MODERN CHALLENGES OF INVENTORY PLANNING. Modern Challenges of Inventory Planning 1

Transcription

1 MODERN CHALLENGES OF INVENTORY PLANNING Modern Challenges of Inventory Planning 1

2 Modern Challenges of Inventory Planning By Jeremy Shapiro, President of Slim Technologies Inventory planning is a venerable area of supply chain management. Planning systems using inventory models to select reorder points, replenishment quantities, and safety stocks based on demand forecasts have been around for decades. However, advances in information technology and business processes that have enhanced supply chain management have rendered traditional inventory planning methods inadequate for many applications. We propose three imperatives on which to base improvements. Imperative 1: Imbed inventory decision making within holistic supply chain decision making At a fundamental level, inventory decisions are dependent on other decisions made by supply chain and other managers within the company. This dependency is revealed by the material balance equation for each period and at each facility where inventory of each product is held: Here period refers to a day, week, or month. Product may refer to a raw material, component, work-in-process, or finished good. Material balance equations describe the underlying dynamics of inventory planning and control. As we can see, product inventories at facilities across the company s supply chain and across time are completely dependent on decisions made by buyers about purchases, by plant managers about manufacturing plans, and by transportation mangers and sales managers about deliveries shipped to other locations within the firm s supply chain and to customers. The goal of supply chain management is holistic, coordinated decision making across the firm s supply chain of these decisions regarding purchasing, production, distribution, and therefore inventory, of the firm s products so as to minimize total cost. Depending on a company s industry, inventory costs due to capital investment, space utilization, spoilage, and other factors will vary between 5% and 20% of total supply chain cost. Inventory planning that ignores other supply chain decisions and costs can easily be inefficient and ineffective. Conversely, for many companies, supply chain plans that do not fully consider the inventory consequences will also be inefficient and ineffective. In the past five years, supply chain network optimization models have been increasingly applied to help mangers identify plans that achieve minimal cost while ensuring desired customer service. Traditional inventory planning models, which ignore decisions affecting 80% or more of total supply chain cost, need to be extended Modern Challenges of Inventory Planning 2

3 and imbedded in more holistic optimization models. Recent research into modeling methods has produced the requisite enhancements. Applications of network optimization models in a wide range of industries, including retailing, consumer products, industrial chemicals, forest and paper products, and others, have led to strategies that save companies more than 5% of total supply chain costs. Ongoing realization of these savings in a company requires business process expansion to create and support a permanent supply chain planning group. The group is responsible for collecting and managing supply chain databases, performing evaluations using models of holistic supply chain plans, and communicating these plans to managers responsible for their implementation. Imperative 2: Coordinate inventory decision making across strategic, tactical and operational planning horizons Superior supply chain management, including inventory planning, is achieved by coordinating decisions across business functions, across geographically dispersed facilities, and across planning horizons stretching from one day to several years. Because it is too often overlooked, we elaborate on the inter-temporal view of supply chain and inventory planning. Overlapping but distinctive analytic methods are needed depending on whether the planning problems are strategic, tactical, or operational. Strategic supply chain planning is concerned with expansion, contraction, or other changes in the design of the company supply chain network over planning horizons of one year and longer. The goal is to maximize the discounted sum of yearly net revenues realized by sales to its customers of the firm s products flowing through the supply chain network. In today s dynamic world, strategic redesign of the company s should be a yearly activity. Strategic inventory planning is concerned with optimal deployment of inventories, often by product family, across the redesigned supply chain network. Deployment refers to decisions regarding the location of inventories and the missions of the facilities where inventories are stored. For example, decisions about whether or not to have one or more distribution centers dedicated to slow moving items. Such inventory deployment decisions should be coordinated with other network redesign decisions such as the location of plants and distributions centers. Incorporating inventory deployment decisions in supply chain network optimization models to optimize coordination plans has been recently achieved. It requires innovative modeling methods because the one year planning periods typically used in these models are too long to accurately track inventories through material balance equations. Tactical supply chain planning is concerned with holistic decision making about supply chain activities across the company s network over the coming months. The design of the network is fixed over that time period. Tactical inventory planning is concerned with determining monthly targets for products or product families to be held in different locations. Meeting these targets involves decisions regarding purchasing, manufacturing and distribution plans that determine inventories through the material balance equations. The goal is to maximize net revenues from sales over the planning horizon while maintaining acceptable levels of customer service. If product mix is fixed and given, this goal is equivalent to minimizing total supply chain cost. Typical tactical inventory planning analysis Modern Challenges of Inventory Planning 3

