The complete picture: Supply chain solutions balance inventory management with transportation costs
For years, when it came to inventory, most manufacturers were focused on one goal: cutting inventory levels as low as they could go. It was a trend that could be called inventory minimization. But a new trend may be emerging—one that, in some cases, proves less isn't always best. “Most supply chains are built on the unwritten rule, or the unwritten assumption, that transportation co...
For years, when it came to inventory, most manufacturers were focused on one goal: cutting inventory levels as low as they could go.
It was a trend that could be called inventory minimization. But a new trend may be emerging—one that, in some cases, proves less isn't always best.
“Most supply chains are built on the unwritten rule, or the unwritten assumption, that transportation costs are pretty low—lower than inventory-carrying costs. So my goal is to be leaner on the inventory with the assumption that my transportation is somehow going to work out,” says Noha Tohamy, a director with Boston-based AMR Research .
To get lean in inventory, some manufacturers rely on inventory optimization tools that analyze the entire supply chain to determine where companies should hold their inventory, and at levels that still enable cutting costs while meeting customer needs.
While the tools often do what they promise, they don't always factor in the impact of transportation costs.
“With fuel costs rising, companies need to solve the inventory problem with more visibility into what their decisions will do to transportation costs,” Tohamy says. “Companies are more interested in a solution that gives them end-to-end supply chain cost, rather than just [establishing] inventory optimization.”
For JDA Software , concern about overall costs in its manufacturing base is becoming increasingly apparent.
“We see more interest in our modeling tool that [covers] the entire supply chain, so a company can, for example, take a look at less-than-full-container load movements that cost a higher per-unit freight cost. They can look at how that compares to a full container and carrying a little more inventory where the increase in the overall working capital requiring additional inventory is less than—or offsets—the gains from reducing overall logistical spin in freight cost,” says David Johnston, a senior VP of manufacturing/distribution for JDA.
Over the past year, Johnston adds, JDA has seen an uptick in interest for its inventory optimization tool. He believes this stems from companies that began offshoring to take advantage of lower labor costs, and increased their buffer-stock levels to ensure they could meet service goals.
“There's a general feeling that inventories are bloated at this point, and they do have opportunities—if done correctly—to reduce them and still meet service-level goals,” Johnston explains. “In the last 12 to 18 months, companies have a better handle on the balance between lower production costs and import costs by going overseas with the proper amount of risk mitigation needed to buffer against those extended cycle times.”
Luckier with local
Finding the right balance is important to Kevin Piotrowski, a director of discrete industry marketing for enterprise systems supplier Infor. He says manufacturers that rely on local supply chains struggle less when it comes to managing the effects of transportation costs on inventory optimization policies.
While cutting inventory is still important, says Piotrowski, “I don't want to move the inventory I have all over the place because that's very expensive.”
Instead, manufacturers need to focus on optimizing their inventory in the locations where they operate. Piotrowski says much of this can be achieved through better demand planning.
“If I minimize the inventory I'm going to hold, it doesn't matter if it's a purchase part, a work-in-progress, or a finished good. I need to be able to predict the demand better,” he points out.
One manufacturer that has seen the results of better demand planning on inventory levels is AccuSpec Electronics , a manufacturing services company that focuses on industrial, medical, military, and aerospace customers looking to outsource the manufacturing of part or all of their electronics assemblies.
In October 2006, AccuSpec implemented Infor ERP SyteLine to manage manufacturing operations. A key challenge involved inventory.
“We weren't managing the inventory; I would say the inventory was managing us,” says Mike Jenkins, CFO of AccuSpec. “We didn't have a complete picture of existing inventory levels, and where we were when things were coming in.”
Since implementing SyteLine, says Jenkins, the accuracy of the demand signals AccuSpec receives from customers has improved, allowing it to do a better job creating forecasts of its inventory requirements. AccuSpec then shares the demand data with its vendors, primarily through the auto-purchase program it deployed through SyteLine.
“We are giving [our suppliers] what we call a vendor feed-out of the SyteLine system on a weekly basis. They see our requirements as far out as they can go,” says Tom Rettger, AccuSpec materials manager. “We have a window set up with them where we can actually turn our requirements into a purchase order number and ship product against that number.”
These and other SyteLine-enabled improvements allowed AccuSpec to cut $1 million out of its inventory, which at one point had reached a high of $4.2 million.
For manufacturers with complex supply chains, and multiple manufacturing sites and distribution centers to manage, multi-echelon inventory optimization solutions may spell relief.
“Think of the supply chain as a network,” says AMR's Tohamy. “If you are just looking at one level at a time—at regional distribution center to retail storefront, for instance—you can figure out what the demand needs are at the store, and based on that, position the inventory at the regional distribution center and make a decision on what level of inventory you should have. That's single-echelon.”
But a single-echelon approach may not be ideal for more complex situations, Tohamy adds.
