this increases efficiency.


Typical questions that need to be asked when definingstrategy per product segment include:• What do we keep in stock that we shouldn’t?• What items shall we focus on, to make the greatest impact?• What inventory policy to use in order to calculate forecast, get optimal

service level, order quantity, safety stock?

This combination of classifying and developing a relevant strategy allows youto impose different rules for different segments. It also means you should beable to simulate the effect of such actions. You should also be able to simulateand adopt more advanced calculation rules for strategic item segments. Doingthis, you are constantly improving performance over time while making surethat the focus is maintained where it matters.

This is a complex procedure. You will need a system that will accurately andquickly produce exception reports for review and auto-adjust for variancesacross a large number of products. It should calculate proper safety stocklevels, determine economic order and best discount quantities. It willautomatically get the right products to maximise line buy minimums. And,importantly, it should provide complete visibility of changes throughout thesupply chain, from manufacturing through to end consumer. This will allowyou to make quick reactions to changes in the supply and demand, serviceyour customers in pre-determined priority sequences, set service levels basedon sound financial judgment, invest in inventory that will maximise returns and analyse and react to exceptions and reduce dead inventory.

The result is a fully – or at the very least largely – automated system that reacts to changes in the operating environment using pre-set prioritiesand data. This will help you make clear decisions rather than confuse you with complexity.



In other words, the result is an end to the sort ofseat-of-the-pants decision-making that often proves at best to becostly, or at worst to be disastrous.

Once you have analysed your performance, classified your inventory and setappropriate strategies, the next step is use the information you’ve gatheredand the control you’ve put in place to calculate your forecasts – the basis for action in optimising inventory.

This article looks at the fourth and most importantstep in your inventory optimisation program – calculating your product forecast.

Calculating your product forecast is the most critical part of inventoryoptimisation. Get it wrong, and you either overstock or understock, both of which can be very damaging to the business.

Forecasting is the basis of setting warehouse stock levels. Forecasts have to be as accurate as possible, which is why software is required that immediatelyreacts when there are changes to trends or seasonality.

There are two main forecasting policies – statistical and demand – and bothare important for different reasons.

Statistical forecasting looks at longer term trends, and is controlled by rulesand methods. This means it has the great advantage of being calculatedmore or less automatically.

Demand planning is influenced by short term changes in the market andcapacity. It is more manual and reflects many more influences, such asmarketing activities, new demand for new products, new markets and so on.

A statistical forecasting system looks for repeatable demand patterns thatoccur at the same time each year. You will therefore need at least a 12-month


Step 4 – How To Calculate Your Product Forecast


demand history to carry out statistical forecasting anddetect trends and seasonal profiles. It is important to focus on orderhistory and not shipping history, as the two can be very different. Using thisinformation, statistical forecasting can determine trends and likely futuredemand, such as if demand for a specific product is going up or down over a longer period of time.

While statistical forecasting calculations might be done automatically, they can be less accurate if there are zeros in the demand history or if the demandhistory is highly irregular. For instance, statistical forecasting does not take intoconsideration the fluctuations caused by specific sales and marketing activities,which are key drivers in the demand planning numbers.

Demand planning is preferred for short term forecasts. Demand is when acustomer buys your products and services, and it is your sales and marketingactivities that normally makes them do this. Sales and marketing activities drive the forecast or demand plan numbers; it is not the other way around. So you will need to ensure that information on sales budgets, promotions and campaigns are included in your calculations. This method also needs to take into account eventual capacity constraints and potential shortages. This means that you can purchase or produce certain items and place them in stock in advance of orders so you can deliver the final product during a high peak season.

Get your forecasts right, and you will never be over or understocked, your customer service levels will go up, and your warehouse efficiency will be optimised.

Of course, while forecasts are vital, you still have to put the products on the shelf. Which means there is one step left in your inventory optimisationprogram, and that is replenishment – making your relations with suppliers run as smoothly as possible.


This article looks at the fifth and final step in yourinventory optimisation program – optimising productreplenishment, and streamlining relations with the supply chain.

