Ronan O'Donovan, product manager with IBM ILOG Supply Chain Applications, ran through a detailed presentation on several scenarios around inventory optimization. Ronan emphasized the continued challenges of presentation minimums, shelf space restrictions, planogram processes and SKU proliferation, in addition to the economic challenges.
Ronan discussed several case studies of the application of multi-echelon inventory optimization (MEIO) and product flow management, including for planning inventory build-up for seasonal peaks in demand at a South American beverage company. Leveraging risk pooling with regard to inventory, this project saw the company actually reduce inventory in the system by 18 percent thanks to increases at the plant level and reductions at the DC level.
A major automotive parts distribution network targeting four weeks of supply validated through an optimization exercise that they were hitting their 98 percent service level, but they found were doing it through a high level of expediting (30 percent), incurring 3-4 times the cost for overnight shipments. They found that if they went from 70 percent sourced from a local DC to 85 percent, they could realize considerable savings. Key lesson: they didn't need to reduce inventory or increase service levels, but they were able to realize significant savings through smarter optimization.
A large US-based apparel retailer running a network of over 3000 stores served out a Central DC (CDC) and two Regional DCs (RDCs) sought to provide better service to stores, reduce peak-congestion at CDC and minimize incremental cost. They wanted to determine the optimal stocking strategy for each SKU that would minimize total cost, subject to minimum order quantity and store presentation minimum constraints, while optimizing service levels to the stores. In examining the cost tradeoffs between various stocking strategies, they established that SKUs with low demand variability were regionally distributed, and SKUs with high demand variability were best fulfilled from CDCs to take advantage of the benefits of "risk pooling" around that category of inventory.
Bottom line lessons learned (to paraphrase Ronan): Inventory and product flow optimization must become a formal business process within organizations, front and center and part of the regular monthly planning process. "Making up the numbers" is no longer acceptable as a planning method. Where organizations put optimization at the heart of the process, the technology tends to follow to enable that process. Note that this process will evolve and mature over time within a company, as the company learns which factors to incorporate and how best to incorporate them. Ultimately, optimization will never be an "easy button" that will make everything work automagically, but it's a necessary and critical process.
|Supply Chain authority Andrew Reese is Editor of Supply & Demand Chain Executive. He has been invited by IBM PR to attend this show as a blogger and speaker. Like all other speakers, Andrew will receive all speaker benefits including travel and board.|