WHITE PAPER. Using Inventory Optimization to Reduce Inventory Levels in a Lean Environment

Transcription

1 APRIL 2005 WHITE PAPER Using Inventory Optimization to Reduce Inventory Levels in a Lean Environment Giving small and mid-size manufacturers and distributors the ability to reduce inventory holdings, increase inventory turns and improve customer fulfillment.

2 Table of Contents Introduction...2 The Challenge...3 Getting to the Next Level... 5 Benefits of Inventory Optimization... 7 Benefits of an Integrated Solution... 9 The SYSPRO Conclusion...13 Glossary of Terms...14 White Paper Page 1

3 Introduction Inventory control is a key aspect of almost every business. Introduction Inventory takes many forms, ranging from raw materials to fi nished goods. While holding large amounts of inventory enables a company to be responsive to fl uctuations in customer demand, the associated costs can be excessive. In order to operate in a lean environment at maximum effi ciency levels, companies must minimize all unnecessary expenses, including those associated with production and storage of inventories. Inventory control is typically a key aspect of almost every manufacturing and/or distribution operation business. The ultimate success of these businesses is often dependent on its ability to provide customers with the right goods, at the right place, at the right time. The right goods are those that the customer wants; the right place is your available inventory, not the supplier s warehouse, and in today s economy the right time is immediately. Failure to have the right goods in the right place at the right time often leads to lost sales and profi ts and, even worse, to lost customers. Today s reality is that there is very little differentiation between commodity products of the same type, and customers will, more often than not, choose to return to businesses that meet all three conditions, even choosing relatively unknown brands over known brands. The role of inventory management is to coordinate the actions of all business segments, particularly sales, marketing and production, so that the appropriate level of stock is maintained to satisfy customers demands. The goal of inventory management is to balance supply and demand as closely as possible in order to keep customers satisfi ed and drive profi ts. Page 2

4 The Challenge The aim of inventory management is to reduce inventory holdings to the lowest point without negatively impacting availability or customer service levels. This can be done while still maximizing the business ability to exploit economies of scale to positively impact profitability The Challenge Inventory management is a fundamental requisite to supply chain optimization. The processes and controls of effective inventory management are critical to any successful business. Since it is rarely the case that any business has the luxury of unlimited capital, inventory management involves important decisions about what to buy or produce, how much to buy or produce and when to buy or produce within the capital limits. These are value decisions. Excessive inventory investments can tie up capital that may be put to better use within other areas of the business. On the other hand, insuffi cient inventory investment can lead to inventory shortages and a failure to satisfy customer demand. A balance must be struck and maintained. The aim of inventory management is to reduce inventory holdings to the lowest point without negatively impacting availability or customer service levels. This can be done while still maximizing the business ability to exploit economies of scale to positively impact profi tability. White Inventory Paper Optimizer Page 3

5 The Challenge cont. Inventory optimization takes inventory management to the next level, enabling businesses to further reduce inventory levels while improving customer service levels and maximizing capital investments. Inventory management is an ongoing process that relies on inputs from forecasts and product pricing, and should be executable within the cost structure of the business under an overall plan. Inventory control involves three inventory forms of the fl ow cycle: Basic Stock The exact quantity of an item required to satisfy a demand forecast. Seasonal Stock A quantity buildup in anticipation of predictable increases in demand that occur at certain times in the year. Safety Stock A quantity in addition to basic inventory that serves as a buffer against uncertainty. The challenge is to weigh the balance in favor of basic stock so that the business holds as little safety stock as possible and provides just the right amount of seasonal stock. However, the predictability of demand has a direct impact on how much safety stock a business must hold. When demand is unpredictable, higher levels of safety stock must be maintained. Therefore, the search for the optimal inventory levels to achieve a lean manufacturing environment becomes a key objective. Inventory optimization takes inventory management to the next level, enabling businesses to further reduce inventory levels while improving customer service levels and maximizing capital investments. Page 4

6 Getting to the Next Level On a more technical level, the peripheral nature of inventory optimization solutions often requires the external duplication and manipulation of data. Getting to the Next Level Traditionally, most companies manage inventory through the monitoring of minimum and maximum stock levels, safety stock, Kanban and economic batch quantities (EBQs). But these methods fail to take external factors into account, such as supply and demand, resulting in inventory levels that do not truly refl ect market conditions. Inventory optimization solutions take it to the next level. And while these solutions are readily available, they come in the form of boltons that often require ongoing consultancy services not just during the critical integration and implementation phases to achieve maximum benefi ts. This increases the overall cost of inventory optimization and can also introduce signifi cant delays, making it diffi cult to accurately apply inventory policy and propagate the results across the extended supply chain. On a more technical level, the peripheral nature of separate inventory optimization solutions often requires the external duplication and manipulation of data. This increases the probability for error and therefore the potential risk that data integrity can be compromised. However, simply applying an external inventory optimization solution is not the silver-bullet that will solve all problems. To understand why we must look at the company itself and isolate the reasons it is often diffi cult to achieve dramatic improvements in inventory control. These challenges need to be overcome, in part, by the method in which the inventory optimization system is implemented and, in part, by the technological functionality the system embodies. White Inventory Paper Optimizer Page 5

