A more complex global environment is creating significant inventory challenges for manufacturing inventory planning.
Manufacturing companies need to become more innovative and resourceful to compete in today’s global marketplace. Many manufacturers not only produce goods for other manufacturers, they are now selling their products directly to other manufacturers (B2B commerce) and even consumers (B2C commerce). The use of e-Commerce rising so dramatically has added more challenges for managing both production and finished goods inventories.
Inventory supply chain planning is more difficult and becoming so every day due to rapidly changing demand patterns, the number of selling channels, the dramatic increase of new SKU’s, higher transportation costs, and competition. Even more challenging is effectively planning items that are commonly used in production, kits (kitting & assembly), and distribution & retail.
It’s amazing how things or ideas happen. You can be working with the same situation day in and day out and all seems normal. Then, out of the blue, the lightbulb goes on. Inventory planning is harder to do and lost sales are increasing due to out of stocks. More and more companies are realizing that the world is too competitive and buyers are too finicky to leave inventory planning to spreadsheets and manual replenishment approaches. Today, an inventory needs to be more dynamic and flow with the changes in demand.
ERP or accounting software is a necessity for running the general business. However, efficient and effective inventory planning is both art and science. Even if the ERP system has some demand planning, it tends to be very basic with textbook forecasting and replenishment methods, like min and max. If there is a small inventory to manage a 100 or so items, these systems may be suitable. But as a business grows and demand and competition increase, a better more advanced solution is required.
The saying “you don’t know, what you don’t know”, is still true. Even with the incredible amount of information on the Internet, we still miss a lot of information and opportunities. Really, there is too much information and trying to distill it all down into meaningful bites is challenging. Everywhere you look there is someone or some company proclaiming they are the best or the leader in inventory planning. They show lots of pretty charts and graphs, the “eye-candy”, which makes it more believable.
Don’t be fooled. You need to consider what your needs are and how you are going to meet them. Many settle on a forecasting package to start with. This is a good start but then a stocking quantity needs to be determined somehow. Once a stocking quantity has been set, you can compare how much is on hand and on order.
Another challenge is the bullwhip effect. The bullwhip effect is a supply chain phenomenon in forecast-driven distribution channels. Demand variability increases as one moves up the supply chain away from the retail customer, and small changes in consumer demand can result is large variations in orders placed upstream. Eventually, the network can oscillate in very large swings as each organization in the supply chain seeks to solve the problem from its own perspective. The bullwhip effect and has been observed across most industries, resulting in higher costs and poorer service.
Moving back in the supply chain from end-consumer to raw materials supplier, each supply chain participant has greater observed variation in demand and thus greater need for safety stock. In periods of rising demand, down-stream participants increase orders. In periods of falling demand, orders fall or stop, thereby not reducing inventory. The effect is that variations are amplified as one moves upstream in the supply chain (further from the customer).
e-Commerce has shown us many great ways to get our message and products out to more buyers. It also has shown that you need to be better at managing and planning an inventory. Utilize the advanced proven technology that inventory optimization provides.