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- Oct. 2, 2013 -  

Finding Money in Your Supply Chain with Demand Segmentation and Inventory Rightsizing

Identifying Clusters of Different Buying Behaviors Leads to Tailored Inventory Strategies that Can Unlock $Millions in Savings

by SCDigest Editorial Staff  

Do you have some opportunities for rather easily unlocking some serious cash in your supply chain network?

The answer for many companies is Yes, Toby Brzoznowski, an executive VP at supply chain network design and other planning solutions provider LLamasoft.

SCDigest Says:
The key point is that these savings were achieve without creating new buildings or making adjustments to the network - that's what makes in found money.

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He said that in working with many companies on larger supply chain network design projects, LLamasoft kept coming across many more focused areas for improvement in just a part of the network that could deliver large supply chain cost savings.

These were often like "found money," Brzoznowski said - the equivalent of discovering a $20 bill in the pocket of a sports coat you haven't worn for a while - except in the supply chain, it is more likely to be the equivalent of a $2 million or even $20 million bill.

SCDigest has actually turned Brzoznowski and LLamasoft's insights in this area into a three part Supply Chain Thought Leaders video series, in which Brzoznowski discusses in each episode one of more such opportunities with SCDigest editor Dan Gilmore.

In part 1, the discussion was around opportunities from implementing "product flow path optimization," an included a case study of a retailer that was able to achieve $20 million in annual savings from simply optimizing which SKUs were brought in through which ports. View it here at: ''Found Money'' in Your Supply Chain Part 1.

In the just released part 2, Brzoznowski and Gilmore discuss demand segmentation and how that can be used to "right size" inventories across the network.

There are many areas of the supply chain that can benefit from segmentation strategies, including customers, suppliers, SKUs and more, but in this broadcast Brzoznowski focused on demand segmentation, which at a high level can be described as looking for "like buying behaviors" around customers or groups of SKUs.

That means going beyond simple A-B-C-D type approaches of classifying inventory based purely on sales volume or movement, Brzoznowski said.


Related Content: White Paper - The Next Generation of Inventory Optimization has Arrived



"In many cases, only 50% of the SKUs at a company actually follow a sort of "normal" pattern that most companies rely on to set inventory policies," Brzoznowski said. More "lumpy" demand patterns are quite common, he added.


Found Money in the Supply Chain Part 2

- Demand Segmentation and Inventory Rightsizing




The key is to be able to segment different SKUs into groups, and then set inventory and safety stock policies appropriate to each profile, Brzoznowski said.

(Supply Chain Trends and Issues Article - Continued Below)



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By optimizing where different groups or clusters of SKUs should be stocked across the network, and what inventory strategies should be employed for each group, a company can "right size" its inventories to hit targeted service levels at the minimum levels inventories needed to do so. This is the essence of inventory optimization strategies and tools.

"It's not always about min-max," Brzoznowski said. "It may be fixed reorder points and fixed reorder quantities. I might need to employ unique ordering strategies based on that lumpy demand."

One manufacturer was recently able to reduce its inventory levels by many millions of dollars by performing such an a analysis and then reducing the number of stocking points across the network for some of its demand clusters.

The key point, Gilmore said, is that these savings were achieved without creating new buildings or making adjustments to the physical network - they were achieved by simply using a new way to analyze inventory and making appropriate adjustments to policies and stocking locations.

"That's what makes it found money," he said.

So how do companies find their own money in their supply chain networks? If they have a network design/modeling tool already, they should consider looking at some of these more focused types of projects, that can provide quick and relative easy wins that deliver significant savings.

If a company doesn't have such a tool, it might start with one of these more focused types of projects rather than waiting for the need to perform an overall network analysis. Many companies are leaving millions of supply chain dollars on the table by waiting.

In part 3 of this excellent series, Gilmore and Brzoznowski will discuss product foot print analysis and capacity planning. Look for it next week.

What are your thoughts on demand and inventory segmentation? Let us know your thoughts at the Feedback section below.

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