7 Getting to the Next Level cont. Wherever business processes and transaction capabilities are integrated and extended across the supply chain, a greater number of users have visibility into the different aspects of inventory optimization and the means to maximize the process. These challenges include: Establishing a single point of accountability for inventory performance by consolidating data, transaction and business processes into a single connected, integrated collaborative system. Ensuring that the many connected departments and external organizations are synchronized in a way that positively affects inventories across the extended supply chain. Making sure that initial data is accurate, complete and that its integrity is preserved during the course of implementation and the subsequent inventory optimization process. Extending the depth of visibility across the extended enterprise to ultimately enable better Distribution Replenishment Planning decisions, eliminating the conventional rules of thumb that result in the speculative fi gures traditionally used to set inventory targets. Enabling all members of the business ecosystem with the necessary technological capabilities. Addressing these challenges requires a tightly integrated approach that closely refl ects the dynamics of the extended supply chain and promotes the imminent availability of data for consumption by other business application modules within the incumbent ERP system. Wherever business processes and transaction capabilities are integrated and extended across the supply chain, a greater number of users have visibility into the different aspects of inventory optimization and the means to maximize the process. Page 6

8 Benefits of Inventory Optimization The primary function of an Inventory Optimization solution is to allow companies to effectively fulfill demand and identify how to gain additional profits from their inventories. Benefits of Inventory Optimization The primary function of an Inventory Optimization solution is to allow companies to effectively fulfi ll demand and identify how to gain additional profi ts from their inventories. Improved effi ciencies through effective resource management and optimization lead to an increase in service level, improved performance against customer request dates and improved return on equity. These gains are derived in three ways: System Benefi ts Value-Added Benefi ts Strategic Benefi ts System Benefits The direct benefi ts derived from the implementation of effective inventory management and optimization methodologies include: Risk reduction from reduced inventory obsolescence Improved service levels resulting in improved customer satisfaction and increased sales Reduced freight costs by having the right inventory in the right locations at the right time Identifying and discontinuing unprofi table slow movers Identifying and managing excess stock to improve cash fl ow and decrease holding costs Identifying and controlling the reduction of dead inventory Improving forecast accuracy for better planning Calculating safety stock appropriate to risk/service required Makes the company more effi cient Increasing automated ordering usage facilitates customer service and effi ciency Increasing inventory turns to improve profi tability Allowing fewer expedites will keep costs in check Identifying service risk items before stock outs occur Improving supplier management lowers expedite costs, product holding costs and shortages with fewer disruptions White Inventory Paper Optimizer Page 7

9 Benefits of Inventory Optimization cont. Strategic application of effective inventory management and optimization should ultimately improve a company s competitiveedge and enable the capacity to service and support an increased market share through better fulfillment. Value-added Benefits The system can be applied to take advantage of company strategies. This involves a shift from point selling to solution selling where perceived value can be used to set premium prices that are higher than what could previously be obtained. An example would be the benefi ts from differentiated service levels that prioritize the most profi table products and customers. Strategic Benefits In the big picture, adoption of inventory optimization solutions is a strategic decision aimed at improving the company s core-competency and should, therefore, be coupled with well-timed Strategic Growth Initiatives. Strategic application of effective inventory management and optimization can ultimately improve a company s competitiveedge, enabling it to service and support an increased market share through better fulfi llment. This is particularly signifi cant where the company has multiple locations or multiple warehouses and the control over such inventory forces a variety of strategic decisions. These decisions are ultimately based on the need to service local, regional, national or international markets. The location, content and amount of inventory produced and held is always a very important decision. Page 8

10 Benefits of an Integrated Solution Implementation of an integrated inventory optimizer will enable a company to target longer term objectives that include Inbound and Outbound Logistics and Warehouse Management... Benefits of an Integrated Solution Typically, a viable inventory optimizer will consist of an application suite that delivers the required functionality in a manner that is complementary to and an integral part of the core ERP system. Such integration will enable the inventory optimizer to leverage the broad and stable base functionality and business logic already inherent and distributed throughout the core ERP system to achieve the desired system benefi ts outlined above. From a wider perspective, the implementation of an integrated inventory optimizer will enable a company to target longer term objectives that include Inbound and Outbound Logistics and Warehouse Management, in effect, elevating the overall level of automation and awareness of the entire supply chain. Analysis Seller Buyer Strategy & Planning End Consumer Execution Demand & Supply Management Figure 1: The CPFR* Model Framework The CPFR model represents the four business activities in a collaborative supply chain advanced through the application of technology. Although depicted as a logical cycle, the activities usually occur concurrently and can impact each other. White Inventory Paper Optimizer Page 9 *Collaborative Planning, Forecasting and Replenishment

