Greener Inventory Planning & Optimization
Inventory Planning Blog
Complex Environment Creates Inventory Challenges
Inventory management has become more challenging in today’s complex and competitive business environment. Yet many companies are still maintaining inventories manually, and performing complicated computations using spreadsheets and point solutions. Keeping track of reorder points can become an overwhelming task as businesses grow. And standard spreadsheets offer little help in driving down costs and improving revenues because they are time consuming and frequently contain multiple errors. Ray Panko, University of Hawaii compiled data from numerous studies that indicates up to 90% of spreadsheets contain significant errors.
Where is the money hiding?
It is common to find excess and obsolete stock representing thirty-sixty percent of inventory and to find that five-forty percent of the time customer demands cannot be met (based on Valogix’ experience). At worst, companies lose sales; at best, they must ship items at a premium in order to fulfill orders, further driving down the profit margins.
There is good news on the (inventory planning) horizon
Automated planning tools are designed to remove complexity and improve inventory mix. They dramatically reduce the amount of time required to properly plan inventory. By automatically forecasting, replenishing and optimizing, companies can manage inventory more efficiently and meet the demands of customers and suppliers at lower costs for a powerful competitive edge.
Multi-location planning adds complexity.
Service Parts Planning Concepts
Service or spare parts inventory management is a prime candidate for advanced inventory planning, i.e. service management software. With many parts to manage and a lack of power tools, most companies with parts inventories have too many of the wrong parts. The result is unnecessary inventory expense, while still suffering service-limiting stock-outs.
Section 179 at a glance - New for 2013 & 2012
• 2013 and 2012 Deduction Limit = $500,000
This is good on new and used equipment, as well as off-the-shelf software.
• 2013 and 2012 Limit on equipment purchases = $2,000,000
This is the maximum amount that can be spent on equipment before the Section 179 Deduction available to your company begins to be reduced.
• Bonus Depreciation = 50%
This is taken after the $2 million limit in capital equipment purchases is reached. Note: Bonus Depreciation is available for new equipment only. Bonus Depreciation can also be taken by businesses that will have net operating losses in 2013.
The above is an overall, "simplified" view of the Section 179 Deduction for 2013. For more details on limits and qualifying equipment, as well as Section 179 Qualified Financing, please read this entire website carefully.
The Business Problem
Until recently, Small and Mid-size Enterprises (SME) did not have affordable, easy to use software tools to help them effectively manage and balance their inventory investment. Software solutions that forecast, plan and optimize an inventory are found in widespread acceptance in large enterprise companies but these solutions can cost between hundreds of thousands of dollars to millions and are generally not affordable by SMEs.
In most cases, spreadsheets are the common tool in use! They are time-consuming to build and maintain, are usually static data repositories, and according to a study by a major consulting firm over 90% of them contain significant errors.
For organizations that carry an inventory, like manufacturers, wholesalers and retailers, that investment is often their largest asset. The cost of carrying excess and obsolete stock, as well as not having sufficient saleable inventory to meet demand is enormously high. It is common to find excess and obsolete stock representing 30% - 60% of inventory and to find that 5% - 40% of the time, customer demand cannot be met. The latter often results in expediting vendor orders at a premium cost that cannot be passed through (based on Valogix’s research and experience).
Procrastination is Costing You More Than You Think
Investing in smart inventory solutions that improve your planning is an important business decision. Sometimes the concept of spending money to save money is very hard to accept. There are no guarantees the investment will pay off, so there is some level of risk involved. But, is it any riskier to do nothing? To maintain the status quo? Yes and even more so as you risk losing customers and possibly your business.
There are a lot of inventory planning solutions available from all types of companies around the world. Many are designed for large enterprise companies as they cost hundreds of thousands of dollars and are highly complex. Some are so complex a math or science degree is required just to operate the system. Others at the low end may be just point solutions for just forecasting, as an example, or offer individual modules you need to buy separately.
Most of these solutions include a forecasting capability either their own platform or from an included third-party provider. They usually also offer min and max levels, safety stock and replenishment calculations. Most require you to manually set replenishment levels and have you select the appropriate forecast method.
But how many offer real inventory optimization and why is this important? There are many reasons why inventory optimization is critical for conducting business in today’s ever challenging economic climate.
