Optimising replenishment means making sure that the relationship with your suppliers is as efficient as possible. This allows you to decrease lead times, lower prices and get better service levels.
Replenishment is an important aspect of supplier relationship management (SRM). The goal of SRM is to streamline and make the processes between an organisation and its suppliers more effective. It enables effective communication between the different parties, who may use quite different business practices and terminology. As a result, SRM is designed to increase the efficiency of processes associated with acquiring goods and services, managing inventory and processing materials.
The relationship with suppliers, as far as inventory is concerned, has four main issues: safety stock levels; service levels; economic order quantity; and supply chain visibility and management.
Safety stock is the level of inventory you need to have in place to cover all contingencies. You calculate that level based on the changes in demand for individual products, applicable lead-times and the desired service levels for those products. The results are constantly and automatically adjusted as circumstances change and exception reports are produced when outside the normal variances.
Service levels are set according to product profitability, total revenue, the number of sales, and the quantity of sales. These factors vary by territory or region, as well as by specific products for key customers. All information is automatically updated by a system that is constantly checking for changes and adjusting for thousands of products. You need to allow for differences throughout your supply chain based on strategic decision-making. Service level reports should alert you when changes in your supply chain's demand or supply affect other areas.
Economic order quantity (EOQ) is a calculation that lets you know the best quantity of a product to order so that you can minimise the total variable costs involved in ordering and holding that product in inventory. EOQ calculations give you an automatic ability to maximise line buy discounts with the right products, exception reports that warn you of changes in demand or supply throughout your supply chain and provide you with the tools to react quickly.
Supply chain visibility is vital in inventory management. You need to be able see your entire supply chain from the manufacturing end to the final consumer. If there are any problems, such as one component is late in arriving or there is a change in consumer demand, you can react and adjust your processes accordingly. This allows you to service customers in a priority sequence that you decide upon. You can set service levels based on sound financial judgment, and invest in the inventory that will maximise your returns. You can also analyse and react to exceptions, and reduce dead inventory.
Implementing an inventory optimisation solution that covers these functions will result in reduced working capital and increased customer service. It can also result in reduced transaction costs because a lot of the processes can be fully automated. At the same time, it gives more time to spend on those transactions and items that are most important for the business.
In summary, then, to do all this accurately and quickly, particularly with a large number of products, you will need a system that will do a range of tasks. These include: create forecasts; calculate proper safety stock levels; determine EOQ; determine best discount quantities; automatically get the right products to maximise line buy minimums; produce exception reports for review; auto-adjust for variances; and provide you with complete visibility of changes throughout your supply chain to allow you to react quickly to changes.
With these functions in mind, it's obvious that it can be very costly to have high service levels on all items. You need a system that allows you to ensure that you have different service levels on different items/warehouses.
Many inventory models prescribe a flat percentage as safety stock for virtually all products. This model is fine when you only have a limited number of products with little-to-no variance in demand. But such models, as simply stated, are too simple to give a serious return on investment. The 'simple' approach breaks down when the variation in demand is high. These situations require more advanced supply chain management techniques, supported by advanced inventory management functionality, that will tell you where the issues and problems are now. Working under the 'management by exception' concept, you let the system do 80-90 per cent of the mundane work automatically. It points you to where you should apply your expertise to make a difference, where there is a problem or an 'exception'.
There are a number of issues with replenishment that add to the complexity. You need to consider the forecast, the cost of placing and shipping each purchase order, the bundled capital in stock, and the discount that we can receive by buying large volumes. And if you have several warehouses, you have to decide how to work with replenishment. It's also very important to be able to do planning and forecasting on a multi-company level. By doing aggregated forecasting, you can get much better agreements with your suppliers.
By monitoring and adjusting your inventory replenishment processes across the entire supply chain - ensuring that the right products are at the right place at the right time and, importantly, in the right quantities and at the right price - you have achieved what you set out to do with inventory optimisation.
You have analysed performance, categorised your products, calculated forecasts, and now you've streamlined your replenishment system. Service levels have increased to their best possible levels. Costs are minimised to as low as they can go. Capital is not tied up in dead inventory and can be used more effectively and efficiently elsewhere in the organisation. The various management requirements, whether from finance, sales and marketing, or CEO level, have been fulfilled, frustration is low, and satisfaction is high.
So you can sit back and relax, right?
Wrong. Inventory optimisation is a continual process. Demand never stagnates at a particular level - there are new products to consider, new technologies with new demands, and tastes that inevitably change, not least thanks to the efforts of your sales and marketing people. But you will find that your inventory system is now able to cope with such changes more effectively and more efficiently than ever before, and will continue to do so as long as you maintain its operations, and be alert to the changes you will need to implement to ensure that the inventory process is continually optimised.
This completes the discussion of the five steps involved in inventory optimisation. But the story doesn't end there. Read on for information on real world examples of organisations that have put this system into practice. And find out how inventory optimisation is a whole-of-organisation issue - beyond the warehouse, beyond the logistics department, right up to the boardroom and down to the factory floor. Our addendum document, "Inventory Optimisation in the Real World", outlines these issues.
Peter Clarke, Chief Technology Officer for IBS Asia Pacific specialises in Supply Chain and ERP Systems implementations.
IBS Australia develops ERP solutions and business management supply chain software for inventory management systems, manufacturing ERP software, business intelligence systems and integration ERP software. The IBS ERP system is fully integrated and includes collaborative sales, procurement, customer service, order management, demand-driven manufacturing, inventory management, business performance measurement and financial control.
http://supplychainsecrets.com.au/
http://www.ibs.net/au/solutions/inventory-management/
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