11 Benefits of an Integrated Solution cont. Customers deploying technology, such as Microsoft.NET, will be able to extract value from the inventory optimizer as it delivers the outward facing capabilities required to implement collaborative commerce solutions. Customers deploying technology, such as Microsoft.NET, will be able to extract value from the inventory optimizer as it delivers the outward facing capabilities required to implement collaborative commerce solutions (such as the CPFR Model). In effect, the resulting system takes a holistic view of the extended Supply Chain in context of the extended enterprise. The combination of these factors represents a signifi cant value proposition. Analysis Performance Assessment Supplier Manufacturer Strategy & Planning Collaboration Arrangement Exception Management Retailer Consumer Joint Business Plan Execution Order Fulfillment Order Generation Demand & Supply Management Order Forecasting Sales Forecasting Figure 2: CPFR in the Extended Enterprise The full implementation of an extended supply chain would include more than two tiers of trading partners in the deployment strategy. This is known as an n-tier confi guration. A modular inventory optimization solution, consisting of three interrelated modules: Forecasting; Groupings and Families; and Inventory Optimization, also gives customers a choice, i.e., install Forecasting initially and then when required, install the remaining modules for a full-blown inventory optimization solution. Page 10

12 Benefits of an Integrated Solution cont. These modules can be designed to utilize the existing functionality, data and business logic of the SYSPRO ERP transaction system. The Forecasting module must encompass: Forecasting at item/warehouse level Aggregation of forecast to higher levels as defi ned by Groupings and Families Variety of forecast algorithms including a tournament method Ability to handle seasonality Ability to remove outliers and anomalies Ability to edit history User forecast override to deal with market intelligence Storage of 3 or more years of history Monthly or weekly time buckets User defi ned calendars User defi nable forecast horizon Graphical output The Groupings and Families module must encompass: Additional levels of data segmentation to provide both subgroup and super-group aggregation Grouping of items by sales turnover, profi t contribution, unit movement and other user selectable attributes The must encompass: The setting of inventory parameters using Groupings and Families The setting of appropriate safety stock Inventory modeling The ability to project future inventory The tracking of inventory performance Lead time tracking The generation of supplier scorecards White Paper Page 11 These modules can be designed to utilize the existing functionality, data and business logic of the ERP transaction system. As noted, this modularity enables a company to avail itself of forecasting without going for the full-blown inventory optimization solution. It also enables a company to implement inventory optimization in stages, as needs dictate.

13 The SYSPRO SYSPRO is bringing an integrated inventory optimization solution to the mid-range. The SYSPRO SYSPRO is bringing an integrated inventory optimization solution to the mid-range. The company is completing the development of a modular Inventory Optimization solution that fulfi lls and includes all the desired features and functionalities outlined above. However, the SYSPRO solution goes beyond the scope of traditional optimization objectives by incorporating optimization across the full breadth of the transaction and process driven base inherent to SYSPRO, supplying optimization functionality across the various application modules. This functionality culminates in an increased level of input to the both in terms of data rate and accuracy. The resulting output of the calculations performed in the Inventory Optimization process are therefore a near real-time refl ection. Periodic Inventory Change Determining Inventory Value Seven Phases Sourcing Product Making Product Delivering Product Recording Systems Maintaining Control Figure 3: Seven Phases of the Inventory Optimization Process The inventory optimization process can be visualized as seven phases that are executed in sequence at a predetermined Review Period and is cyclic as shown. Page 12 The SYSPRO refl ects the company s philosophy of bringing sophisticated solutions to the mid-market solutions that traditionally have only been available with the high-end company solutions.

14 Conclusion The SYSPRO Inventory Optimization solution is consistent with the SYS- PRO objectives of the solutions the company offers. Conclusion The SYSPRO Inventory Optimization application was designed to provide customers with advantages that can only be derived when optimization functionality is executed as an integral component of an ERP system. The SYSPRO Inventory Optimization solution is consistent with meeting the requirements of the following company objectives: Helping customers to increase overall effi ciencies Utilizing technology for superior decision-making Providing visibility across the supply chain Enhancing a demand driven model for the company Delivering greater profi tability to the customer s bottom line White Paper Page 13

15 Glossary of Terms Advanced Planning & Scheduling The ability to obtain a live picture of the shop fl oor in order to plan workloads against available capacity to accommodate rush shipments, broken equipment and absentee workers. Collaborative Planning, Forecasting and Replenishment The sharing of information along the supply chain to enable fi nite adjustments to forecasts and replenishment needs. Distribution Replenishment Planning (DRP) Distribution Replenishment Planning (DRP) is the process for determining inventory requirements in a multiple plant/warehouse environment. ERP ERP (Enterprise Resource Planning) is a business management system that integrates all aspects of the business, including accounting, manufacturing and distribution. Forecasting A management tool that leverages available history and/or selected algorithms and mathematical formulas to predict future sales activity. Inventory Optimization The use of historical data and sophisticated algorithms to forecast future sales in order to minimize the investments in raw materials and fi nished goods inventories. Lean Manufacturing Reducing order turnaround times by eliminating non-value-added waste in the production stream. The ideal of a lean system is to reduce inventories of raw materials to a supply suffi cient to meet current orders. Page 14

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