4 addresses the build-up of inventories in distribution centers to meet seasonal demand, the assignment of forecasted market demand to manufacturing facilities, or the transshipment of work-in-process from one plant to another. Operational planning is concerned with making efficient supply chain decisions at the SKU level over the coming days. Operational inventory planning is still primarily concerned with traditional decisions regarding reorder points, replenishment quantities, and safety stocks for these SKUs. However, myopic planning of inventories at the SKU level can be complicated by interactions among SKUs; for example, multiple products may be shipped together to fill up delivery trucks. In addition, SKU s may be available at multiple locations for delivery to customers, which can complicate replenishment plans for these locations. Clearly, the synergy among strategic, tactical and operational inventory decisions should be recognized and consciously incorporated into the firm s planning processes. On the one hand, efficient inventory management at the operational level must be made in the context of a strategic supply chain design that allows the firm to achieve superior net revenue performance over the long term. Conversely, a supply chain network optimization model to support strategic planning must incorporate aggregate descriptions of operational inventory decisions to ensure that an optimal design identified by the model can be translated into efficient operations. By dealing with aggregate information over the medium term about the dynamics of the firm s supply chain activities, tactical inventory planning provides a major bridge in translating long-term strategic plans into efficient, shortterm inventory plans. Imperative 3: Extend inventory planning methods to accommodate new technologies and new business processes Advances in computer hardware and software for supply chain management have created the need and facilitated the opportunity for important improvements in inventory planning. Many companies have already or are seeking to use these advances to promote demand-driven methods. An important example is the design and assembly of computers, automobile, and other consumer durable products under postponements strategies where final products are assembled from almost complete products that are customized to meet specific orders. This allows more efficient inventory management based on more accurate forecasts for the smaller number of almost complete products, rather than on more volatile forecasts for specific SKU s. The implementation of postponement strategies depends on new business processes and supporting software for manufacturing products and managing sales. Inventory planning must be coordinated with manufacturing and sales decisions for postponement strategies to prove effective. A new approach to operational inventory planning is dynamic sourcing where specific customer orders over the coming days are assigned to stocking locations so as to minimize avoidable costs associated with inventories and transportation. This approach has already been successfully applied in companies that rent pallets and containers. It has also recently been implemented in a few consumer products companies. In effect, dynamic sourcing allows a company to holistically manage its supply chain, even at a short-term, operational level of planning. The likely adoption of RFID in retailing and other companies has also introduced new challenges for inventory planning. Modern Challenges of Inventory Planning 4

5 The anticipated benefits of the new technology include: Automatically and accurately updating inventory levels Accelerating put-away and picking of items from inventory Displaying the current location of an item Traditional inventory planning methods must be extended to exploit new information made available by RFID devices. Companies that are considering their adoption should perform strategic studies, including the construction and optimization of network models, to fully evaluate the technology s impact on their long-term supply chain plans. This analysis can also help determine the most effective timing and phasing of a company s conversion to it. Sending an alert when an item is no longer visible The development of effective inventory planning methods to accommodate these and other innovations must recognize and act upon the requirements of our first two imperatives. Development of new inventory and supply chain planning methods based on data-driven models and supporting business process expansions are needed to exploit the benefits of innovations. Companies that embrace the new methods will gain considerable competitive advantage over rival firms that fail to do so. About the Author Jeremy Shapiro is currently President of SLIM Technologies, LLC, a Boston based firm specializing in the implementation and application of modeling systems for supply chain management and other business problems. Dr. Shapiro is also Professor of Operations Research and Management Emeritus in the Sloan School of Management at MIT. He took early retirement from MIT in 2001 but continues to teach short courses there in supply chain management and related topics. For nine years Dr. Shapiro served as Co-Director of MIT s Operations Research Center. Previous to his appointment at MIT, Dr. Shapiro was employed by Procter and Gamble, Hughes Aircraft Company, and the Port of New York Authority. While at MIT, he served for several years as a Senior Research Associate at the National Bureau of Economic Research. He is a frequent lecturer and the author of two books: Mathematical Programming: Structures and Algorithms, published by John Wiley and Sons in 1979; and, Modeling the Supply Chain, published by Duxbury Press in A second edition of Modeling the Supply Chain is scheduled for publication in Copyright Slim Technologies, LLC 2005 Modern Challenges of Inventory Planning 5

6 ABOUT US Since 1993, Arkieva tools have been used in more than 200 unique applications around the globe, and most of our clients leverage Arkieva software to support collaborative planning teams in North America, Europe, and in Asia. Modern Challenges of Inventory Planning 6