Summary
Every organization can be viewed as a set of loosely coupled network activities from the acquisition of raw material to the production and transportation of intermediate and finished goods (FG) to their delivery to the customers. It is inventory that makes it being “loosely” coupled possible. Additionally, inventory buffers an organization from uncertainty in demand, production, transportation, and raw material availability. Inventory comes in many forms and flavors; it is the critical element of supply chains that enable a firm to respond quickly and take advantage of scale. However, managing inventory is one of the most difficult aspects of supply chain management since there are competing forces – some pulling for more inventory and others for less. Arkieva understands the four factors in successfully managing inventory (process, data, software, and analytics) to navigate the trenches without losing sight of the big picture. The upcoming inventory webinar led by one of our rising stars in the supply chain, Ms. Jennifer Izaguirre, will provide some helpful insight and real examples of these twin challenges to help any organization get started. On the analytics side, she is supported by Dr. Robert Tenga with over 40 years of experience in the successful application of applied analytics.
Introduction
Every organization can be viewed as a set of loosely coupled network activities (A Critical Insight to Successful Supply Chain Planning) from the acquisition of raw material to the PT (production and transportation) of intermediate to PT of finished goods (FG) to the transportation of FG directly to the customer or a retail outlet. It is inventory (including work in progress WIP) that makes it “loosely” coupled, where inventory is defined as the accumulation and storage of products to be consumed in the next step of the network. Additionally, inventory buffers an organization from uncertainty in demand, production, transportation, and raw material availability. Without an inventory, a firm could not be responsive. Imagine going into a store to purchase a new cell phone and having to wait nine months for it to be produced starting with the Wafer. Having established the importance of inventory, the question becomes:
- Monitoring its levels to avoid too little or too much and taking the appropriate actions in
- Determining how much is the correct amount and adjusting “how much” in relevant time.
This requires the right combination of process knowledge, software, databases, and analytics to be in place in an organization. Without this combination, it is impossible to navigate the trenches without losing sight of the big picture. The upcoming webinar led by one of our rising stars in the supply chain, Ms. Jennifer Izaguirre, will provide some helpful insight and real examples of these twin challenges to help any organization get started. On the analytics side, she is supported by Dr. Robert Tenga with over 40 years of experience in the successful application of applied analytics.
Two Examples – why inventory is required
In the bakery example, (Figure 1 in The Dual Reality of Inventory Management (IM): Stand Alone and Central Planning – Avoiding Data-Driven Disasters) inventory occurs at each step in the network (raw material – butter), component product (batter), and finished good (cookies). This inventory enables raw material to be purchased in bulk and makes production decisions loosely coupled from the acquisition of raw material. The ability to hold finished goods inventory enables production to focus one day on cakes and another day on cookies (if it wants). This inventory protects the supply chain from uncertainty in the availability of raw material, production, and product demand.
In the ice cream example, the network is shorter – focused on the purchase decision of ice cream in bulk and the selling of ice cream in small quantities. Here inventory is critical to protect against uncertainty of demand, lead time, and enable bulk purchases.
Basics to management inventory – what inventory do I have
The initial critical function for inventory management is to know what inventory is in stock, what is arriving, what is likely to leave soon, where it is, how long has it been there, and where it is currently planned to be used. Although often overlooked in the rush to get to the fancy analytics stuff, Ms. Izaguirre will make clear the importance of this and demonstrate that best in class software secures this base. A lesson learned in LMS 40 years ago.
Helpful way to manage inventory – classify your inventory by contribution to revenue
This is sometimes referred to as the ABC method. Essentially, it is most important to focus attention on avoiding shortages on those products that generate the most revenue. Often this is a small subset of the number of products or SKUs. Sometimes referred to as the 80/20 rule. The webinar will cover the basic principles and demonstrate our software makes it easy to do the revenue and quantity analysis and then set up visuals and reporting.
Helpful way to manage inventory – understand the variability in demand
Profiling the variability in the demand is one of the best methods to navigate the trenches and not lose sight of the big picture. In the webinar, the demand history will be used to assess variability. In some cases, the estimated future demand is better. The core concepts are the same. Demand can be classified as:
- Regular demand – average demand across time is steady or clearly trending up or down with limited variability from time period to time period.
- Strong variability – average or trend is clear, but substantial changes from time bucket to time bucket.
- Irregular/difficult to predict – this is often intermittent demand and the best one can do is bound the risk.
One of the standard metrics used to classify demand variability is the coefficient of variation. There are a number of other methods such as the run test (forthcoming blog) from non-parametric statistics. These methods are part of the Arkieva forecaster used in its demand profile expert system.
The webinar will demonstrate how the correct software will enable a user to successfully mix and match different classification methods to effectively navigate the trenches without losing sight of the big picture.
Multi-echelon Inventory (MEI)
Is a critical inventory topic, but outside the scope of the webinar!
Whitepaper: Multi-Echelon Inventory Optimizer
Click here to download a copy.
KPIs
There are numerous KPIs that will be covered in the webinar which will emphasize the advantages and disadvantages of each and how to best use them in combination.
Use of Targets to Manage Inventory
This was outlined in a previous blog, Inventory Management: Avoiding Data-Driven Disasters – Targets and Monitoring
Conclusion
Inventory comes in many forms and flavors; it is the critical element of supply chains that enable a firm to respond quickly and take advantage of scale. However, managing inventory is one of the most difficult aspects of supply chain management since there are competing forces – some pulling for more inventory and others for less. Arkieva understands the four factors in successfully managing inventory (process, data, software, and analytics) to navigate the trenches without losing sight of the big picture which includes its connection to central planning and demand management.
The upcoming inventory webinar will provide participants the basics needed for a successful start.
