While doing some research for an upcoming white paper, I came across a nice article from Nov 2009 from Dan Gilmore at the SupplyChainDigest, "The Real Value of (Less) Inventory." A key line from the article is:
reducing your level of inventories relative to sales and sales growth
can have a dramatic impact on a company’s share price."
The article quotes research and cases to back up this claim. This certainly fits with what our customers are telling us-- they are seeing significant inventory savings through inventory optimization.
The word "permanent" is a great choice of words. Inventory optimization technology, by itself, will not lead to a permanent reduction. As we noted in an earlier post, we have developed an inventory planning playbook to help firms make the right inventory decisions with the right cadence and considering important strategic factors.
The Dec 2010 issue of Inbound Logistics reported that McKesson Corporation is using "IBM's Supply Chain Sustainability Management Solution to aggregate supply chain, sales, and geographic data to create "what-if" scenarios that enable distribution network modeling, supply planning, inventory positioning, vehicle routing, and sustainability management."
When optimization and analytics are applied to a firm's supply chain, you can often see significant returns on your investment. When you make this capability part of an overall framework, like McKesson did, you create a repeatable process to continually drive improvements in your supply chain.
IBM recently came out with its annual "Next Five in Five" report highlighting five innovation predictions for the next five years. One article that picked up the story pointed out:
IBM, the world's largest provider of computer services, is one of the
few big corporations investing in long-range research projects and
invested $5.8 billion in research and development last year, accounting
for 6.1% of revenue, according to the company's financials.
This investment in research helps benefit our supply chain clients. For example, IBM recently came out with a new study and white paper, "New Rules for a New Decade: A Vision for Smarter Supply Chain Management." SupplyChainDigest picked up the story and provides a nice summary in addition to the IBM material. The study found that supply chain visionaries have significantly better financial returns by more quickly predicting demand and optimizing and analyzing their supply chain to take advantage of this in closer to real-time. The chart below summarizes the key capabilities of different types of supply chain organization. Of course, there are significant advantages to getting your supply chain to the "Planners" level.
It is increasingly important to have the analytics
that enable better decision-making, says Douglass. But an area where
supply chain managers need to improve is scenario planning— assessing
different alternatives based on risks.
“It’s like having different playbooks with different response profiles for different contingencies,” Douglass explains.
Overall, IBM is investing heavily in supply chain thought leadership to help our clients run better supply chains.
Previously, Indeval, like most CSDs around the world, operated a
settlement system that required banks to hold liquidity of billions of
dollars while securities were being settled. Linking the delivery of
securities to their corresponding payment requires depositors to have
adequate financial resources available to settle their trades. Financial
institutions may have to borrow if they do not have sufficient funds to
settle stock and debt trades.
At the heart of
Indeval's Dali securities settlement system, the IBM ILOG CPLEX
Optimizers match thousands of transactions simultaneously, so that only
net amounts of securities and cash need to be transferred among the
participating financial institutions. This tremendously reduces the
amount of cash and securities the institutions need to have on hand to
settle the transactions.
Indeval won the 2010 Edelman Award from INFORMS (Institute for Operations Research and the Management Sciences) for this work.
We are presenting a SC Digest Videocast on Tuesday, December 14 at 11:30 EST. Here is a description of the Videocast:
Increased complexity requires a complete supply
chain network based approach to sourcing that incorporates end to end
cost from supplier to customer and all of the associated manufacturing,
logistics and inventory costs in between.
A network based approach enables
the ability to meet sales demand, reduced transport miles, efficient
production, improved asset utilization and capital deferment, which,
results in increased revenues, lower production costs, lower
transportation costs, and increased manufacturing capacity. Another key
component is understanding how robust the supply chain is to different
events or risks and designing the supply chain to withstand 'shocks'
frequently experienced in today's large global supply chains.
Join IBM ILOG to learn how top
performing Consumer Products companies are leveraging sourcing
optimization to drive customer service and system profitability through
effective asset use.
As data becomes more available, firms are revisiting their S&OP process to add more analytics to the process. In fact, the lack of analytics and optimization is often a reason that firms do not get the full value from their S&OP process. That is, without optimization-based technology, the S&OP process can become just a demand planning exercise with minimal analysis of the operations and supply.
By combining the Cognos S&OP solution with integration to LogicNet Plus XE, firms can now create optimized plans. That is, Cognos provides the descriptive analytics, an S&OP dashboard, the detailed reporting, the platform for demand consensus, the ability to standardize data from multiple sources to create a single S&OP view, and the ability to tie it back to financial systems. Cognos becomes the enterprise level platform for S&OP. LogicNet Plus XE then receives data from Cognos, allows the planner to run multiple scenarios, and feed the operations plan back into Cognos.
