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"SYSPRO Inventory enables effective customer servicing and improved profits
by providing superior inventory that optimizes stocking levels.
Inventory Optimization that aggregates & analyzes inventory to support
lean
manufacturing principles enabling more accurate forecasting at product component levels."
Source : SYSPRO
Using Inventory Optimization to Reduce Inventory Levels in a Lean Environment
Lean is also known as :
Lean,
Lean Management,
Lean Manufacturing,
Lean for Service Industry,
Process Improvement,
Lean Manufacturing Lean Production,
Lean Production,
Lean Tools,
Lean Software,
Lean Innovations,
Boost Productivity Become Lean,
Lean Organization,
Lean Enterprise,
Leading Lean,
Leading Lean Software Development,
Lean Manufacturing Lean Tools,
Lean Practices,
Productivity Lean Manufacturing,
Origins of Lean Thinking,
Principles of Lean Manufacturing,
Lean Innovations Custom,
Lean Software Development,
Lean Thinking,
Meaning of Lean,
Lean Six Sigma,
Leading Lean Software,
Implementing Lean,
Lean Methodology,
Advanced Lean Thinking,
Lean Advancement Initiative,
Lean Insider,
Lean Learning,
Lean Software Engineering,
Motivate Lean Thinking,
Resources on Lean Manufacturing.
Giving small and mid-size manufacturers and distributors the
ability to reduce inventory holdings, increase inventory turns
and improve customer fulfillment.
Introduction
Inventory takes many forms, ranging from raw materials to fi nished
goods. While holding large amounts of inventory enables a company
to be responsive to fl uctuations in customer demand, the associated
costs can be excessive. In order to operate in a lean environment at
maximum effi ciency levels, companies must minimize all unnecessary
expenses, including those associated with production and storage of
inventories.
Inventory control is typically a key aspect of almost every
manufacturing and/or distribution operation business. The ultimate
success of these businesses is often dependent on its ability to
provide customers with the right goods, at the right place, at the right
time. The right goods are those that the customer wants; the right
place is your "available" inventory, not the supplier's warehouse, and in
today's economy the right time is immediately.
Failure to have the right goods in the right place at the right time often
leads to lost sales and profi ts and, even worse, to lost customers.
Today's reality is that there is very little differentiation between
commodity products of the same type, and customers will, more often
than not, choose to return to businesses that meet all three conditions,
even choosing relatively unknown brands over known brands.
The role of inventory management is to coordinate the actions of all
business segments, particularly sales, marketing and production, so
that the appropriate level of stock is maintained to satisfy customers'
demands. The goal of inventory management is to balance supply and
demand as closely as possible in order to keep customers satisfi ed
and drive profits.
"Inventory control is a
key aspect of almost
every business."
The Challenge
Inventory management is a fundamental requisite to supply chain
optimization. The processes and controls of effective inventory
management are critical to any successful business.
Since it is rarely the case that any business has the luxury of unlimited
capital, inventory management involves important decisions about
what to buy or produce, how much to buy or produce and when to
buy or produce within the capital limits. These are "value decisions."
Excessive inventory investments can tie up capital that may be put
to better use within other areas of the business. On the other hand,
insuffi cient inventory investment can lead to inventory shortages and
a failure to satisfy customer demand. A balance must be struck and
maintained.
The aim of inventory management is to reduce inventory holdings to
the lowest point without negatively impacting availability or customer
service levels. This can be done while still maximizing the business'
ability to exploit economies of scale to positively impact profi tability.
"The aim of inventory
management is to reduce
inventory holdings to
the lowest point without
negatively impacting availability
or customer service
levels. This can be done
while still maximizing the
business' ability to exploit
economies of scale to positively
impact profitability"
Inventory management is an ongoing process that relies on inputs
from forecasts and product pricing, and should be executable within
the cost structure of the business under an overall plan. Inventory
control involves three inventory forms of the fl ow cycle:
- Basic Stock - The exact quantity of an item required to satisfy
a demand forecast.
- Seasonal Stock - A quantity buildup in anticipation of
predictable increases in demand that occur at certain times in
the year.
