Every supply chain planner’s goal is to provide the highest degree of customer service while reducing inventory in the supply chain network. High customer service translates to more business for the organization, and low inventory costs mean increased working capital. Supply chain planners may struggle to balance both, but good inventory planning software would help them in this journey.
This blog talks about three must-have features in inventory planning software that make the supply chain planner’s job easier.
The first step is to have inventory visibility in the network. The tool should be able to provide simple reports and answers to critical questions such as:
- What and how much inventory do I have?
- How much does it mean in terms of dollars?
- Where is that inventory located?
Once the answers to the above questions are known, data analytics can help answer questions such as:
- What is the inventory velocity – how fast or slow is it moving?
- What inventory is forecastable?
- How is the inventory aging?
A quote by Management Consultant Peter Drucker fits very well when we talk about inventory visibility: “You can’t improve what you don’t measure.”
To provide a better view of the network inventory, a good planning tool should also be able to:
- Easily integrate with the ERP or system of records to read the master and the transactional data.
- Generate reports such as inventory age, on-hand inventory trend in volume, value, etc.
- Provide the functionality to view the report in different units of measure.
- Run analytics on the inventory data.
The second must-have feature is the capability to recommend optimum inventory levels – safety stock, target stock, and re-order point.
Determining the right inventory levels involves maintaining optimal inventory buffers for your cycle, safety, anticipation and transit stocks. Additionally, businesses must answer the question of where to keep their inventory without sacrificing customer service level targets.
Inventory optimization begins with setting inventory and/or stocking policies. Depending on the type of business, there are different policies:
- Make-to-order (MTO)
- Make-to-stock (MTS)
- Assemble-to-order (postponement strategy)
- Combination of the above
Using inventory planning software, one can set the inventory levels based on variability in demand and supply.
This is typically done using:
- Rule-of-thumb (days of supply based on historical usage or forecast)
- Single echelon
- Single enterprise multi-echelon
- Multi-enterprise multi-echelon
The universally accepted method of calculating safety stock is using the normal distribution with uncertainty in demand and supply. The safety stock calculation for a single echelon network can be done in Excel but with trade-offs on the size of the file, performance, sharing the file between team members, writing macros, etc.
Good planning software can mitigate all these issues and provide advanced functionalities such as:
- Provide different methods to calculate demand variance.
- Provide flexibility to set customer service levels based on demand, stocking policies, etc.
- Apply business rules.
- Scenario configuration to play with input parameters such as lead times, lot sizes, etc., generate inventory levels and compare scenario results.
- Monetize the results – Provide safety stock and target stock value.
Inventory Monitoring and Warning Reports
Once we have the visibility of the inventory and the tool has recommended optimum inventory levels for every item and location, inventory monitoring and warning reports provide actionable insights.
Different reports can be generated which helps a planner to take action to make sure the right inventory in the right amount is at the right location.
- Excess Inventory – This report shows how much surplus inventory is in the supply chain network.
- Inventory Shortage – This report shows which items are in short supply at a given location.
- Using the excess and shortage report a planner can decide whether some items need to be transferred to other locations or decrease/increase the production or purchase of certain items, etc.
- Inventory Runout – This report shows which items are expected to run out of stock and when.
- Health of Inventory report – Inventory days, % of on-hand above/below target stock, % of obsolete stock, etc.
In summary, a good inventory planning tool should help the supply chain planner to achieve:
- High customer service level.
- Increase working capital.
- Anticipate and plan different scenarios.
- Automate the tasks of generating inventory levels, KPIs, etc.
- Provide early warnings to take action.