The Two Levers of Inventory Optimisation

By Henry Canitz, Director of Product Marketing & Business Development , Logility

When I hear the term “Lever” my mechanical engineering side comes out and I think of the Physics and Mechanical Design courses I took some 30+ years ago. Although I didn’t appreciate it at the time, my engineering education laid a strong foundation that has helped me be as successful as possible in whatever I did. More than anything, I learned how to analyse and solve problems. So when I think of a lever I think of a rigid bar resting on a pivot or fulcrum, used to help move a heavy or a firmly fixed load with one end when pressure is applied to the other.

Back to present day and the supply chain. Two powerful levers a company can use to optimise inventory are “Working Capital” and “Customer Service Levels.” Through the effective use of these levers, you can free trapped working capital while improving service levels.

Your company’s inventory efficient frontier is a tradeoff curve between working capital and service level and represents the currently achievable service level at any corresponding inventory investment. At its most basic, start with a piece of graph paper and plot your current service level on the x-axis and current inventory level on the y-axis. Chances are you are not on the inventory efficiency curve that is theoretically possible given your current operating capabilities. When you remove inefficiencies, failures, etc. and estimate how much your service level will go up and down with changes in inventory investment you end up with a curve – your current inventory efficient frontier curve. Organisations can slide up and down along this curve by manipulating the service and inventory levers (see Figure 1).

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However to create real value you have to be able to shift the inventory efficient frontier so that higher service levels can be achieved without increasing inventory or the same service levels can be achieved with less inventory. Multi-echelon Inventory Optimisation (MEIO) allows you to truly optimise your inventory across the entire supply chain and enables you to shift to a new efficient frontier for your entire supply chain (Read the eBook: The Inventory Optimization Handbook).

By modeling the end-to-end supply chain, MEIO determines not only the optimal inventory to carry at each location but also at which locations each item should be carried. MEIO looks across sales channels, distribution tiers, and even types of inventory (raw, WIP, FG) to understand how best to minimise total inventory while still providing the desired customer service levels. MEIO can take you into unexplored territory providing reductions in working capital of up to 30 percent or more. For most companies that amounts to millions of dollars in savings annually. That is an impressive use of levers.

What is important to understand is that the supply chain is a living, breathing and constantly changing organism. Your optimal inventory strategy for this month might be suboptimal next month due to changes in demand or supply, changes in competition or market health, or a variety of other factors. Modeling your end-to-end supply chain inventory is not a “one and done” activity and therefore there is always opportunity to shift that efficient frontier into new and undiscovered territory.

Do you understand your company’s service level – working capital tradeoff? Can you model your end-to-end supply chain to determine your optimal inventory locations and levels?

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Henry Canitz, Director of Product Marketing & Business Development, Logility

 

 

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Turning Reverse Logistics into Profit

While retailers are still celebrating one of the strongest holiday buying seasons in recent years, the secondary retail market is now enjoying its own successful season. Once consumers take their unwanted items back to retailers, resellers and reverse logistics groups acquire those items to turn their own profits, according to an article in The Wall Street Journal.Golden_Passenger_1

The National Retail Federation reports that holiday sales totalled nearly $692 billion in the last two months of 2017. Reverse logistics provider Optoro estimates that about 13 percent, or $90 billion, of that merchandise, will be returned by the end of this month. The most commonly returned items include clothing and apparel, electronics, beauty products, and sports and outdoor gear.

About half of this returned merchandise is restocked on the retailers’ shelves and often resold at a discount. Some 5 billion pounds of merchandise is just thrown away because this option is cheaper than restocking and reselling the items. The remainder is picked up and sold by the secondary retail market. Retailers have actually improved their reverse logistics processes in the past few years, with many being able to process hundreds or thousands of items a day, noted Tony Sciarrotta, executive director of the Reverse Logistics Association. Some retailers even add a second logistics shift to help manage the returned items and move them to the next selling point as quickly as possible, he said.

As a result of these return trends, January and February tend to be the busiest months for resellers and the reverse supply chain, explained Howard Rosenberg, chief executive of B-Stock Solutions. B-Stock Solutions manages liquidation sites for Best Buy and Sears, among other major retailers, and auction sites for retailers such as Costco, Macy’s, JCPenney and Lowe’s. “It’s just mayhem during this period,” Rosenberg said.

