Inventory Planning Blog
The first forecasting blog covered an overview to inventory forecasting and the techniques available. This post continues to review the approaches to inventory forecasting.Read More
This is Part 1 of a two-part series on inventory forecasting. This blog provides some basic information about viable inventory forecasting techniques. Forecasting is a key step in inventory planning but not the only one. There are other key variables and processes that come into play in good supply chain replenishment planning including inventory rationalization and optimization..Read More
Inventory Performance Improved with Inventory Optimization & Analytics
In simple terms, inventory optimization balances the investment in an inventory to achieve a targeted service level or order fill-rate. There are also financial considerations, constraints that can also be applied in the development of the algorithm. These highly complex algorithms work behind the scene so as not to confuse the user or make them fearful of using optimization to help manage their inventory.
Advanced inventory planning and optimization solutions enhance the MRP process by automating inventory planning and replenishment. It automatically selects the best forecast algorithm for every item at every location and creates a rolling forecast of from 12 to 36 months. The solution then calculates an optimal stocking quantity for each item based on many critical variables like the lead time, order frequency, and target service level. Variability in demand is also considered along with other key factors ensuring the right amount of stock is available without creating an overstocked situation.
The year 2015 brings a solid outlook of improving global economies and growth opportunities. Balancing near term resilience with longer-term objectives is what is needed now. Reducing costs, buying less, increasing productivity, improving cash flow are critical. Keeping these inventory objectives balanced and in perspective, you need an effective way to rationalize and prioritize important business demands. Improve your competitive advantage responsibly and efficiently without incurring major costs should be at the top of your list. Waiting until its too late in your ordering cycles will invite your customers to buy elsewhere. Reducing the wrong items at the wrong time only exacerbates the issue.
If your company tends to reduce items with the highest investment because it creates a larger reduction faster, what it actually does is create potential stock outs, more backorders and increased expedited shipping – and, even more importantly, customer dissatisfaction. We all know that when customers are unhappy they become former customers. Randomly cutting inventory has been proven repeatedly to be the wrong strategy as does overstocking your inventory. As supply chains grow more complex, manual planning using spreadsheets can cause losses. Yes, you can create them to be specific to your business but they are hindering your growth.
Now, more than ever, you have many affordable choices for improving your inventory investment and performance. The Cloud is a viable alternative to investing in On-Premise inventory software. Software-as-a-Service (SaaS) provides an affordable and flexible way to utilize some of the most powerful inventory planning solutions on the market.
Why should you be interested? SaaS applications provide many benefits you just cannot achieve on-premise. Benefits include:
Lower upfront capital: By going to a SaaS model, you avoid the up-front capital requirements and funding requests, and pay for the software as an on-going expense.
Faster implementation: There is generally less overall set-up time, and in some cases, companies can often leverage the hosted solution’s existing integrations with existing key ERP solutions.
Faster “time-to-value”: Given a more rapid implementation, the time-to-value and positive cash flow returns are more rapid than a traditionally deployed on-premise implementation.
Reduced internal IT resource requirements: No installed application software or hardware to manage over time.
Overcome objections to best-of-breed software: Some companies are finding that they are able to overcome the objections or rules against implementing software that does not come from the company’s ERP provider if they use a SaaS model.
Fit for “on-demand” usage: Users can truly access these solutions when they need them anytime and anywhere 24x7.
Staying current with technology: The software will periodically be automatically upgraded with enhancements to functionality. This should serve to keep users on the current platform, and keep them from falling behind the state of the art over time, sometimes badly so.
So, before you wait another moment, do yourself, your employees, and your customers a favor. Take a serious look at Cloud-based inventory planning and optimization solutions and begin 2015 with a clear path to success.
SAP Business One includes an MRP module for planning needs in a manufacturing environment. retailers and wholesale distributors also use the on-board functionality. Discover an affordable, seamlessly integrated inventory optimization solution to SAP Business One from Valogix.
