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Four Familiar Inventory Troubles - Which Do You Want to Overcome?
Stuart Dunkin, Data Profits Inc.
You experience some inventory troubles on a regular basis - out of stocks, overstocks, bumpy cash flow, and lost sales - every week in your retail business. What about Inventory Optimization?
Inventory optimization has been made to sound like the "end all" answer to these four profitability issues. Is it a state of nirvana for retailers that, if reached, magically removes all inventory troubles? What is inventory optimization and is it truly the "final answer"?
What is Inventory Optimization?
Is inventory optimization a goal, a plan, a piece of software, or an industry term? We blame poor inventory planning as the cause of our business problems. Is inventory optimization the "Holy Grail" of inventory deliverance? What is real inventory optimization and how can it help us become better retailers, enhance customer satisfaction, lower costs, provide more proactive management with less firefighting, and actively increasing our profits? Inventory optimization can provide all of these improvements, if properly executed.
In a Utopian inventory world, an optimized inventory would mean we have the right products at the right locations at the right inventory levels to meet all customer service demand and fulfill all revenue goals - with no inventory left on the shelf and deferred billing from the supplier so we wouldn't have to pay until after the promotion was over. Well, then there is reality and the point that inventory optimization is a journey; a plan, goal, and strategy to provide better operating results. It requires data, educated and trained people, and some fairly sophisticated computer software programs to deliver improved results (sorry Microsoft and all pivot table aficionados - Excel is a spreadsheet, a tool, NOT a real software program!).
Do You Know the Difference between Sales & Demand Forecasting?
Inventory optimization starts with effective demand forecasting for each of the demand types: regular, promotion, event, closeout, and lost sales. Many systems lack the technology to break out sales by demand type and then forecast based upon each type of demand. Promotions and events need to be fully integrated into the demand forecast, but also separated for effective replenishment without the fear of overstocks. There are two different forecasting methodologies: Sales Forecasting and Demand Forecasting. We have all read research papers about Demand Planning and S&OP, so we know there are differences between sales forecasting and demand forecasting. The two key pieces of information you need to know about your current system are:
- Which forecasting method does your system use?
- How can you use that knowledge to drive better results?
Finding Your Perfect Demand Forecast
Step 1: Consider using a true Demand Forecast software package; do not be fooled by the name of the software. Last week a major software company in Europe claimed their product delivers demand forecasting. The next sentences on their website contradicted this: We forecast using demand types rapid, slow, and intermittent. Funny, those were terms for rate of sale and S&OP sales forecast processes use those same "types," so how is that "demand" forecasting? Without demand forecasting, a system will forecast based on total sales. If you have promotions then the forecast will be too high and you can overbuy inventory to support regular business.
Get your Lead Time Variance in Line
Step 2: Lead Time Forecasting is also needed to understand when to place the orders. This can be a tricky thing as lead time variances change and forecast have seasonal and market trends being applied or removed as all the pieces start to move.
While many systems report on the supplier lead time variance and fill rate, these do not translate into when a replenishment purchase order needs to be placed to avoid an out of stock. When the lead time changes, your order dates need to change to reflect the lead time impact and the demand forecast needs to translate the new lead time days into a correct number of units needed on the shelf to support sales while awaiting the delivery of new product. The demand forecasting and lead time forecasting need to be integrated with each other to deliver an optimized inventory. Remember, the lead time unit of measure is time; to understand units to support sales, the demand forecast must be integrated.
Order Cycle and Optimization
Step 3: Inventory Order Cycle Optimization is needed to determine the most efficient quantities to buy product. Buying on some fixed order cycle or based upon open to buy for too long has been a part of top down planning philosophy. You schedule a supplier purchase order for weekly or bi-weekly and then try to exception manage the service issues. Real inventory optimization around an optimum order cycle is pull methodology, from the bottom, a pull based on individual product/location service goals. That is the best way for your business to be customer centric as it lowers your inventory costs and raises your sales and service level attained.