First of all, what is the cost of carrying, holding and managing an inventory? The costs for most items are steadily increasing, real estate costs and taxes are up and shipping costs are through the roof. Inventory optimization provides a great balanced inventory to meet expected demand, while reducing costs and better controlling spend for additional stock purchases. Planning in a timelier manner reduces the need for expediting orders in from vendors, which in-turn reduces the need for expediting shipments to customers!
Secondly, optimization dramatically improves the financial performance of an inventory because buying and stocking are more in-line with expected customer demand. It helps to reduce and almost eliminate the future build-up of excess inventory and dead stock.
Third, there are too many known and unknown variables that can affect your inventory and subsequent customer service levels to manage properly. Just forecasting and planning your inventory leaves you wide-open to problems in meeting both your financial goals and customer expectations. Trying to plan with spreadsheets is even a worse situation that will eventually lead you to higher costs and lower service producing a higher level of customer dissatisfaction and lost business.
Maximize Your Profits and Competitive Advantage at the Same Time
Congratulations! You have survived another challenging year. In some cases you survived by holding off investing in much needed hardware and software. Now may be the time to surpass surviving and start thriving again.
When we talk with people who want to improve inventory management at their company, we like to find out what they have accomplished already. The “stages of planning growth” model helps classify their situation and indicate what should be their next step to improved inventory planning.
Invariably, there are at least four distinct stages. Companies must pass through each one in sequence to properly improve their policies, practices, and systems. Each stage of improvement brings performance improvement in customer service and inventory reduction.
In Stage 1, the company doesn’t have a good idea of how much inventory it has and where the inventory physically resides. If their enterprise system tracks inventory, it is highly inaccurate. Warehouse organization is messy and shrinkage is problematic. Getting stock from vendors and shipping orders to customers is primarily a costly expediting exercise. Spreadsheets and maybe a few reports are used.
To progress to Stage 2, there must be a strong desire for inventory accuracy and efficiency. A cycle counting program (randomly sample actual SKU inventories and compare them with system numbers) provides an excellent framework for the accuracy push. Warehouses need to be cleaned up and shrinkage needs to be addressed head-on, with causes and remedies identified. Most companies today have already reached Stage 2, because companies in Stage 1 tend to be blown away by their competition. Also, customers are dissatisfied due to the lack of correct and adequate stock. Excess inventory of the wrong items tends to be relatively high at this stage.
Companies at the this stage usually utilize an Enterprise Resource Planning (ERP) or Accounting system from vendors like SAP, Oracle, NetSuite, Sage or from other vendors. Among its many functions, the system maintains inventory status. When current inventory of an SKU falls below a minimum level, the system orders enough to get up to the maximum. Setting the min and max levels is mostly a manual, painful process, so it is not done often—perhaps once per year. As a result, Stage 2 companies have a relatively static approach that does not respond to dynamic changes in demand or supply.
To progress to Stage 3, the company recognizes the need for solid financial and customer service improvements. They also realize that dynamic demand responsiveness is critical to success. Sophisticated enabling technologies like those offered by Valogix fit the bill. These solutions automatically review each SKU’s past demand history, forecast future demand, set optimal stocking quantities, and recommend the amount to order. Most companies are using a spreadsheet and reports to do this, but quickly find their results are too static and time-consuming and too error prone. An advanced automated approach is desired.
Stage 3 companies who have implemented a good set of dynamic policies and tools can still improve their performance. Inevitably, their inventory management has key cost and service level drivers that can be optimized for maximum value effectiveness. That is, an automated process needs to search through a large number of possibilities in order to select the best. Here are some examples:
Cloud Applications Going Forward
Advances in technology have allowed previous concepts like Time-Sharing and Shared servers and services to become a reality. Cloud computing today has real meaning and positive impact for companies in a true global economy. The future is that more business applications for mobile computing will be available and virtual software appliances will be developed.
Advanced inventory planning and optimization software in the cloud not only automates the entire planning process, it dramatically increases the positive cash flow of a company. By smartly reducing inventory investment, reducing stockouts, decreasing expedited shipping costs, and reducing planning time all contribute to more available cash. Add to that increased sales and productivity and the gains will also lead to an improved competitive advantage.