Resellers acquire the returned items through liquidation sites at a deep discount, enabling them to turn a profit. For example, last week, Best Buy sold 49 returned washing machines and dryers on one online auction site for $13,300 — a 68 percent discount. Similarly, on the same day, Sears resold four pallets of sportswear, intimate apparel and accessories for only $5,825 — a 93 percent discount. Damaged or bulk items usually have the greatest discounts.

Because of the strong holiday selling and returning seasons in the past few years, the resale market is stronger than ever. Post-retail sales of returned and overstocked items totalled $554.2 billion in 2016 — only $137.8 billion less than 2017’s November and December sales — and have been growing at approximately 7.5 percent a year, reported Zac Rogers, an operations and supply chain professor at Colorado State University. Nearly half of those 2016 sales were collected by salvage dealers and online auction houses, the remaining half collected by smaller vendors like dollar stores, factory outlets, pawn shops and flea markets.

The secondary retail market also received a volume surge this year following the rise in online purchases, which are more likely to be returned than items purchased in a physical store.

In conjunction, online liquidators like B-Stock, Liquidation.com and Optoro’s Bulq.com have grown their businesses. Online auction sales have increased 66 percent in the past 10 years, and combined sales through factory outlets, dollar stores and value retailers have more than doubled.

Be a part of the action

These retail trends are fueling the growth of the reverse supply chain, which the APICS Dictionary defines as, “The planning and controlling of the processes of moving goods from the point of consumption back to the point of origin for repair, reclamation, recycling or disposal,” or, in this case, resale. The growing secondary retail market will need resources to collect, manage and move an increasing amount of inventory to the new end users.

APICS offers resources to help you and your company participate in the growing reverse supply chain. Consider earning your APICS Certified in Logistics, Transportation and Distribution (CLTD) designation. The APICS CLTD program covers reverse logistics as well as capacity planning and demand management, order management, inventory and warehouse management, transportation, global logistics, logistics network design, sustainability and other important topics. Learn more at asci.org.au/cltd.

Author – CEO, APICS
Abe Eshkenazi

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Overall view of event logistics is crucial for Melbourne Cup Carnival

The Melbourne Cup is the race that stops a nation but, behind the scenes, supply chain management experts are far from stopping.

An overall view of the entire end-to-end supply chain with control over the entire management of the process for large scale events is imperative otherwise chaos erupts. We saw this unfold during an Olympic Games where there was no clear management of processes. Most supply chains are managed in an ongoing, sustainable way, however, supply chain management for large scale events operate entirely differently with rapid ramp up and ramp down phases, detailed master delivery schedules, ample availability for consumable goods, and lastly a rigorous plan for waste removal. The Melbourne Cup Carnival is no exception.

Lexian has developed proprietary event management software to manage the logistics for major sporting events.

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The Australasian Supply Chain Institute (ASCI) and myself wish to invite those working in supply chain and logistics to a breakfast where Bruce Craig, from Llamasoft and myself will offer you the opportunity to:

·       Learn how these best practice companies are achieving competitive advantage by significantly improving in the areas of; cost, margin, customer service and risk.

·       Understand how they are implementing analytical centres of excellence to perform; network, product flow, production, cost-to-serve, multi echelon inventory optimisation and simulation.

·       Join a discussion on common supply chain problems

·       Run through the “Supply Chain Matrix Scorecard”

Imagine if you had a living, digital model of the end-to-end supply chain, enabling continuous improvement and innovation to rapidly and accurately answer the toughest ‘What-if’ questions and generate effective and clear data driven recommendations. The principles of Supply Chain Design are applicable to most businesses that have a supply chain. This presentation will provide members with sufficient information about Supply Chain Design so that they can determine the “fit” within their own business as well as the foundations of building a business case for action.

ASCI Networking Breakfast: An Overview of Supply Chain Design

When: 7.30am, 30 November 2017

Where: Michael Page offices, Level 19, 600 Bourke St, Melbourne

Cost: Free to ASCI members and their guests

RSVP: via EventBrite: https://www.eventbrite.com.au/e/a-brief-overview-of-supply-chain-design-tickets-38645845765

Guest Blogger

Shaun Gates (Managing Director, Lexian Solutions)

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