The operational plan considers capacity of the facilities, starting inventory positions, the demand plan from the S&OP process, and alternatives for meeting demand. Using this capability, it creates integrity in the process by coming up with operational plans that match the demand plans.
We have a short video available for additional information.
A SupplyChainDigest article from earlier this year noted that "IBM is building a formidable portfolio of supply chain software solutions that has the potential to shake up the existing market."
Now that IBM has completed the Sterling Commerce acquisition, IBM has much more to offer to the ILOG Supply Chain customers.
The IBM ILOG supply chain group provides supply chain planning capability (LogicNet Plus XE), inventory planning (Inventory and Product Flow Analyst), strategic transportation planning (Transportation Analyst), and production planning and scheduling (Plant PowerOps).
Sterling provides a strong set of supply chain execution and visibility products. These products include:
Transportation Management System (TMS), offered as a Software as a Service (Saas)
Warehouse Management System (WMS)
Supply Chain Visibility
Yard Management System (YMS)
The supply chain products from Sterling and ILOG complement each other and allow our customers to make better plans and efficiently execute against those plans.
Last week, IBM hosted another Connect to Win event for business partners at it's northern California IBM Innovation Center. The event focused on business analytics and featured IBM Distinguished Engineer Jeff Jonas, a dynamic and highly sought after speaker. Among his many accomplishments, he is known for developing the technology used by the Las Vegas gaming industry featured in the book "Bringing Down the House", the recent movie "21", and numerous documentaries on the Discovery Channel, Learning Channel and the Travel Channel.
Following the keynote by Jeff Jonas, IBM hosted a panel discussion. Some 30+ partners came to learn how to leverage analytics in their offerings, and naturally a wide spectrum of analytics sophistication was represented, generating a vibrant discussion on everything from Smarter Planet to Artificial Intelligence to Decision Management.
The panel was made up of:
Jeff Jonas, IBM Distinguished Engineer, Chief Scientist, IBM Entity Analytics Group
Jeff Kreulen, Senior Manager, Senior Technical Staff Member, Services Oriented Technologies, IBM Almaden Research Center
Thomas Dong, Senior Product Marketing Manager, ILOG Optimization and Analytical Decision Support Solutions
Daniel Mannisto, CEO, Applied Analytix (IBM Business Partner)
During the panel discussion I had the opportunity to first share IBM's vision for business analytics, using an adaptation from Tom Davenport's book "Competing on Analytics", to explain why, how and where IBM has invested $14B since 2005 in business analytics. Several partners thanked me afterwards for presenting this visual, as it provided them with a blueprint for how they might evolve their own analytics capabilities.
In fact, this gave me an opportunity to define a new software category for many - Advanced Analytics, which applies statistical and mathematical techniques to provide forward-looking capabilities, beyond the insight commonly extracted from historical data and information. It can be viewed as a subset of Business Analytics, and provides an interesting convergence opportunity, between the IT-based "analytics" world, and this emerging world previously reserved for specialists in statistics and Operations Research-related disciplines (Management Science, Industrial Engineering, Financial Engineering, Systems Engineering, Applied Mathematics, etc.). As the business world evolves its analytics agenda beyond business intelligence and performance management capabilities, the desire to not only look back in time, but forward in time as well, is driving awareness for Advanced Analytics - and creating many opportunities for SPSS and ILOG Optimization at the point of business impact.
To learn more about Advanced Analytics for a Smarter Planet, start here:
This map shows a classic network design case. This client was producing most of its product in northwest Mexico with some product coming from the Virginia plant.
Like many firms, they were just distributing product from the plant where the product was made. The baseline map shows the current situation.
They wanted to do an analysis to determine a better distribution strategy. The result on the right shows the optimal distribution strategy. Thy shipped full trucks loads from the plant in Mexico to the warehouse in Virginia and then on to the customer.
This solution has much more expense in transportation from the plant to the warehouse. However, this is more than offset by the savings on shipments to customers. The optimal solution resulted in $5MM in savings (about a 25% reduction in transportation costs).
Although this case looks rather simple, it wasn't clear at the start whether the best solution would have one warehouse in the center of the country, two warehouses not located at the plants, or a third warehouse. And, it wasn't clear how the country should be split. And, finally, with a lot at stake in terms of savings, and moving capabilities, it is important to do a robust study to make sure you have covered all the angles.