- Safety Stock - A quantity in addition to basic inventory that
serves as a buffer against uncertainty.
The challenge is to weigh the balance in favor of basic stock so that
the business holds as little safety stock as possible and provides
'just the right amount' of seasonal stock. However, the predictability
of demand has a direct impact on how much safety stock a business
must hold. When demand is unpredictable, higher levels of safety
stock must be maintained. Therefore, the search for the optimal
inventory levels to achieve a lean manufacturing environment
becomes a key objective.
Inventory optimization takes inventory management to the next level,
enabling businesses to further reduce inventory levels while improving
customer service levels and maximizing capital investments.
"Inventory optimization
takes inventory management
to the next level,
enabling businesses to
further reduce inventory
levels while improving
customer service levels
and maximizing capital
investments."
Getting to the Next Level
Traditionally, most companies manage inventory through the
monitoring of minimum and maximum stock levels, safety stock,
Kanban and economic batch quantities (EBQs). But these methods
fail to take external factors into account, such as supply and demand,
resulting in inventory levels that do not truly refl ect market conditions.
Inventory optimization solutions take it to the next level. And while
these solutions are readily available, they come in the form of "boltons"
that often require ongoing consultancy services - not just during
the critical integration and implementation phases - to achieve
maximum benefi ts. This increases the overall cost of inventory
optimization and can also introduce signifi cant delays, making it
diffi cult to accurately apply "inventory policy" and propagate the results
across the extended supply chain.
On a more technical level, the peripheral nature of separate inventory
optimization solutions often requires the external duplication and
manipulation of data. This increases the probability for error and
therefore the potential risk that data integrity can be compromised.
However, simply applying an "external" inventory optimization solution
is not the "silver-bullet" that will solve all problems. To understand why
we must look at the company itself and isolate the reasons it is often
diffi cult to achieve dramatic improvements in inventory control. These
challenges need to be overcome, in part, by the method in which the
inventory optimization system is implemented and, in part, by the
technological functionality the system embodies.
"On a more technical level,
the peripheral nature
of inventory optimization
solutions often requires
the external duplication
and manipulation
of data."
These challenges include:
- Establishing a single point of accountability for inventory
performance by consolidating data, transaction and business
processes into a single connected, integrated collaborative
system.
- Ensuring that the many connected departments and external
organizations are synchronized in a way that positively
affects inventories across the extended supply chain.
- Making sure that initial data is accurate, complete and that its
integrity is preserved during the course of implementation and
the subsequent inventory optimization process.
- Extending the depth of visibility across the extended enterprise
to ultimately enable better "Distribution Replenishment
Planning" decisions, eliminating the conventional "rules
of thumb" that result in the speculative figures traditionally
used to set inventory targets.
- Enabling all members of the business ecosystem with the
necessary technological capabilities.
Addressing these challenges requires a tightly integrated approach
that closely refl ects the dynamics of the extended supply chain and
promotes the imminent availability of data for consumption by other
business application modules within the incumbent ERP system.
Wherever business processes and transaction capabilities are
integrated and extended across the supply chain, a greater number of
users have visibility into the different aspects of inventory optimization
and the means to maximize the process.
"Wherever business processes
and transaction
capabilities are integrated
and extended across the
supply chain, a greater
number of users have visibility
into the different
aspects of inventory optimization
and the means to
maximize the process."
Benefits of Inventory Optimization
The primary function of an Inventory Optimization solution is to
allow companies to effectively fulfi ll demand and identify how to gain
additional profi ts from their inventories. Improved effi ciencies through
effective resource management and optimization lead to an increase
in service level, improved performance against customer request
dates and improved return on equity. These gains are derived in
three ways:
- System Benefi ts
- Value-Added Benefi ts
- Strategic Benefi ts
System Benefi ts
The direct benefits derived from the implementation of effective
inventory management and optimization methodologies include:
- Risk reduction from reduced inventory obsolescence
- Improved service levels resulting in improved customer
satisfaction and increased sales
- Reduced freight costs by having the right inventory in the right
locations at the right time
- Identifying and discontinuing unprofi table slow movers
- Identifying and managing excess stock to improve cash fl ow
and decrease holding costs
- Identifying and controlling the reduction of dead inventory
- Improving forecast accuracy for better planning
- Calculating safety stock appropriate to risk/service required
Makes the company more effi cient
- Increasing automated ordering usage facilitates customer
service and effi ciency
- Increasing inventory turns to improve profitability
- Allowing fewer expedites will keep costs in check
- Identifying service risk items before stock outs occur
- Improving supplier management lowers expedite costs, product
holding costs and shortages with fewer disruptions
"The primary function
of an Inventory Optimization
solution is to
allow companies to effectively
fulfi ll demand
and identify how to gain
additional profi ts from
their inventories."
