Changing the Status Quo to Stay Ahead of the Amazon Effect

By Henry Canitz

Picture1.png

Planning teams face multiple dilemmas including promoting and supporting top line growth, containing cost, efficiently managing on-going operations and finding new ways to drive innovation. To complicate matters, supply chains are growing more complex as product proliferation and customer service expectations rise driven in part by the “Amazons” of the world.

Increasing complexity due to larger product portfolios drives demand volatility, more distribution channels and wider-spread supply chain networks. Traditionally, complexity required increasing inventory levels to buffer against the unknown, which in turn brought about more scrutiny from senior management as working capital increased. The answer, while simple to state, seems to allude many organisations: hold the right amount of inventory in the right locations to improve cash flow and provide better responsiveness to dynamic customer demand. Industry research and surveys point to Inventory Optimisation (IO) as a key capability to combat these growing supply chain stresses.

A form of prescriptive analytics, IO determines where and how much inventory to hold to meet a designated service level while complying with specific inventory policies. Through sophisticated algorithms, IO makes stocking recommendations to satisfy demand with the least amount of inventory. Inventory Optimisation can have a huge financial impact by minimizing inventory and freeing up working capital while guaranteeing the right stock is on hand, when and where needed.

Change the Status Quo through Multi-echelon Inventory Optimisation

Multi-echelon Inventory Optimisation (MEIO) goes a step further to simultaneously optimize stock locations and amounts across all inventory types in a supply chain network. Through advanced mathematical algorithms, MEIO models inventory flows through every interdependent stage and location of a supply chain to create an optimal configuration of internal and external inventory buffers to handleScreen Shot 2018-02-13 at 12.18.12 pm demand and supply uncertainty. MEIO can model component/raw, work-in-process (WIP) and finished goods inventory to ensure the right amount of each is stocked in the right locations enabling powerful postponement strategies.

MEIO’s rapid “what-if” scenario analysis to modify stock buffers (lowering some, raising others) and revamped policies and targets around the supply chain has shown in the real world to reduce inventory 10% to 30%, freeing millions (and in some cases, billions) in working capital that was trapped in excess stock and carrying costs.

Multi-echelon Inventory Optimisation, at its simplest form, enables the trade-off between service level and inventory cost modelled across the efficient frontier (see Figure 1). The Inventory Efficient Frontier shows that, for any status quo, it will always cost more to achieve higher service levels. However, through MEIO initiatives we can change the status quo and create a series of new curves that deliver a desired service level at less cost than the formerstate allowed.

 Picture12.png

Figure 1: The Inventory Efficient Frontier

 

MEIO’s Impact on the Supply Chain

MEIO modelling compares actual demand to forecast, and actual receipt of goods to the plan for each SKU. MEIO models identifies forecast accuracy and safety stock issues while factoring historical forecast accuracy into the equation enabling predictive service level calculations. This fact-based approach to inventory targets allows you to right-size inventory by SKU and location.

MEIO strategic inventory modelling answers more difficult questions, i.e. where to make or stock products or the impact of distribution or manufacturing facility closures and openings. Strategic inventory modelling can provide quick, side-by-side scenario analysis to help make the right decisions. MEIO enables timely answers to complex “what-if” questions including impacts of channel changes and stocking policies across a complex and volatile omni-channel distribution network.

 

A Proven Three Step Approach to MEIO:

A simple three-step approach has been proven effective to achieving a successful MEIO initiative:

  1. Assess your organization’s capabilities from the perspectives listed below to understand your current state and to lay the foundation for a solid business case that delivers real-world results:
  • Inventory performance
  • Business process and inventory management expertise
  • Technology and organizational readiness
  1. Create a future state MEIO capability—process, technology, organization—that provides your supply chain team with a roadmap to success.
  2. Drive fundamental strategic changes that create greater resiliency and agility throughout the supply chain and establish a cycle of continuous improvement.

 

Time for Change

The benefits of Multi-echelon Inventory Optimization (MEIO) are well established by hundreds of companies of all sizes and in many industries. Leading organisations have shown that right-sizing inventory buffers and restructuring where and in what form inventory is held can drive powerful financial benefits. Inventory Optimisation provides a knowledge platform for better decision-making and enables organizations to use inventory as a lever for balancing supply and demand.