“A much more efficient way of looking at it is understanding what the inventory needs are across the entire supply chain and solving one optimization problem, taking into account all the levels,” she says. “If you're just doing it one level at a time, you're aggregating or estimating what the demand is going to look like from one level to the next. But if you're doing it as one problem all at the same time, all you need is just the customer demand all the way at the end. You can take that into account, and based on that, you make the right decision for inventory.”
Approaching inventory optimization from this perspective can make a big difference, says Fred Lizza, CEO of Optiant, provider of a multi-echelon inventory optimization tool called PowerChain Inventory.
“We see people worrying about this warehouse or this plant or this production line. When you add up all those little pieces, you have a lot of inventory, and it could be 10 percent to 15 percent of your revenues tied up in inventories—or more,” Lizza says. “What we do—and where the multi-echelon capabilities come into play—is look across that and see if we have this much inventory in one location, we may not need as much in the next one, or the next one. Or we look at whether we can store more raw materials, and have less of the more expensive finished goods in inventory. That's what the multi-echelon system does.”
Lizza says Optiant solutions can establish the infrastructure that manufacturers need to handle changing conditions, including rising transportation costs.
“The fact that things can change as quickly as they are now is a reminder that there's more that can be done in terms of managing inventories and designing supply chains,” says Lizza. “Our message is there's a next generation of solutions out there for dealing with that, and Optiant is one of them.”
But are solutions surrounding multi-echelon inventory optimization enough? Tohamy says some small vendors are taking things several steps farther.
She says these vendors “help companies make decisions based on the financial implications of every decision that they make.
“They might not go to the detailed level of a multi-echelon inventory optimization vendor,” says Tohamy, “but at the end of the day, they are solving a multi-functional optimization [problem], so inventory is one component, transportation is another component, and customer service is another.”
Tohamy points to River Logic as one of these vendors. Founded in 2000, the company offers what it terms an integrated business planning solution, called Enterprise Optimizer.
With Enterprise Optimizer, says Dr. Robert Whitehair, founder and chief research officer for River Logic, “You are driving toward achievement of financial objectives, which is quite different from the way a supply chain system typically works, where you're dealing more with operations—that is, service, throughput, inventory—and you drive those supply chain systems with financial assumptions. There's no way of knowing if those assumptions are valid or not unless you've built the financial side of the house into the model, and that's what Enterprise Optimizer does—and that's why it's so unique.”
Tools such as the one offered by River Logic may represent the future of supply chain software, says Tohamy.
“You can't operate on a function-by-function basis because that doesn't take into account what the financial implications are for your entire supply chain. I think the new generation of supply chain tools will have to account for the fact that whatever decision I make on the inventory side is going to impact my transportation, and vice versa.”
Whitehair agrees. “Inventory is one piece of a very complex set of relationships that run through a business,” he says. “To make the best decisions from an enterprise perspective, you have to consider those other things as well.”
Energy costs up? Try drilling down into data collection
Rising energy costs and the attendant issues associated with managing inventory and optimizing stock levels mean manufacturers must take advantage of data collection technologies, asserts Dan Bodnar, industry marketing director with Intermec , which offers solutions for identifying, tracking, and managing supply chain assets.
While using data collection technologies such as bar codes to track inventory isn't a new concept for manufacturers, Bodnar points to the convergence of data collection and mobile technologies as creating new opportunities for manufacturers to optimize stock levels by increasing visibility into inventory.
Bodnar cites the benefits realized by a large agricultural equipment manufacturer working with Intermec that wanted to better manage inventory used for field-service calls. By scanning in inventory such as spare parts as it's loaded on field service technicians' trucks, and giving each technician a mobile computer, the technicians can quickly determine during a service call if the necessary parts are on the truck. If they aren't, they can query the system to see if other nearby trucks have them.
By using data collection capabilities to carefully track this inventory, this particular manufacturer reduced the amount of redundant parts it orders, and cut its inventory carrying costs. Customer-service levels also are enhanced as evidenced by an increase in first-time fix rates.
Even when a manufacturer's inventory isn't always on the move, newer data collection technologies can still make a difference. One way these technologies can help, says Bodnar, is by allowing manufacturers to attach more data to inventory assets.
There's a movement, Bodnar says, “toward two-dimensional bar codes where you can put more data on the tag beyond the few characters you can put in a Code 39 [bar code]. It might be serial number data; it might be lot number data. And obviously with RFID, you can carry more data, and then write to and from that tag.”
Bodnar says the ability to attach data to inventory can help in situations where there is concern about inventory shelf life, or if inventory needs to move based on a first-in/first-out approach.
RFID tags are available with more memory to write to and read from, allowing manufacturers to add information such as service histories to critical inventory assets.
In addition, new RFID sensor capabilities will make it possible for companies to exercise better quality control over inventory that is sensitive to variations in temperature. When they receive shipments, manufacturers will be able to tell whether or not the goods were exposed to temperatures beyond their ideal range, and use that information to decide whether or not to accept the materials.