Optimising replenishment means making sure that the relationship with yoursuppliers is as efficient as possible. This allows you to decrease lead times,lower prices and get better service levels.

Replenishment is an important aspect of supplier relationship management(SRM). The goal of SRM is to streamline and make the processes between an organisation and its suppliers more effective. It enables effectivecommunication between the different parties, who may use quite differentbusiness practices and terminology. As a result, SRM is designed to increasethe efficiency of processes associated with acquiring goods and services,managing inventory and processing materials.

The relationship with suppliers, as far as inventory is concerned, has four mainissues: safety stock levels; service levels; economic order quantity; and supplychain visibility and management.

Safety stock is the level of inventory you need to have in place to cover all contingencies. You calculate that level based on the changes in demand for individual products, applicable lead-times and the desired service levels for those products. The results are constantly and automatically adjusted as


Step 5 – How To Optimise Your Product Replenishment


circumstances change and exception reports are producedwhen outside the normal variances.

Service levels are set according to product profitability, total revenue, thenumber of sales, and the quantity of sales. These factors vary by territory orregion, as well as by specific products for key customers. All information isautomatically updated by a system that is constantly checking for changes and adjusting for thousands of products. You need to allow for differencesthroughout your supply chain based on strategic decision-making. Service level reports should alert you when changes in your supply chain’s demand or supply affect other areas.

Economic order quantity (EOQ) is a calculation that lets you know the bestquantity of a product to order so that you can minimise the total variable costsinvolved in ordering and holding that product in inventory. EOQ calculationsgive you an automatic ability to maximise line buy discounts with the rightproducts, exception reports that warn you of changes in demand or supplythroughout your supply chain and provide you with the tools to react quickly.

Supply chain visibility is vital in inventory management. You need to be able see your entire supply chain from the manufacturing end to the finalconsumer. If there are any problems, such as one component is late in arriving or there is a change in consumer demand, you can react and adjustyour processes accordingly. This allows you to service customers in a prioritysequence that you decide upon. You can set service levels based on soundfinancial judgment, and invest in the inventory that will maximise your returns.You can also analyse and react to exceptions, and reduce dead inventory.

Implementing an inventory optimisation solution that covers these functionswill result in reduced working capital and increased customer service. It canalso result in reduced transaction costs because a lot of the processes can be fully automated. At the same time, it gives more time to spend on thosetransactions and items that are most important for the business.


In summary, then, to do all this accurately and quickly,particularly with a large number of products, you will need a systemthat will do a range of tasks. These include: create forecasts; calculate proper safety stock levels; determine EOQ; determine best discount quantities;automatically get the right products to maximise line buy minimums; produceexception reports for review; auto-adjust for variances; and provide you withcomplete visibility of changes throughout your supply chain to allow you toreact quickly to changes.

With these functions in mind, it’s obvious that it can be very costly to havehigh service levels on all items. You need a system that allows you to ensurethat you have different service levels on different items/warehouses.

Many inventory models prescribe a flat percentage as safety stock for virtuallyall products. This model is fine when you only have a limited number ofproducts with little-to-no variance in demand. But such models, as simplystated, are too simple to give a serious return on investment. The ‘simple’approach breaks down when the variation in demand is high. These situationsrequire more advanced supply chain management techniques, supported by advanced inventory management functionality, that will tell you where the issues and problems are now. Working under the ‘management byexception’ concept, you let the system do 80-90 per cent of the mundanework automatically. It points you to where you should apply your expertise to make a difference, where there is a problem or an ‘exception’.

There are a number of issues with replenishment that add to the complexity.You need to consider the forecast, the cost of placing and shipping eachpurchase order, the bundled capital in stock, and the discount that we canreceive by buying large volumes. And if you have several warehouses, you haveto decide how to work with replenishment. It’s also very important to be able to do planning and forecasting on a multi-company level. By doing aggregatedforecasting, you can get much better agreements with your suppliers.