Amazon and other large e-retailers appeal to consumers on product offering, price and speed of delivery. They are able to effectively compete in these areas due to economies of scale that lower operating costs. To compete against the “Amazons” of the world, companies must find ways to simultaneously lower costs and improve customer service. MEIO is a modern weapon that does just that by enabling companies to selectively pick where to engage. MEIO allows companies to optimize inventory for the markets they want the battle to be fought in, for select customers, and select products.

 

About the author

Hank Canitz Picture

Henry Canitz is The Product Marketing & Business Development Director at Logility. To read more of Henry’s insights visit www.logility.com/blog.

Advertisements

Supply Chain Planning & Optimisation Projections for 2018 – Back to the Future

By Henry Canitz, Director of Product Marketing and Business DevelopmentPicture1

I get a kick reading “prediction” articles both prior to the year start and then again after the year is complete. When it comes to predicting the very dynamic supply chain management industry, those after year reviews can be quite amusing. For even more fun look back 10 or more years to see where we all thought the industry would be. Therefore, it is with a bit of trepidation that I toss my hat in the arena and make my 2018 supply chain planning and optimization predictions.

From all indications, 2018 should be a very interesting year for supply chains and supply chain practitioners. I think there are a few advanced capabilities that will grow in importance but I also believe there is a growing awareness that to benefit from advanced planning and optimization capabilities a company needs to build a firm foundation. Companies need a robust integrated and highly functional supply chain platform that is operated by highly trained supply chain professionals. In a way, we need to go back to fundamentals to move forward to the future.

The Rise of Cloud Deployment and Heightened Security

The large number of major data breaches in 2017 has been the focus of many C-level meetings. In an interesting reversal, SaaS (software-as-a-service) solutions are now viewed by most as the least risky deployment option and this will increase in the year ahead. 2018 will bring a renewed emphasis on security for supply chain facilities due to the growing awareness that data breaches can originate through almost any type of connected system and the fact that more facilities are being opened in unstable geographies.

The Shift to Continuous Planning

The pace of the supply chain is increasingly driven by ever-growing customer expectations (Amazon Effect) making end of the day, week, or month periodic planning processes, while still important, no longer sufficient for today’s operations. The concept of continuous planning where planners address opportunities and disruptions as they happen will continue to gain ground in 2018. These efforts could be part of a Sales and Operations Execution (S&OE) process or tightly tied to building more robust digital planning and optimization capabilities. To facilitate continuous planning process companies will start to move towards cross-functional teams working in a control-room type environment to address global disruptions and opportunities using advanced planning and optimization capabilities.

Digitisation

You can’t open a recent supply chain periodical today without seeing something about artificial intelligence (AI). Advanced analytics, machine learning, algorithmic planning, and AI will all continue to capture a significant slice of attention in 2018. In the year ahead, this will require supply chains to shift how they operate. With digitization of the supply chain, the role of the planner will become one of solving problems using advanced analytics to make business decisions not just supply chain decisions.

The Internet of Things (IoT) will continue to drive supply chain execution innovation as companies find new opportunities in the wealth of data available. For many, the current state includes difficulties interfacing IoT data in a high quality, repeatable fashion. Most companies just aren’t at the point where consuming this firehose of data is feasible.

Supply Chain Data Quality and Ownership

Supply Chain Master Data Management (MDM) is quickly becoming a critical foundational requirement and I expect to see more interest in this area in 2018. Much of the data used for supply chain planning and execution comes from outside of a company’s ERP systems. Ask yourself, where is supply chain data maintained at your company today? The answer might surprise you. Effective supply chain planning and optimization requires high quality and consistent data and the ability to easily and quickly maintain and update that data. Inconsistent and poor quality data will degrade confidence in recommendations. One of my mentors once told me that, “One awe S#?* wipes out 1000 Attaboys (or Girls)”. One piece of bad data that tarnishes a recommendation will be difficult to overcome. To take full advantage of IoT data, supply chain organizations will need to invest in their Supply Chain Master Data Management capabilities and platforms.

