Inventory management and optimisation is once of the most challenging tasks facing supply chain professionals. So what does it take to get it right? Malory Davies asks the questions.
When Tesco released its annual results last month, much was made of the fact that it had managed to stem the decline in like-for-like sales. But, read further and the retailer also revealed that it had made a £400 million improvement in working capital – and that was driven by a £300 million reduction in inventory.
Holding inventory is expensive. It’s not just the capital costs, which can be as high as 15 per cent of value of the inventory. There is also the cost of storage space along with associated services costs. And, many would argue, inventory risk costs also need to be considered.
And, in a multi-channel world, it is all too easy to end up holding too much stock in too many places just to be sure that demand can be satisfied.
Inventory is vital because it sits at the junction of supply and demand. It is very much at the heart of planning, says Martin Woodward, managing director of ToolsGroup, which produces SO99+, the supply chain optimisation software.
For Dawn Howarth of consultants Oliver Wight the starting point has to be an understanding of why the organisation has the inventory it has. She points out that a surprising number of organisations don’t necessarily know why they have the inventory they have got.
“Problems arise if you don’t have an overall picture of the inventory you need to run the business,” she says. “You can’t make predictions, if you don’t have an overall picture.”
For Woodward, a challenge in developing an inventory optimisation strategy is simply establishing ownership. In some organisations there can be an issue over who the inventory belongs to. It might be the commercial department or supply chain – and the ownership is not always transparent. So it is important to declare ownership, says Woodward.
Woodward also points out that supply chains can be “skills constrained”. Organisations don’t necessarily have all the skills they need.
Gavin Clark, commercial director of Synergy Logistics which produces the Snapfulfil warehouse management system, says: “Very often, the key challenge can involve storage and retrieval for specific periods or campaigns. With long lead times for deliveries from suppliers around the world, the biggest challenge can be ensuring the items are processed and ready to fulfil demand at the right time. When the sun comes out, the flip flops need to be ready to pick, not sat in a container awaiting processing.”
Jonathan Bellwood, founder and chief executive of Peoplevox, says: “There are several challenges including gaining real-time visibility of stock levels and sales volume by suppliers which are key to steering you on what to buy. Others include avoiding buyers working off historical sales data, dealing with a wide SKU base where it can be tricky to know the range, and running the risk of buying to stock and then only showing on the website when in stock.”
Fab Brasca, VP, Solution Strategy at JDA, argues that inventory is just one component of the modern global supply chain. “Organisations need to learn how to achieve higher customer service levels with lower resource investment when looking to optimise inventory. Instead of focusing on short-term results, organisations need to adopt more innovative approaches to inventory optimisation to create a long-term, sustainable competitive edge. This would help by aligning day-to-day inventory plans with top-level goals on an ongoing basis – thereby, turning this component into a powerful strategic advantage in a challenging economic climate.”
Sheila Davies, source tagging implementation manager at Checkpoint Systems, argues that the emergence of Click and Collect has increased the need to make delivering very small shipments work for customers and retailers alike. “Businesses need to ensure they are able to distribute the correct level of merchandise to the right locations in a very short period of time, so we’re seeing more companies adopt technologies that help streamline and error-proof these processes, such as RFID.”
And she points out that one of the biggest issues for retailers is that they don’t have enough meaningful data available to enable them to make informed decisions on inventory matters. Inaccurate data is also a problem.
“We see many retailers continuing to carry out manual inventory checks, which by its nature leads to human errors. Taking grocery stores as an example, you then see products remaining on shelves or in the warehouse which have past their sell-by-dates, when they could have been reduced and sold to customers days before.
“Another major issue for retailers is that many are unclear what stock is being held. The latter can lead to problems such as ‘frozen inventory’ where the retailer might think the store is holding the minimum acceptable level of stock for an item, but due to theft, misplacement or poor stock-keeping practices the shelf is actually empty. It can take a long time to spot and fix this kind of anomaly and the out of stock could be fuelling customer negativity over a long period,” says Davies.
Determining the optimum level of inventory for a particular operation must start with business requirement, says Woodward. “You need to decide the level of service you are going to provide.
“100 per cent service is impossible – so it is necessary to decide what is the appropriate level of availability.”
He highlights the pharmaceuticals market where product availability can be a matter of life and death. It’s impossible to guarantee 100 per cent of products will be in stock so it is necessary to have contingency plans to ensure that demand is met. One example would be to have an expedited delivery service to ensure that products could be delivered quickly.