By monitoring and adjusting your inventory replenishmentprocesses across the entire supply chain – ensuring that the rightproducts are at the right place at the right time and, importantly, in the rightquantities and at the right price – you have achieved what you set out to dowith inventory optimisation.

You have analysed performance, categorised your products, calculatedforecasts, and now you’ve streamlined your replenishment system. Servicelevels have increased to their best possible levels. Costs are minimised to aslow as they can go. Capital is not tied up in dead inventory and can be usedmore effectively and efficiently elsewhere in the organisation. The variousmanagement requirements, whether from finance, sales and marketing, orCEO level, have been fulfilled, frustration is low, and satisfaction is high.

So you can sit back and relax, right?Wrong. Inventory optimisation is a continual process. Demand never stagnatesat a particular level – there are new products to consider, new technologieswith new demands, and tastes that inevitably change, not least thanks to the efforts of your sales and marketing people. But you will find that yourinventory system is now able to cope with such changes more effectively and more efficiently than ever before, and will continue to do so as long as you maintain its operations, and be alert to the changes you will need to implement to ensure that the inventory process is continually optimised.

This completes the discussion of the five steps involved in inventoryoptimisation. But the story doesn’t end there. Read on for information on real world examples of organisations that have put this system into practice.And find out how inventory optimisation is a whole-of-organisation issue – beyond the warehouse, beyond the logistics department, right up to the boardroom and down to the factory floor. The concluding article“Inventory Optimisation in the Real World”, outlines these issues.


Conclusion: Inventory Optimisation In The Real World

This article looks at the application of inventoryoptimisation in real world situations, as well as the issue of its relevance throughout the organisation.

Completing an inventory optimisation program can have a dramatic impact on an organisation’s bottom line.

The Laminex Group is a leading marketer, distributor and manufacturer ofpremium decorative surfaces in Australia and New Zealand. In addition, it is a manufacturer of raw wood panels in Australia, which are an important baseproduct for its decorative surfaces.

During the past 70+ years, The Laminex Group has grown from one small outlet to 40 distribution centres nationwide, as well as over 8000 marketing and information display centres in independent outlets. The company also hasseven production facilities in Australia and one in New Zealand, all of which arestructured to provide operational flexibility and efficiency. The company supports30,000 products, 30,000 customers and processes 3500 invoices per day.

The Group did not have integration in terms of consistency of product and customer codes. Each of the company’s outlets had its own database.Customers were often listed in two or more databases with distinct creditlimits at each outlet. There was no central control. In 1999, The LaminexGroup acquired Formica, a rival decorative surfaces manufacturer, whichresulted in the need for both companies’ systems to be integrated. It used to take six to eight weeks to get a price increase through the distributed


databases. Today, that task is accomplished in just one totwo weeks thanks to database integration.

Through this integration, the removal of pre-invoicing and use of pickconfirmations, credit notes have been reduced from 11 per cent to less thanfour per cent of sales. Invoicing costs have been reduced by A$410,000.Duplication in customer data has been eliminated, resulting in enhancedcustomer service. Furthermore, The Laminex Group is able to better trace thebuying pattern of its customers, allowing the company to stock the rightproducts at each of its sales outlets to meet local demand.

Most importantly, by improving the visibility and the speed of The LaminexGroup’s supply chain, IBS has assisted the company to reduce its stock levels by 17 per cent – a massive saving of A$18 million. The project’s ROI wasachieved within 18 months from inventory reduction savings alone.

On the international front, Galexis is Switzerland’s leading pharmaceuticalwholesaler. The company keeps local healthcare providers stocked with over40,000 products ranging from medicines and surgical supplies to cosmetics anddaily hygiene products from more than 1000 different suppliers. Thousands ofhospitals, pharmacies, drug stores and doctors rely on Galexis’ daily deliveriesand it is not uncommon for a single client to place up to six orders on any givenday. The company is pressed to typically process 200,000 order lines per day,and sometimes as much as an incredible 70,000 per hour. It is thereforeessential to eliminate order-processing errors as much as possible.