Talent GapPicture12

You continually hear from hiring managers that there is a “War for Talent” driving increased salaries, benefits, and turnover rates for supply chain professionals. This will not change anytime soon. Actually, with a shrinking baby-boomer workforce the war for talent is only going to heat up in 2018 (read more here: The Talent Gap and here: Imagine 2030: Supply Chain Talent). Companies will need to find additional ways to attract and retain talent like rotational programs, clear-cut career paths, advanced degree support, and support for professional training. Another way is to provide advanced supply chain platforms that allow team members to work on more value-added activities. Yes, the ability to hire and retain talent could be another way to justify an investment in new supply chain planning and optimization capabilities.

Taking S&OP to the Next Level

I have personally seen the significant benefits of a well-run S&OP process and I know other practitioners have as well. I may be going out on a limb here but I think 2018 will be the year of renewed efforts around putting advanced S&OP capabilities in place including the ability to;

  • Optimize the end-to-end supply chain based on constraints and business objectives (minimize cost, maximize profits, meet customer service levels, etc.)
  • Analyze the impacts of product-lifecycle decisions, especially new product introductions
  • Align and synchronise strategic, tactical and operational planning
  • Collaboratively plan with partners and customers

A year from now I am sure we will all get a good laugh by revisiting this piece, but I am hopeful that a least of few of my predictions will hold true. Here’s to a happy and successful 2018.

About the author 

Hank Canitz PictureHenry Canitz is The Product Marketing & Business Development Director at Logility. To read more of Henry’s insights visit www.logility.com/blog.

Removing the Two Barriers to Optimising Inventory

Removing the Two Barriers to Optimizing Inventory

Removing the Two Barriers to Optimising Inventory
Caught Between a Rock and a Hard Place

Henry Canitz – Product Marketing & Business Development Director, Logility

Supply chain leaders often find themselves in a difficult situation when it comes to the conflicting goals of improving customer service and minimising inventory. The omni-channel world we live in has driven customer service to new heights. Companies that don’t prioritise providing what the customer wants when they want it will soon find themselves losing market-share. On the other hand, product lifecycles continue to accelerate and the penalty for carrying too much of the wrong items leads to high levels of obsolescence. This isn’t a new dilemma, the balancing act between inventory and service has been going on since the earliest days of commerce. However, the penalties for bad service and/or high inventory are growing more severe and the space “between a rock and a hard place” is continuing to shrink.

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 some supply chain teams have conducted inventory optimisation (IO) initiatives to raise service levels while lowering inventory cost, others worry that they won’t be successful in the effort.

There are two common barriers that can prevent an organisation from reaping the benefits of inventory optimisation efforts:

  • IO success can be undermined by reliance on:
    • Limited tools (such as modules built into, or bolted onto, existing ERP systems)
    • Inadequate solutions (e.g. error-prone, hard-to maintain spreadsheets)
    • Black-box systems (where calculations are difficult or impossible to validate)
  • 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 and the benefits are too good to ignore. Companies that embrace Multi-echelon Inventory Optimisation (MEIO) achieve, on average, a 28% increase in inventory turns.

A simple three-step approach can remove barriers to achieving a successful MEIO initiative.

  1. Understand your current state and lay the foundation for a solid business case. Assess your organisation’s capabilities from the perspectives of:
    • Inventory performance
    • Business process and inventory management expertise
    • Technology and organisational readiness.
  2. Create a future state inventory optimisation capability—process, technology, organisation—that provides your supply chain team with a roadmap to success.
  3. Continue to drive fundamental strategic changes that create greater resiliency and agility throughout the supply chain and establish a cycle of continuous improvement.

Can you overcome the two common barriers to implementing inventory optimisation capabilities and get out of being Between a Rock and a Hard Place? Of course. We work with companies around the world who are driving significant value from their MEIO process.

Learn More:

 

About the author

Hank Canitz Picture

Henry Canitz is The Product Marketing & Business Development Director at Logility. To read more of Henry’s insights visit www.logility.com/blog.