Order cycle optimization needs to be integrated with the demand forecast and is based upon your company's cost structure, both internal and external. What are your product acquisition and carrying costs? Do you know what your PO header or PO line expense is? What economies do your suppliers offer, e.g., bracket pricing (think volume discounts)? What are the suppliers' shipping and logistics constraints? Do you have limits on the days of the week you can order or they will ship? There are many moving pieces that need to be integrated to determine a dynamic order cycle which will reduce inventory costs and increase product/location service attained. Finding your most economic buy quantities always result in better cash flow and increased sales at the store.
Visible Supply Chains Then and Now
Step 4: Inventory optimization needs supply chain visibility tools that can monitor demand and supply and be configured by the individual users and management. The monitoring needs a set of analytical BI tools that are easy to use by business users and do not need a tech translator. Monitoring also needs effective exception management that is, again, configurable at the user and management levels. Canned programs from the software company that define exceptions are only a starting point - you need to understand the uniqueness of your business, define the exceptions and, most importantly, understand the workflow activities that are needed to resolve exceptions. The supply chain visibility monitoring and exception management tools need to be integrated with demand forecasting, lead time, order cycle optimization and business rules, plans and goals to provide the best results.
Finally, the tools need to be dynamic. You should be able to tell the system, for example, what business rules create a top 10 product in any product hierarchy, and those rules could be different for each hierarchy. An inventory optimization solution that is integrated should also be able to automatically update the products in a group without the need for human intervention.
Inventory optimization is the Holy Grail and can deliver strong results for your business – we have seen these things in action with many customers. The first clue of a retailer that has made progress towards successful inventory optimization is at the beginning of the work week. When we meet with a planning group that has only three or four reports on their desks on Monday morning, not 10-15, and their phones are not ringing off the hook, we know they are more proactively and less reactively managing their inventory. We also know we are working with a retailer that has made significant progress in their journey of learning how to manage an optimized inventory.
Inventory Optimization can impact rapidly and with profitable results for the four trouble areas of retail inventory – out of stocks, overstocks, bumpy cash flow, and lost sales. There are different pieces to each problem but the common thread is accurate demand forecasting, integrated systems and collaboration delivered in a user configurable format that is visible across the network. Today there are systems available that can be installed rapidly and deliver this kind of functionality at a fraction of the costs of legacy systems. Start asking a new set of questions and look for your opportunities.
This is the fourth in a series of five articles on Demand Forecasting and Inventory Replenishment. Take time to review the previous articles for help with your supply chain.
- Why Planning and Sales Forecasting are Bad for Replenishment
- The 5 Most Expensive Mistakes When Managing Inventory
- Did Sharknado Chew Up All Your Lead Time?
Join us next month for our last article in this series on Demand Forecasting and Inventory Replenishment: Differences in plan based and service based replenishment systems and how they can each provide opportunity and profits.
CEO © Data Profits, Inc. 2013 All Rights Reserved.
Stuart Dunkin, CEO of Data Profits Inc, is a strategic visionary who leads by calling on his broad range of experience as a former retail executive, consultant for top retailers, and work for E3/JDA software. Data Profits delivers forecasting, replenishment and collaboration supply chain tools to our customers. Data Profits interviewed over 100 retailers who outlined - the disjointed relationship between supply chain data, people and business goals. This influenced our software designs. Data Profits Software connects people, meets service goals, increases profits and provides a highly visible supply chain across a retail network. The user configurable software installs in less than 30 days at more than 50% less than legacy solutions.
Stuart attended Auburn University for a Bachelor of Science degree in Business Administration. He continued his education at Emory University, pursuing a joint Masters of Divinity and Masters of Business Administration. Stuart writes almost weekly for a popular retail supply chain blog. Call Data Profits at (770) 574-4100 or visit their website and subscribe to their blog at http://www.data-profits.com and start to "Tighten the Links in Your ChainTM."