In an article in today's Wall Street Journal with the same title as this post, the authors argue that the economic conditions in this recovery are going to be different than the years prior to the recession. Specifically, they mention that capital is going to be much more expense to come by; globalization will continue to put pressure on margins, and rising world demand will drive up commodity costs.
A key part of the article argues that companies will have to learn to finance their growth and investments with their own cash flow.
We are seeing how companies are now adjusting to this reality:
More companies are implementing advanced inventory optimization to reduce inventory to free up working capital for other parts of the business. And, this is not a one-time exercise. These firms are making inventory reduction an on-going part of the business. Our inventory optimization solutions are allowing firms to uncover new strategies to reduce inventory and allow them to maintain optimal inventory levels by integrating this technology with their ERP systems.
An article in DCVelocity provides some great insight into how Whirlpool and Maytag combined their supply chains. Whirlpool purchased Maytag in 2006 and promised the investment community $400M in savings over the first 3 years.
According to the article, $40M of savings per year was going to come from logistics-- freight and warehousing costs. This reminds us how important it is to get these decisions right. And, in Whirlpool's case, the article reported that they were able to overachieve and hit a savings of $66M in the current year.
How they got off to a fast start:
One of the first steps was to determine what inventory was on hand in
both operations so that Whirlpool could determine what to do with it.
The company acquired ILOG's LogicNet Plus suite of network design and
planning software so it would have a tool in place that
could import and crunch data once the deal was finalized (regulations
did not permit the managers to have access to Maytag-specific data until
the acquisition closed).
"When the deal was completed on March 31, 2006, we were in the
starting blocks ready to go. We had our tools in place and people in
place, and we had our own data. We were then prepared to bring in the
The network optimization with LogicNet Plus allowed Whirlpool to determine which distribution centers to close, which new sites should be built, and what the local cross dock network should look like.
We have seen this type of result many times over the years. When a firm grows through an acquisition, having a high-quality network optimization tool allows it develop solid plans for the new network. This creates a foundation for additional improvements and helps a company meet the goals of the acquisition.
According to an article in Businessweek, "Companies from Tiffany & Co. to Home Depot Inc. are restocking
shelves in a move that will boost economic growth and may keep the
recovery on track through 2010."
The questions many retailers are asking is "what should I restock with?"
Today, we recorded an educational webinar with SC Digest on shelf space optimization-- a great way to answer the question about how to stock your stores. The objective is to keep customers happy at every single store with the right products and, in turn, drive up revenues and profits.
SC Digest will keep the Webinar available for 12 months for viewing. You just need to register to watch it. Click here for the link.
A recent article in The Wall Street
Journal discusses the benefits of a foldable shipping container. This would be a big innovation in shipping.
Inbalances in supply and demand means that shipping companies must pay
to get their empty containers back to where customers want them.
importance of moving empty containers is simple:
a huge expense, a huge headache for the industry," says Neil Davidson
of London-based Drewry Shipping Consultants. The net cost of moving
empties is around $7 billion a year, say analysts.
foldable container would reduce the cost of shipping the empties.
However, these foldable containers cost around $4,000, or twice the cost
of the standard containers. And, the technology
has not yet proven robust enough for the realities of "heat, cold and
salt water of the high seas, and the rough handling of
Right now, the industry is not standing still.
IBM's ILOG Optimization solutions are being used to optimize the return
of the empty containers. The goal of the optimization is to get empty
containers to where they
are needed at the lowest cost. Of course, the containers do not have to
return from where they started and there are options for leasing or
buying new containers.
The problem can be difficult when you
start to consider such things as the different container types, the
capacities of ships, the costs of different modes of transportation, and
the long ocean shipping times.
Besides reducing costs, the
shipping companies using this technology
are seeing benefits in customer service by having the needed empty
containers in the right place at the right time and having the ability
to quickly re-plan when conditions change.
commitment to Analytics and Smarter Planet, provides additional benefits to this problem:
First, since there is variability in demand and supply, it is important
to correctly set the safety stock levels for empty containers at key
locations. Second, it is important to track and trace the containers so
you have better visibility but also to know when a container needs to
be replaced or repaired.
Join IBM Optimization and Supply Chain experts on March 30, 2010 for the webcast: Building a Smarter Supply
Chain: Learn how to position your
business for recovery and growth with better supply chain
decision-making using next generation supply chain optimization. Abstract: Is your business
positioned for recovery? Are your supply chain strategies flexible
enough to manage a rapidly changing and volatile economic landscape?
Join IBM ILOG Optimization & Supply Chain experts to learn how
optimization technology supports flexible business strategies that
enable companies to reduce costs today and prepare for growth tomorrow.