The initial implementation of IBS Pharma ERP software successfullyconsolidated eleven distribution centres into just three, and brought costsavings in excess of EUR 8.1 million (A$13.3 million).

A second optimisation project has achieved further tangible cost savings inprocurement and goods reception, allowing the company to reduce its stocklevels by another 25 per cent while maintaining the same high availability rate.


Meanwhile all of the 40,000 items stocked in its threedistribution centres have been integrated into a new system, and awarehouse concept based on optimum stock levels has replaced one based onminimum stock levels. As a result, Galexis reduced stock levels by 25 per centand increased stock turnover from 12 times to 17 times for common productsand even up to 22 times for specialty pharmaceutical products – withoutinfluencing availability, which has always been considerably high. Theproportion of fully automated procurement has risen from 38 per cent to a current 50 per cent.

A whole-of-business issueThese successes have been achieved because the organisations concernedensured alignment between their inventory minimisation strategy and theirother business objectives, the corporate goals.

The benefits of inventory minimisation flow throughout an organisation, from a reduction in stock holding and carrying costs, opportunities to driveefficiencies throughout the warehouse, to numerous other opportunities that may arise from the reinjection of frozen capital and free capacity back into the organisation.

Inventory minimisation therefore needs to be seen not as a solo activity ofoperations or logistics, but as a holistic corporate activity. Only KPIs that are aligned with business objectives should be implemented. Inventoryminimisation needs to feed through all departments, not just warehousing and finance, but planners, purchasers, sales and marketing teams. All needrelevant KPIs that are aligned with overall organisation objectives.

Every industry and every company within an industry operates under differentcircumstances. But what is common and absolutely essential is to have aunified corporate direction. There has to be a corporate goal set by the seniorexecutive, and it has to be driven throughout the company. It cannot be doneas a one-off crusade, but it has to be managed as an ongoing process ofcontinual improvement.



Admittedly, there are often competing interests within anorganisation, such as the apparently diametrically-opposed positions ofinventory minimisation and guaranteed customer service levels. It is sometimesthe case in organisations that the sales people and product managers actuallyhave vested interests in not managing obsolescence and slow moving stock.

But the fact is that tools and methodologies exist to assist every organisationto manage competing interests, just as there are well-founded and well-documented protocols and systems for managing areas such as forecasting,supply planning or MRP planning.

How these different methodologies and ‘world views’ fit together and aremanaged has to be driven from the top. But the result will be one of mutualbenefit, where all can see the results of a formal structure of inventoryoptimisation, that gives everyone accurate and timely information, and thatallows the organisation as a whole to make tactical and strategic inventorydecisions that positively impact on every department.


With more than 20 years of experience in product and applicationsdevelopment, project management, and customer supportmanagement roles, Peter Clarke has led ERP and SCM projects forcustomers such as The Laminex Group (Australia & New Zealand),Sigma Pharmaceuticals (Australia), Miele and Hino (Australia &Asia). As such, Peter can offer insights into supply chaincollaboration and visibility, demand planning and forecasting(inventory optimisation), e-Commerce, enterprise applicationsintegration, as well as business performance management. AsChief Technology Officer at IBS Asia Pacific, Peter directs thedevelopment of integrated ERP solutions for optimising the supplychains of customers in Asia, Australia and New Zealand, acrossindustries such as automotive, electrical, consumer durables, and paper & packaging.

Peter Clarke Chief Technology OfficerIBS Asia Pacific

IBS (International Business Systems) in briefWith over 30 years of supply chain expertise, IBS is a leading provider of complete ERP softwaresolutions to mid-sized and large companies. IBS has more than 5,000 customers across some 40countries, including The Laminex Group, Sigma Pharmaceuticals, Galexis, Nintendo, General Electric,Honda, Maxell, Scribona, Miele and Volvo.

For more information on inventory optimisation visit: www.ibs.net/au/solutions/inventory-management/

Contact IBS todayEmail: [email protected]: 1300 882 467

the essential guide to inventory optimisation

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