"How Inventory Optimization Can Increase Your Profitability"

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"IBS is a world-leading supplier of business systems and supply chain management solutions to distribution and manufacturing companies. We generate measurable value by helping our customers utilize our solutions for distribution, warehouse control, manufacturing, supply chains and inventory management. Inventory optimization is the area where most ERP software implementations normally get the highest and fastest Return on Investment (ROI)."
Source: IBS

Resources Related to How Inventory Optimization Can Increase Your Profitability:

• Supply Chain Optimization (Wikipedia)

How Inventory Optimization Can Increase Your Profitability

One of the largest capital expenses for many distributors and wholesalers is stock. Finding the balance between ensuring products are available when customers need them and not holding too much, is business critical. However, most companies make these decisions without looking at the full picture. The critical point is accuracy. In order to get accurate forecasting the statistical forecast figures have to be based on requested demand rather than delivery statistics. In addition, casual factors such as events and promotions, as well as collaborative input from the organization and trading partners have to be included or considered. An inventory optimization system is designed to help companies increase accuracy and overcome these issues in order to enhance customer service and lower operational costs.

What is inventory optimization?

The core objective of a good inventory management system is to provide the best possible customer service within the restraint of the lowest practical inventory costs. Good service is the result of ordering the right items and quantities of stock at the right time. Inventory optimization tools help companies make reliable decisions on product replenishment. Making these correct decisions quickly improves efficiency and profitability by improving the forecasting of future demand and through more economic stock holding. Reducing the volume of stock held at any given time has a massive impact on the capital outlay an organization has to make. However, this has to be balanced with the need to maintain customer satisfaction through stock availability.

Many companies are faced with a tug of war between the CEO's desire for improved profitability; the sales team's demand for more of everything in order to improve customer service and the CFO's demand for lower inventory costs. It's generally hard work for a purchase department to fulfill such demands.

The physical distribution network is the basis for an effective inventory and supply chain management solution. An efficient inventory management system requires a multi-level distribution network for each product. This covers where the product is stored, either at an external supplier or within internal production or warehouse locations. Replenishment recommendations created by inventory optimization software can help companies decide when to buy, produce or ship goods between warehouses, thereby optimizing the total inventory situation.

Most distributors and wholesalers have fast moving products that need to be available all the time. However, there may be some specific products that are required much more rarely. They may be expensive but if the customer asks for them and they are not available, they aren't going to wait. A dedicated solution for optimizing inventory helps ensure the right products are available when and where they are needed.

In addition, by automating many of the procedures required for effective inventory management, the people who deal with purchasing can concentrate on more profitable items.

Demand planning

In order to achieve inventory optimization, companies need to ensure they can provide accurate Demand Forecasting. There are two principles of forecasting that companies can carry out to achieve this. Statistical forecasting provides an accurate report on previous selling volumes and patterns. While this is useful information, it cannot deliver true inventory optimization because very few supply chains are consistent year on year and this leads to inaccurate forecasting data. For example, for many consumer electronics products, the life cycle is only a few months. This does not lend itself to accurate year on year statistical analysis.

In combination with statistical forecasting inventory management software from IBS offers advance demand planning capabilities, allowing the flexibility to enter many more variables to add greater accuracy to the forecasting process. It allows companies to enter details of sales demands, marketing budgets and campaigns, geographic trends and other key information that demand planning uses to generate detailed forecasting reports. The system can also bring in statistical data and, through an advanced and intuitive graphical user interface, allows users to work with data either at a very high level for a broad, strategic view of the business, or at a lower detailed level to establish specific tactics, such as defining promotion forecasts for a certain product or product group.

Implementing inventory optimization generates several options for forecasting demand with greater accuracy. It creates an automatic analysis of the demand history for each product as well as pinpointing slow-moving products. It can use this information to combine with customers' own forecasts to create an Efficient Consumer Response (ECR) solution as a basis for future demand forecasting.

Several different forecasting methods can be applied separately to item segments, to suit differing demand patterns. Inventory optimization can also keep track of demand figures for each customer and calculate demand data on items, warehouses and time periods. With the right system and setup in place, these demand plans can be performed automatically to become a key component in the on-going business plan.

Managing the business

For many years, software companies have enabled businesses to manage and control their operations at a much higher level. The reality of this is that their ability to carry out repeatable processes is much more effective and supply chains have adapted to meet these improvements. A company that, five years ago, delivered to customers on a weekly or monthly basis, is now able to manage that relationship at a micro-level depending on specific requirements, such as the need many wholesalers have to deliver to customers daily or more.

In order to remain competitive, many companies are expected to provide higher service levels, executing higher numbers of individual transactions with customers on a higher level of frequency. However, the flip side is that often the volume of actual business is not increasing and more frequently the actual real value of the business is decreasing due to continuous pressure on prices. This results in continued pressure on the bottom line margin.

In order to meet these exacting demands, companies are being forced, more than ever, to look at their supply chain operations and processes to identify how they can reduce the overall cost per transaction to its lowest level in order to maintain profitability. Companies need to increase collaboration with trading partners within the supply chain in order to reduce the overall cost per transaction. Many internal costs cannot be reduced without tight collaboration with trading partners; this is where most money can be saved.

Once again, this is evidence of the way that effective IT systems both forces cultural change on a company and can be used to assist that change. The use of IT to provide Business Process Automation is helping to reduce operational transaction costs and maximize efficiency as well as providing the ability to monitor all aspects of the business and supply chain performance. This impacts the business in many positive ways, but it means the organization has to adapt not only its culture, but also its understanding of the business processes across the supply chain in order to fully realize the benefits.