Value-added Benefi ts
The system can be applied to take advantage of company strategies.
This involves a shift from point selling to solution selling where
perceived value can be used to set premium prices that are higher
than what could previously be obtained. An example would be the
benefi ts from differentiated service levels that prioritize the most
profi table products and customers.
Strategic Benefits
In the "big picture," adoption of inventory optimization solutions is a
strategic decision aimed at improving the company's core-competency
and should, therefore, be coupled with well-timed "Strategic Growth
Initiatives." Strategic application of effective inventory management
and optimization can ultimately improve a company's competitiveedge,
enabling it to service and support an increased market share
through better fulfi llment.
This is particularly signifi cant where the company has multiple
locations or multiple warehouses and the control over such inventory
forces a variety of strategic decisions. These decisions are ultimately
based on the need to service local, regional, national or international
markets. The location, content and amount of inventory produced and
held is always a very important decision.
"Strategic application of
effective inventory management
and optimization
should ultimately improve
a company's competitiveedge
and enable the capacity
to service and support
an increased market share
through better fulfi llment."
Benefi ts of an Integrated Solution
Typically, a viable inventory optimizer will consist of an application
suite that delivers the required functionality in a manner that is
complementary to and an integral part of the core ERP system. Such
integration will enable the inventory optimizer to leverage the broad
and stable base functionality and business logic already inherent and
distributed throughout the core ERP system to achieve the desired
system benefi ts outlined above.
From a wider perspective, the implementation of an integrated
inventory optimizer will enable a company to target longer term
objectives that include Inbound and Outbound Logistics and
Warehouse Management, in effect, elevating the overall level of
automation and awareness of the entire supply chain.
Figure 1: The CPFR* Model Framework
The CPFR model represents the four business activities in a collaborative supply chain
advanced through the application of technology. Although depicted as a logical cycle, the
activities usually occur concurrently and can impact each other.
*Collaborative Planning, Forecasting and Replenishment
"Implementation of an
integrated inventory optimizer
will enable a company
to target longer term
objectives that include
Inbound and Outbound
Logistics and Warehouse
Management..."
Customers deploying technology, such as Microsoft .NET, will be able
to extract value from the inventory optimizer as it delivers the outward
facing capabilities required to implement collaborative commerce
solutions (such as the CPFR Model). In effect, the resulting system
takes a holistic view of the extended Supply Chain in context of the
extended enterprise. The combination of these factors represents a
signifi cant value proposition.
A modular inventory optimization solution, consisting of three
interrelated modules: Forecasting; Groupings and Families; and
Inventory Optimization, also gives customers a choice, i.e., install
Forecasting initially and then when required, install the remaining
modules for a full-blown inventory optimization solution.
Figure 2: CPFR in the Extended Enterprise
The full implementation of an extended supply chain would include more than two tiers of
trading partners in the deployment strategy. This is known as an n-tier confi guration.
"Customers deploying
technology, such as
Microsoft .NET, will be
able to extract value from
the inventory optimizer as
it delivers the outward
facing capabilities
required to implement
collaborative commerce
solutions."
