Halim Says:

Network & Inventory Optimization is not a supply chain “silver bullet” solution. What do you say? Send us your comments here

In today’s competitive landscape, businesses are constantly challenged with how to improve their organization’s supply chain efficiency while at the same time reducing operating costs. Organizations know that an efficient and streamlined supply chain can provide a great competitive advantage.

A lot has been written about Network and Inventory Optimization solutions and how it is perhaps the most important aspect of a successful supply chain. Although it is vital to examine what we know to be true about the benefits of an effective Network & Inventory Optimization solution, we must look beyond the traditional effort and examine several points about Network & Inventory Optimization that have not been sufficiently discussed.

Traditionally, many companies have scrutinized and examined Network & Inventory Optimization solutions with the expectation of overcoming common supply chain challenges -- How can we match supply and demand by positioning and managing inventory effectively? How can we realize the right balance between inventory, transportation and manufacturing costs? How can we effectively use our resources in an ever-changing environment?

Consider the typical two-step approach many companies set about to enable the most optimal configuration to run their business:

• Step 1 – Try to optimize the structure of their network by taking into account available capacities, seasonality, complex production constraints and the flow of products across the network. This can include multi-site production planning and sourcing, and focusing on where to produce different products. This also involves deciding between a flexible strategy in which each product is produced at multiple locations thus reducing transportation cost due to shorter distance to clients, or a strategy where each facility specializes in a small number of products, thus reducing production costs due to economies of scale.
• Step 2 - Once the network is defined, determine where to place inventory, how much safety stock to keep, what the right inventory mix at different locations is, what the key inventory drivers are and how to increase service levels and decrease order fulfillment lead-times. In addition, they must analyze postponement strategies and determine which portion of the supply chain should be managed based on push and which should be managed based on pull.

Although these will yield benefits, a true Network & Inventory Optimization strategy requires more than following these two steps alone.

Shelve the “Silver Bullet” Theory

Network & Inventory Optimization provides a comprehensive tool-set designed to analyze the variables associated with operating a distribution-intensive retail supply network - including costs, capacities, and DC/store locations - and optimize the network to help you achieve the lowest total landed cost and the highest possible profits. However, Network & Inventory Optimization is not a supply chain “silver bullet” solution. Risk factors and limits exist which need to be addressed in order to achieve the promised optimal business performance. These include:

1. Human productivity has a hard, physical limit
2. Effective process must be sustainable and repeatable
3. Simultaneous costs and constraints, including working capital budgets
4. Ability to consider trends in time-phased manner (not static)
5. Integration with tactical and operational planning solutions
6. Capability to compare actual and hypothetical scenarios

To compete in today’s demand-driven business environment, companies must maximize their performance against business goals, market conditions, risk, and constraints. The impact from companies super-charging their Network & inventory Optimization solution will ensure they are “right-sizing” their inventories while reducing their costs. They will be able to model and evaluate the impact of potential unplanned events, understand their impact, determine the most cost effective mitigation strategies, and formulate contingency plans.

Agree or disgree with our guest expert's perspective? What would you add? Let us know your thoughts for publication in the SCDigest newsletter Feedback section, and on the web site. Upon request, comments will be posted with the respondents name or company withheld.