However, you may want to explore how a more advanced inventory planning and optimization solution can further improve your supply chain performance. NetSuite recognized Valogix with their 2013 Supply Chain Partner of the year Award for successfully providing dynamic, automated multi-echelon planning and optimization.
Organizations with large inventory operations work with multiple levels of supply. Central sites purchase and stock most of the items. Slow-moving and less important items can be sent quickly to remote sites when needed, while fast-moving items are stored closer to the customer to enable more rapid customer service.
Advantages of the “multi-echelon” supply chain planning include:
- Consolidating inventory reduces the quantity required
- Consolidating purchasing gives greater leverage to obtain discounts from suppliers
- Balanced stock mix at all locations
Inventory planning for finished goods has become more complex and costly. The ever-increasing number of new Items (SKUs), changing demand patterns, and increasing transportation costs are taking a toll on a distributor’s bottom line. Especially difficult is planning items used both in kits and sold separately. Further complexity comes from planning for multiple locations and accounting for substitutes and supersedes.
Assume we have three locations supplied by a master warehouse, which has a planning horizon of 90 days. It also has a forecast of 90 units for that three-month period for an item.
Through the advanced algorithms in VALOGIX Inventory Planner, we can predict that:
• Location 1 will place a replenishment order for 30 units 16 days from now;
• Location 2 will place an order for 20 units in 27 days;
• Location 3 will place an order for 40 units in 7 days.
It is not just about having visibility and the capability to manually set safety stock and min/max levels for multiple locations. It is about having the right, balanced mix of items at the proper location at the right time. Using inventory optimization to dynamically plan and replenish multiple locations is a much better, proven method. That fact that the optimization is automated dramatically improves productivity and reaction time to changing demand.
What inventory optimization does is balance the investment in an inventory with the fill-rate (service level) goals of a company across all locations. There are also financial considerations, constraints that can also be applied in the development of the algorithm. These highly complex algorithms work behind the scene so as not to confuse the user or make them fearful of using optimization to help manage their inventory.
We have determined that you can dramatically improve the effectiveness of the optimization algorithms by adding heuristics into the overall process equation. Heuristic refers to experience-based techniques for problem solving, learning, and discovery. Heuristic methods are used to speed up the process of finding a satisfactory solution, where an exhaustive search is impractical. Valogix incorporates heuristics into all processes.
So consider the capabilities carefully when planning multiple locations:
Valogix automates the entire inventory planning process:
- Forecasting & Planning – every item at every location
- Stock Level Setting – considers forecast, lead time, order frequency,
- Desired service level and variability in demand
- Replenishment - Purchase Orders, Production Orders, Stock Transfers
- Easy to use and highly effective
- Avoids disruptions from costly stock-outs
- Exception based – alerts warn of potential future issues
- Planning Groups give unparalleled planning control & flexibility
- Items used in B.O.M.s and Kits as well as those sold independently
- Back-schedules to cover longest lead time of components
- Considers substitutes and supersedes
- Synchronized planning for smooth-flow inventory availability
- Reduced inventory by 20% to 40% or more usually within 6 months or less
- Reduced expediting and emergency shipments by 35% or more
- Improved productivity by reducing planning time by 60% to 80% or more
- Controlled and reduced replenishment spending by 15% or more
- Improved service levels by having the right items available when your customers want them by 5% to 15% or greater
- Reduced stock-outs by 15% - 30% or higher
- Increased sales of 15% to 15% or more
- Reduction in cost of goods by 5% to 10% due to improved vendor relations
Companies approach their inventory planning in many different ways - from seat of the pants guessing, to team collaboration, to spreadsheets that may invoke more team collaboration and manual changes, to forecasting software and some to advanced planning solutions.
Business software solutions like accounting packages or ERP systems come with some level of inventory management or inventory control functionality but rarely do they include forecasting or demand planning. They rely on the user manually setting min and max levels and safety stock to control the inventory. There are stand-alone forecasting packages that offer dozens of statistical models that allow the user to select the one or ones they want to use, and some even provide automated forecasting in which the solution uses a best-fit approach.