The Forecasting module must encompass:
- Forecasting at item/warehouse level
- Aggregation of forecast to higher levels as defi ned by Groupings
and Families
- Variety of forecast algorithms including a tournament method
- Ability to handle seasonality
- Ability to remove outliers and anomalies
- Ability to edit history
- User forecast override to deal with market intelligence
- Storage of 3 or more years of history
- Monthly or weekly time buckets
- User defi ned calendars
- User defi nable forecast horizon
- Graphical output
The Groupings and Families module must encompass:
- Additional levels of data segmentation to provide both subgroup
and super-group aggregation
- Grouping of items by sales turnover, profi t contribution, unit
movement and other user selectable attributes
The Inventory Optimizer must encompass:
- The setting of inventory parameters using Groupings
and Families
- The setting of appropriate safety stock
- Inventory modeling
- The ability to project future inventory
- The tracking of inventory performance
- Lead time tracking
- The generation of supplier scorecards
These modules can be designed to utilize the existing functionality,
data and business logic of the ERP transaction system. As noted, this
modularity enables a company to avail itself of forecasting without
going for the "full-blown" inventory optimization solution. It also enables
a company to implement inventory optimization in stages, as needs
dictate.
"These modules can be
designed to utilize the
existing functionality, data
and business logic of the
SYSPRO ERP transaction
system."
The SYSPRO Inventory Optimizer
SYSPRO is bringing an integrated inventory optimization solution
to the mid-range. The company is completing the development of a
modular Inventory Optimization solution that fulfi lls and includes all
the desired features and functionalities outlined above. However, the
SYSPRO solution goes beyond the scope of traditional optimization
objectives by incorporating optimization across the full breadth of the
transaction and process driven base inherent to SYSPRO, supplying
optimization functionality across the various application modules.
This functionality culminates in an increased level of input to the
Inventory Optimizer both in terms of data rate and accuracy. The
resulting output of the calculations performed in the Inventory
Optimization process are therefore a near real-time refl ection.
Figure 3: Seven Phases of the Inventory Optimization Process
The inventory optimization process can be visualized as seven phases that are executed in
sequence at a predetermined "Review Period" and is cyclic as shown.
The SYSPRO Inventory Optimizer refl ects the company's philosophy
of bringing sophisticated solutions to the mid-market - solutions that
traditionally have only been available with the high-end company
solutions.
"SYSPRO is bringing an
integrated inventory
optimization solution to
the mid-range."
Conclusion
The SYSPRO Inventory Optimization application was designed to
provide customers with advantages that can only be derived when
optimization functionality is executed as an integral component of an
ERP system.
The SYSPRO Inventory Optimization solution is consistent with
meeting the requirements of the following company objectives:
- Helping customers to increase overall effi ciencies
- Utilizing technology for superior decision-making
- Providing visibility across the supply chain
- Enhancing a demand driven model for the company
- Delivering greater profi tability to the customer's bottom line
"The SYSPRO Inventory
Optimization solution is
consistent with the SYSPRO
objectives of the solutions
the company offers."
Glossary of Terms
Advanced Planning & Scheduling
The ability to obtain a "live" picture of the shop fl oor in order to plan
workloads against available capacity to accommodate rush shipments,
broken equipment and absentee workers.
Collaborative Planning, Forecasting and Replenishment
The sharing of information along the supply chain to enable fi nite
adjustments to forecasts and replenishment needs.
Distribution Replenishment Planning (DRP)
Distribution Replenishment Planning (DRP) is the process for
determining inventory requirements in a multiple plant/warehouse
environment.
ERP
ERP (Enterprise Resource Planning) is a business management
system that integrates all aspects of the business, including
accounting, manufacturing and distribution.
Forecasting
A management tool that leverages available history and/or selected
algorithms and mathematical formulas to predict future sales activity.
Inventory Optimization
The use of historical data and sophisticated algorithms to forecast
future sales in order to minimize the investments in raw materials and
fi nished goods inventories.
Lean Manufacturing
Reducing order turnaround times by eliminating non-value-added
waste in the production stream. The ideal of a lean system is to reduce
inventories of raw materials to a supply suffi cient to meet current
orders.
World Wide Offices:
USA & Americas
Email info@us.syspro.com
United Kingdom and Europe
Email info@uk.syspro.com
Canada
Email info@ca.syspro.com
Africa and the Middle East
Email info@za.syspro.com
Asia Pacific
Email info@au.syspro.com
www.syspro.com