There are clearly calculations to be made on what is the appropriate level of stock to hold and when to rely on the contingency plan.
Clark says: “Accurate reporting of the available space within the warehouse will help to guide buying decisions. An holistic approach to planning, marketing and fulfilling any orders for a given SKU will always need to include a storage element, or over filled warehouses/yards/port and third party overflows will rapidly eat into productivity and profitability.”
And, says Brasca: “In terms of ensuring the optimum level of inventory for any given operation, businesses seeing varying or static levels of demand could turn to profitable order promising as a solution. This would enable businesses to create an optimal view of inventory and the network, so that decision makers at the top can better understand the reality of implementing their plans at each level of execution. As a result, businesses can close the gap between what they plan to do what they actually do, meeting their customer demand with ever greater efficiency and profitability.”
Davies highlights the importance of information sharing between manufacturers and retailers, particularly when retailers don’t own the supply channel. “This is a result, in part, of accelerated product launches, broader and sometimes customised product lines and more frequent shipments, particularly with fast fashion. Data sharing on trends such as “what’s hot” and “what’s not” enable both parties to work together more efficiently and improve inventory management.
“However, understanding estate-wide sales data is key. No two stores are the same and every multi store retailer will have to plan for regional differences. We’re seeing companies like Holland & Barrett employing systems that deliver improved footfall data analytics, which can help commercial teams identify which stores need to be provided with more merchandise.”
The growth of multi-channel and omni-channel retail is adding a whole new level of complexity to the inventory management.
The change in buying patterns shifts the traditional flow of goods from warehouses serving brick-and-mortar stores to new locations shipping direct to consumer, says Robert F Byrne, VP and GM, Forecasting Solutions at E2open. “Omni-channel strategies are still relatively new for most manufacturers so inventory optimisation strategies require the flexibility to update stock targets weekly and keep models current. Multi-channel sales also create opportunity for manufacturers to define channel-specific service levels and closely align inventory investments with business objectives. Companies should consider these elements when building or revising their inventory optimisation strategies.”
Gavin Clark points out that omni-channel retailing is making orders smaller and more numerous. “This often results in high levels of popular products being purchased to reduce cost, but this can create serious problems for the fulfilment team if not properly accommodated within the warehouse. A high percentage of customer service calls can be avoided if the warehouse team are notified of a new ‘hot’ product launch/campaign to ensure they can provide the necessary pick faces(s) for the expected order surge. Tier 1 WMS functionality will often allow SKUs to be profiled as Super-Fast and then appropriately ‘slotted’ to the most appropriate locations for fast order fulfilment.”
Woodward highlights the demand variability that occurs in multi-channel and omni-channel operations. “It introduces a different demand signal as different channels have different demand characteristics.
One example is a customer that serves different channels from a single warehouse. People using different channels can behave quite differently – with online buyers shopping outside normal hours and so on.
One response is to move to segregated stock – perhaps even virtual warehouses for each channel. But, Woodward points out that this is inefficient.
Crucially you need to understand how these different channels are behaving – and the trends – to be about to create a strategy that will satisfy those requirements, says Woodward.
Bellwood says: “You need to consider whether to show all inventory from stores and warehouse, or even have separate retail and e-commerce warehouses. It’s best to show all stock providing it’s accurate. The rule to abide by is to ensure you have 100 per cent accurate inventory and 100 per cent accurate fulfilment for e-commerce. The real optimisation challenge is where to put it all if you have multiple stores or when it gets returned where it can sit in no-man’s land for a while as you won’t know what is being sent back when.”
Brasca believes that in today’s increasingly omni-channel world, the future winners will be those retailers that have invested in an ultra-responsive supply chain. “Businesses are having to continuously adapt every stage of its supply chain to keep up and remain competitive. With the rise of services such as home delivery and ‘Click & Collect’ retailers need to create an optimised network, where fulfilment locations (and that could be anywhere that inventory resides), is configured with capacity, lead times and resource capability that maps to serving the needs of all channel commerce. End-to-end visibility, from source to fulfilment centre is a pre-requisite, as, is having this in real time, how else can an order promise be made and maintain competitive in an ultra-competitive market?”
Choosing the appropriate system to support inventory optimisation is clearly a major decision for any organisation. Dawn Howarth argues that companies should make the most of the systems they have got before investing in dedicated optimisation tools – ERP systems have a lot of the functionality needed.
