Expert Insight: Guest Contribution
  August 4, 2008  

Supply Chain Perspectives: Inventory Optimization Thought Leaders Discussion


Inventory Optimization Must Natively Be Multi-Echelon Capable - Otherwise It Simply Cannot Be Optimal

Daugherty Says:
Inventory Optimization must natively be multi-echelon capable - otherwise it simply cannot be optimal. Inventory Optimization provides a holistic solution that solves the inventory objective of meeting the desired service goal on the least possible amount of inventory for the supply chain network top to bottom.

What do you say? Send us your comments here

Supply Chain Digest’s Dan Gilmore recently spoke with Inventory Optimization expert Rod Daugherty of Manhattan Associates on several themes related to Inventory Optimization software.

Gilmore: How would you summarize the concept of Inventory Optimization?

Daugherty: The optimal deployment of inventory is a vital business function for an enterprise. The benefits of running a manufacturing, distribution or retailing operation with leaner inventories range from a permanent reduction in working capital to increased sales and higher customer satisfaction.

Managing inventory in a multi-echelon network versus a single-echelon network presents major challenges. One is the failure to achieve true network inventory optimization because replenishment strategies are applied to one echelon without regard to its impact on the other echelons. Another challenge is to baseupper-echelon replenishment decisions on specious demand forecasts.

These challenges can create a whole bunch of negative consequences, from redundant inventories across the networks to stock-outs and many other business problems.

Inventory Optimization must natively be multi-echelon capable - otherwise it simply cannot be optimal. Inventory Optimization provides a holistic solution that solves the inventory objective of meeting the desired service goal on the least possible amount of inventory for the supply chain network top to bottom. This is done as a single optimization exercise rather than in a sequence of sub-exercises for each echelon, and takes into account inventory drivers at each successive higher echelon, including lead time, lead time variation and demand variation.

Gilmore: The role of strategy versus technology in optimizing inventories - how do the two work together?

Daugherty: It requires equal amounts of both - in fact it doesn’t do much good to have one without the other. You must have the proper tool that appropriately combines the components of inventory, so technology is very important - and there really are very few vendors that do this.

The strategy side requires people that understand the vision and have the discipline to execute on the Inventory Optimization strategy. The complexities of managing inventory increase significantly for a multi-echelon distribution network with multiple tiers of locations, such as a network comprising a central warehouse and downstream customer-facing locations.

Gilmore: What do you see the companies that are best at optimizing inventories do that middle performers do not?

Daugherty: One of the things all top performers have in common is a strong Inventory Optimization team. In fact, other thanhaving the best software to support Inventory Optimization, the singlemost important thing that all top performers have in common is that they are completely aligned top to bottom in the enterprise.

This starts with the senior executive responsible for inventory management. The best performers have a senior exec that understands the profit potential represented by their inventory investment. These companies have a top IO system – I’d suggest the Manhattan Associates Inventory Optimization as an example - and a properly aligned and motivated IO team.The topperformers have a crystal clear vision of their key metrics and the IO team touches base weekly onachievement of the on-going IO goals and all things IO related.

Gilmore: What are some of the more recent technology innovations in this area?

Daugherty: I think nimble and dynamic demand forecasting that proactively adapts to changes in the demand signal, particularly SKUs with intermittent demand, is an important new capability.

I’d also cite the ability to exploit data transparency within the enterprise to enable a holistic IO solution within a single solution. One more is the capability to use different safety stock distributions across time for different SKU classifications like Slow Moving and Intermittent Demand SKUs, rather than just assuming a normal distribution.

Gilmore: What kind of results do you see companies achieving, recognizing they all start at a different place?

Daugherty:  It depends on a company’s optimization goals. Speaking from first hand experience with our customers, for those that want to lower their inventory investment, they typically achieve 15-20% inventory reduction on at least the same service levels. For companies focused on achieving improved customer service, we have seen increases in service levels of 5-15% percent with the accompanying increases in revenue.

We had one customer that completely re-engineered its entire supply chain process, including going from a relatively simple, single echelon replenishment model that went direct from manufacturers to the customer facing facilitiesto a multi-echelon modelthat includedintroducingnewregional distribution centers – and a new layer of inventory.

Their primary business goal was to improve their supply chain logistics, particularly getting tight control over their transportation spend. By implementing our multi-echelon inventory optimization solution they were able to introduce the additional level of inventory at regional DCs without increasing their network inventory - in fact, we lowered the overall network inventory incrementally while maintaining their alreadyhigh service levels, which enabled them to achieve their transportation goal.

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 respondent's name or company withheld.

  Send an Email