Inventory optimisation is about more than keeping track of stock. There is huge value in making inventory work harder, says Johanna Parsons.
This is the omni-channel era, and there has never been a higher premium on visibility and keeping supply lines running smoothly. But although the market for warehouse management systems is firmly established, inventory optimisation seems to be a less appreciated art.
The consensus among consultants is that even successful companies can often reduce inventory holdings by up to 30 or even 50 per cent. A figure most striking because it indicates just how much room there is for improvement.
When fractions of a per cent affect the purchase decision for warehouse automation or picking systems, having such potential may be what’s putting inventory optimisation in the frame for enterprising firms.
Sainsbury’s has recently taken on the American firm Quantum Retail Technology to provide software and services to help optimise its fashion and general merchandise inventory through improved allocation and replenishment functionality.
And with an eye on the strategic importance of inventory in the final delivery and service offering, JDA has just launched a distribution-centric Supply Chain Suite, an integrated set of cloud-based supply chain planning and execution solutions designed to solve inventory planning, replenishment and order fulfilment challenges.
“The warehouses and distribution centres within the supply chain network form an integral part of inventory optimisation,” says Oracle’s Andreas Brock, EMEA VCP business solution director.
And there is a case for using WMS for that purpose – to some extent. “Companies can use their warehouse management systems to identify and understand gaps between actual and optimal inventory,” says Robert. Byrne, CEO of Terra Technology.
Working the WMS
An example is e-retailer Oak Furniture Land, which says it has been expanding at an exponential rate in the past few years, and was one of the first ‘pure-play’ online retailers to start to open bricks and mortar stores.
This being the opposite route to most retail channel extensions, it presented quite the challenge for keeping track of inventory. Suddenly a vast network of stores and depots needed to be monitored and feed back inventory information. To streamline their supply chain operations in the UK it took on Snapfulfil to install its warehouse management system software.
Gavin Clark, Snapfulfil commercial director, explains: “Oak Furniture Land needed to improve their warehouse operation and went to market, looking for warehouse management system software that offered a greater level of visibility and drove efficiency within their business.
“After a relatively short implementation process, I’m pleased to say that we went live last month without a single system incident and are already planning the second implementation.”
Networks changing like this shows how the concept of multi-channel retail is putting a new pressure on systems which aim to keep track of exactly what stock is where.
WMS is certainly a valuable and perhaps vital ingredient for a proper view of inventory. But while it is often seen as a pre-requisite, it will not do everything that true inventory optimisers will.
“It is a common misconception that significant inventory optimisation can be driven by these solutions,” says Rod Daugherty of Blue Ridge.
“In fact, many companies purchase WMS with the impression that it will mean significant optimisation impact, only to find that a subsequent effort with forecasting, inventory planning, replenishment and allocation solutions is required to truly see significant results.”
Fab Brasca, vice president of global logistics at JDA says that good WMS and visibility tools are vital. “To be able to make realistic and profitable order promises to customers, businesses need to have real-time, holistic data with which to make accurate forecasts, and create plans.”
But crucially, he says, they then need to be able to put those plans into action across the entire organisation, which is where true inventory optimisation software comes in.
And this is simply not something that can be approximated says Byrne. “Stock recommendations need to be recalculated weekly to account for market volatility and SKU turnover. This calls for an automated solution – there are simply too many settings to review manually, especially with reduced headcount and cost constraints…
Data powered tools
“State-of-art inventory optimisation systems have evolved to work directly from daily forecasts, eliminating the need for approximations and assumptions, and are paired with systems like demand sensing to create and publish daily forecasts.”
And choosing the right mix of these systems is imperative. “There are lots available. Demand forecasting, inventory planning, allocation, replenishment and supply chain analytics. Manufacturing solutions don’t work for retail and distribution, and vice versa,” says Daugherty.
Dawn Kynaston, of Oliver Wight agrees, emphasising the consideration that must go into selecting the most appropriate systems in the first place.
“I feel really strongly about getting the appropriate tool at the appropriate time…. The danger is people jumping to taking on an optimiser without having the knowledge and understanding to use it properly.”
