In today’s competitive environment, inventory management can no longer take a traditional approach and be a secondary priority for process improvement. With the demand for faster production schedules, shorter lead times, on-time delivery as well as total cost reduction, antiquated processes will have no place in a fast-paced business environment.
The core of inventory management lies in the benchmarks and policies that govern inventory management practices in the organization. A study by the Aberdeen Group has found that the majority of companies (87%) still utilize relatively outdated policies such as Week of Supply, ABCD and MRP/DRP approaches. These approaches, although still somewhat effective in measuring inventory levels, may not have incorporated new operation policies such as contract manufacturing, global sourcing or multi-channel distribution. As a result, these companies hold 20 – 30% of excess inventory, which in turn increases variable asset costs.
Operations policy changes have brought about a need for a longer or multi-tiered supply chain. In such a model, the inventory management system is required to take into consideration external variables such as internal inventory, lead time of external parties, production capacities of external partners and variability in delivery times to attain optimum inventory levels.
In order to do this, the inventory management solution needs to embody multi-echelon inventory. One of the core attributes of these systems is that statistical probability approaches are used in determining supply and demand across the complete line of supply chain, as opposed to the more rule-based approach of past inventory management policies.
Among the benefits of such systems is their ability to provide precise and more detailed statistical reports about the performance indicators of external vendors. For example, traditional management systems will provide reports that 90% of inventory will be delivered on time by Vendor A, but a multi-echelon inventory optimization system will provide breakdowns such as “2% of orders are one to three days late”. This is possible as variability in the supply chain outside the company is also taken into consideration in the inventory management process.
Holistic supply chain consideration of multi-echelon inventory optimization has brought about other advanced practices in inventory management. Amongst these is that production targets can now be set simultaneously across the supply chain over all locations instead of being individually determined. Additionally, inventory calculations take into account all factors within the supply chain such as production capacities and constraints of all tiers, lead times for transportation, shipping and handling time as well as distribution capacities.
In the end, with all these additional efficiencies in place, inventory levels can be reduced by 20 – 30%, customer satisfaction levels can be increased through improved delivery lead times, and productivity improved across the tiers of the supply chain.
Ken Town is VP Research and Technology at Invendia, a leading provider of Vendor Managed Inventory (VMI) and Web-based Inventory solutions.