Accurate replenishment

The expected demand, inventory storage method, existing stock levels and the physical supply network form calculable situations whereby replenishment suggestions can be made by an inventory control system. These suggestions are available online for evaluation and can be integrated directly into the core ERP system to enable automatic entry onto purchase orders.

Accuracy is one of the most critical factors when it comes to inventory control. For example, faulty lead-time figures in inventory calculations have a direct and negative impact on subsequent calculations. To assure accuracy and to measure current performance, inventory optimization provides multiple methods for analyzing current performance. These cover the volume and value of stock, seasonal trends, excess, lead-time analysis, demand variation analysis and automatic user-defined purchasing suggestions.

It is also important to have a fully integrated system that captures true demands and requests instead of simply uploading delivery statistics from the ERP system. The system needs to be 'clever' enough to know that if a customer is asking for a blue pen from one warehouse but, because these are unavailable they receive a red pen from another warehouse, the demand figures should show the original request, particularly as this is what the customer will probably ask for next time.

Handling customer requests and returns

In highly competitive distribution industries, service is often a crucial differentiator. Companies need tools that support decision-making and provide more flexibility to help face business challenges. They also need to respond effectively to requests to suppliers for rebates, as well as handling incoming customer returns.

When a product is returned, there are a number of variables associated with it. Was it delivered in error? If so, it probably needs to be returned to stock. Was it a damaged or poor quality product? If so, it will need to be returned to the supplier and a request for reimbursement created. These are processes that can be automated as part of an inventory optimization system.

There are some issues, such as batch recalls, that need to be carried out as quickly and efficiently as possible. To handle these effectively requires software that can track particular batches and ensure they are collected for return to manufacturers or suppliers. Quality control can be carried out on the stock returned by customers and these results can be reflected in the request, regardless of whether or not there are any faulty items.

Conclusion

Companies that will be successful in the long run are those that realize the answer lies in maximizing supply chain efficiency. This means exploiting integrated applications that increase automation and collaboration throughout their businesses, allowing them to meet customer demands faster and more accurately, generating greater competitiveness and profitability

Case study - 25% stock reduction at Swiss pharmaceutical wholesaler Galexis Swiss pharmaceutical wholesaler Galexis AG has significantly improved its stock management and replenishment with an inventory management system from IBS. Galexis has achieved tangible cost savings in procurement and goods reception, and has also been able to reduce its stock levels while maintaining a high availability rate. The optimization of Galexis' processes was made possible by continuously monitoring and adapting the potential of the standard inventory management software on the basis of business experience and the sales development of the products. As well as the core modules, which form part of the comprehensive solution implemented at Galexis, the Swiss wholesaler also relies on the industry specific software IBS Pharma to cover all its supply chain processes in pharmaceutical wholesale, from order processing to delivering products to pharmacies.

"The goals we set for ourselves were sustainable and reasonable stock reduction and increased automation of the replenishment processes," says Nicklaus Sesser, procurement manager at Galexis and responsible for the optimization project. "These goals have been reached dead-on: Meanwhile all of the 40,000 items stocked in the three distribution centers have been integrated into the new system and a warehouse concept based on optimum stock levels has replaced the one based on minimum stock levels. As a result we have reduced stock levels by 25% and increased stock turnover from 12% to 17% for common products and even up to 22% for specialty Pharma products- without influencing availability which has always been considerably high. The proportion of fully automated procurement has risen from 38% to a current 50%"

Joint project

IBS and Galexis set up a precise roadmap for optimizing procurement planning, which was rapidly and successfully implemented at Galexis distribution centers at Bern-Schöbül, Zürich-Schlieren and Lausanne-Ecublens. At the center of this inventory control software is a matrix with a volume value code, which quantifies the revenue ratio of each product based on traditional ABC classification. It also contains a movability code, which defines the throughput time from slow-movers to non-movers.

This provides a stable basis for a sophisticated solution that can cope with the various parameters for each stock item. For example, to lower stock levels for some segments and to minimize procurement and reception processes for others. This two-dimensional matrix provides an accurate segmentation of the 40,000 stock items and supports accurate purchasing suggestions, which improves inventory availability and reduces the time and effort required for effective procurement. The potential for increased efficiency, speed and profitability became evident after a very short time across all three distribution centers. "In the reception area, too, the reduction of procurement times by 20% will lead to a tangible increase of efficiencies," adds Sägesser.

Increased efficiency through automation

A purchase suggestion generated automatically by the system, based on past orders as well as current and future stock data, is much more efficient, accurate and cost-effective than a manual suggestion. Galexis defines a purchase suggestion as "automatic" when the quantity suggested by the system is transferred to a purchase order without further review. In the optimization process the automation rate has been increased from 38% to 50%.

In addition, seasonal profile control and trend analyses are planned to refine forecasts and hence to improve the quality of purchase suggestions. Further aspects concerning product life cycles will also play a more important role in the calculations.

Convincing results

Investment in the optimization of existing standard solutions has been a real success for Galexis in many ways. For a comparatively small effort, Galexis now has a purpose-specific control instrument, which significantly improves critical processes in stock and procurement management.

The solution also comprises tools that verify which items have been ordered according to the system's suggestions. This allows Galexis to quantify the automation rate in processing purchase suggestions, and give procurement planners a reliable tool to check the relationship between system parameterization and procurement behavior.

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