Spreadsheets and Reports – The Only Alternative?The vast majority of companies that own an inventory invariably use spreadsheets to control, manage, and report. The types of companies vary from manufacturing, to wholesale distribution, to retail, to aftermarket services, to maintenance and repair operations. In addition, this is true geographically and for companies from the very small to the largest. So why the fascination with spreadsheets?
In most cases, companies already own the software as part of a suite or as already installed on the computer they purchased. They are relatively low cost and have an abundance of features that make them attractive. It is also a case of “you don’t know what you don’t know”. Meaning, people are unaware of the availability of easy to use affordable, automated inventory planning software.
The dangers inherent in spreadsheets are:
1. Lack of Control
2. Errors from:
- Formula and data entry mistakes and typos
- Cell formatting and range definition mistakes (or errors)
- Data exporting problems
- Cell referencing problems
4. Potential for fraud
Lack of adequate training can result in poor to mediocre spreadsheet results, such as improper referencing, linking to other spreadsheets, or using inaccurate formulas to master complex calculations.
If the policies and procedures to mitigate spreadsheet risks are inadequate, errors will become more common and lack of consistency will show up in internal control audit reports. Therefore, the style, content, and accountability for spreadsheets should be documented in the organization's policies and procedures or in the spreadsheet used.
People are creatures of habit, which is one reason why spreadsheets are reused from year to year. Unfortunately, after cutting and pasting information, the spreadsheet might not work the way it did before — formulas can be damaged, links can be broken, or cells can be overwritten.
Many disruptions to the daily workday are common reasons personnel make data entry errors such as skipped entries or transposed numbers. A 2004 PricewaterhouseCoopers study shows that up to 91 percent of sophisticated spreadsheets contain errors. Unfortunately, if auditors know there are spreadsheet errors, so do fraudsters. For example, inadequate spreadsheet controls may lead to errors, misstatements, and possibly fraud.
Failure to back up data is a common and sometimes fatal error that may result in the loss of hours of data entry for computer users, which applies equally to all software tools including spreadsheets. Hardware and software breakdowns do occur from time to time, and backing up regularly and frequently is the best prevention for the spreadsheet user.
Keeping track of reorder points and safety stock for hundreds or thousands of items is becoming an overwhelming task. The time involved to update and maintain these spreadsheets can take hundreds of hours every week. Moreover, demand is constantly changing which can make the data stale and behind the curve for the most recent trends. This can lead to under-stocking causing lost sales and overstock creating excess inventory. In cases, a loss and a waste of valuable cash.
Ray Panko, University of Hawaii compiled data from numerous studies that indicates up to 90% of spreadsheets contain significant errors. Read this report.
Web-based demand planning and optimization products help companies reduce costs, increase productivity and offer a very quick ROI. In concert with a cloud-based ERP system like NetSuite, provides the users with an automated easy to use product. Planning and managing any inventory is a serious challenge and one that can be rewarding if done correctly and efficiently. Automation of the entire planning process from forecasting to replenishment to optimization and analytics is critical in order to keep up with the changes in demand and supply.
Discover an affordable, seamlessly integrated inventory optimization solution to SAP Business One for small and midsize businesses. A solution that frees up your resources (including cash), reduces losses from obsolescence, and increases service levels. The tools you need to forecast, plan, and optimize inventory, manage your business more efficiently and meet the demands of customers and suppliers are powerful and affordable.
Inventory Planning and Optimization the Key to Your Inventory Success
Well, it’s a new year that brings slowly improving global economies. In these challenging times, it is important to balance short term resilience with longer term needs. You will hear a lot about reducing costs, buying less, increasing productivity, improving cash flow and more. It is important to keep these inventory objectives balanced and in perspective. Yes, currently, times are interesting but, as economic growth gains momentum you will need to improve your competitive advantage.