“Once you have leveraged the ERP system then it is time to look at optimisation tools. There are some very good ones, but rules are vital. Badly used they can cause more problems than they solve. Don’t try to use them too early in the process – it causes problems,” says Howarth.
Woodward agrees that there are simple tasks that can be done with ERP systems. But, he points out that at a company level there are sophisticated decisions to be made. “You need a system that can take those factors into account – understanding demand and demand variability going back through the supply chain.
Woodward highlights an implementation of SO99+ by US online retailer Wayfair, which handles forecasting for just under one million SKUs and the replenishment planning for the 40,000 it ships directly from Wayfair’s DCs. The ability to handle Wayfair’s demand volatility, including long-tail SKUs has improved planning accuracy by reducing forecasting errors by 50 per cent; reducing ‘unhealthy’ distressed or aged inventory by 50 per cent; and increasing inventory turns by 25 per cent. It has also cut planning time from 100 hours per week to 15.
Kate Fratar, senior inventory planning manager at Wayfair says: “Before ToolsGroup, my team invested a colossal effort for a small payoff. Now the situation is reversed. The chief reason ToolsGroup frees up our time is that we now trust the output. This means we can spend more time looking at the genuine exception SKUs rather having to question everything.”
Jonathan Bellwood argues that ideally the web site should be able to look at where to fulfil from in an optimum way, otherwise through the order management layer. “Unfortunately, most of the solutions available are for large enterprises but there’s nothing really for companies with a few stores that want to have one single inventory. Our own experience of addressing and solving e-commerce retailers’ overall fulfilment challenges has shown that achieving real-time inventory visibility requires easily scalable and deployable warehouse management software – this needs to be open in design for integrating sales, marketplace and carrier platforms, and, of course, within budget range. Replenishment to store is typically done on a sold and replace basis plus using a bit of intelligence which seems to work well using systems like Futura,” says Bellwood.
Fab Brasca says: “When looking to choose technology to support the inventory planning, replenishment and allocation process – businesses need to look for a solution that determines service levels and inventory targets for each product location while leveraging demand forecast data, sales history, and manufacturing and distribution assets. Indeed, by choosing an inventory optimisation solution that also considers existing multi-echelon network complexity, lead time, costs and constraints as well as demand and supply variability helps to create a sustainable and competitive edge, by aligning day-day inventory plans with top-level goals on an ongoing basis.
Sheila Davies believes RFID technology can enable retailers to improve their inventory management significantly.
“RFID-based asset tracking provides the real-time status of assets within a business’ supply chain, allowing a retailer to identify exactly where an item is located. It can be used to establish what merchandise is in the distribution centre, that it has been placed in the store warehouse, or it can now even tell a shop assistant where on the shop floor a particular item is using a handheld reader – vital for the replenishment of goods,” she says.
Strategy: The planning challenge
Is it possible to have an effective inventory strategy without an effective planning process? “Never,” says Dawn Howarth of Oliver Wight. In fact, she says she tells clients: “Over my dead body”.
Oliver Wight has driven the concept of integrated business planning as a common sense process for aligning the company plans on a month-month basis, arguing that this provides substantial bottom-line benefits, and ensures early focus on any potential gaps in business performance.
A good planning process is essential, says Howarth. “There are huge wins to be had if you get it right.”
Robert F Byrne, VP and GM, Forecasting Solutions at E2open, agrees: “Inventory is directly linked to forecast error. Safety stock protects against demand volatility, so the first step in an effective inventory strategy starts by improving planning accuracy. Since past performance is a poor indication of future results, leaders are sensing demand to improve near-term accuracy. By using pattern recognition to systematically analyse current demand signals from across the supply chain, demand sensing typically cuts weekly error by 40 per cent and enables a 10 per cent reduction in inventory. The second step is to adopt multi-enterprise inventory optimisation software specifically designed to use daily forecasts. This allows the tool to properly measure demand over exact lead times instead of estimating demand with square root approximation techniques.”
However, perhaps surprisingly, Martin Woodward, reckons that is not always necessary. “It’s horses for courses. There are some simple lean supply chains that rely on a kanban card system. Particularly for low-volume items, that is all they need.”
But those examples are few and far between, he says. There is a risk of the supply chain becoming over-extended.
And as you move to the expectation of higher availability, a proper planning process is required. And from there, there is whole spectrum of refinement.
“Our advice is always to have an effective planning process,” says Woodward.