Kynaston says it’s only when an organisation can define what inventory it needs to run its business effectively and deliver its objectives, that it can take hold of the “inventory monster” and make lasting improvements.
But how does an organisation decide what the “right” level is?
There are of course a plethora of formulas and tools for deciding the optimum safety stock, mainly balancing factors such as variation of demand and supply, lead times, and the desired service level.
But Kynaston say that’s the easy bit. “Before starting down this route the business needs to step back and review the reasons it holds inventory in the first place.
“It’s all about making conscious decisions to do things, rather than making knee jerk reactions when things go wrong.”
“What levels do you want to offer your customers? And what does the industry expect? It’s what the competitor offers which often sets the tone,” says Kynaston.
Oracle’s Brock points out that the answers to these questions, and the purposes of inventory optimisation can vary, depending on the industry and the markets a company is active in.
“Depending on these factors, the inventory policy needs to be reflected in the planning system of the company. Ideally the planning suite allows for a flexible setup and reflection of these policies without the need of customisation, which is usually the case when looking at best-of-breed solutions,” says Brock.
One of the biggest drivers for change at the moment is of course online retail. And the variety of “channel” operations, and different ways of blending them will influence those key questions that define the right approach.
“In today’s omni-channel environment, demand is king, and meeting it quickly and cost-effectively is critical to business success,” says JDA’s Brasca.
Indeed, many believe that data, visibility and agile inventory are inextricably linked with the concept of e-retail.
Michael Kliger is managing director Europe and APAC, eBay Enterprise, the arm of eBay which facilitates commerce technologies, omni-channel operations and marketing drives for its global retail customers.
He says: “Data quality is vital to ensuring you have the most accurate information possible when it comes to understanding stock availability. This is the bedrock on which any e-commerce operation is based.
“Without a clear view of how many of what items you hold in inventory, you run the risk of presenting consumers with incorrect or out-of-date information, which can lead to a frustrating retail experience if it leads to orders not being able to be fulfilled.” Kliger says.
And this is the kind of pressure that is forcing retailers, as well as other businesses, to consider the real value of thinking in terms of the overall inventory flow.
“With modern supply chains looking to balance inventory across a variety of potential stockholding nodes including production sites, national/regional distribution centres, warehouse, forward stockholding locations, back of store inventory, etc it is vital that these locations provide inventory information that is accurate, granular and timely,” says Brock.
Kynaston says that in her experience it is these different entities within an organisation, and echelons or locations in the supply chain, that often present the biggest challenge for installing an effective inventory management system.
Conflicting ideas and agendas can develop within the supply lines, and any weakness in communication usually results in stockpiling on all sides to protect each unit’s respective integrity. She gives an example of a one day workshop where each business unit within a firm revealed its true position and by agreeing to a more open approach reached a reduction in stock worth some €200,000.
However, Karin Bursa, vice president of Logility, points out that reducing stock is not always the final goal. But using greater visibility and data, it should be possible to see exactly where in the supply chain stock actually is and to make strategic decisions about where it should be.
“Multi-echelon inventory optimisation goes beyond single stage optimisation (such as finished goods inventory at a single distribution centre) to look at the interdependencies of the entire supply chain to determine the optimal amount of inventory for each SKU from raw materials through work in process to finished goods,” says Bursa.
“MEIO offers a proven strategy to minimise excess inventory while maintaining or improving customer service levels. An MEIO approach enables companies to determine the appropriate inventory investment for each location—manufacturing facility, warehouse, distribution centre, etc.”
Kliger agrees, and points to omni-channel retailing as a classic example of how knowing exactly what’s in the chain is as valuable as having it on hand.
“You can make significant savings in terms of sales that might otherwise have been lost as a result of items going out of stock. You might not have any stock of a particular product in your central warehouse, for instance, but by taking an integrated, multi-channel view of your inventory you can use your physical outlets as mini, local distribution centres to fulfil orders that couldn’t otherwise have been processed,” he says.
“By incorporating other channels and stock silos into your overall inventory, you remove the need to over-stock your central warehouse,” continues Kliger. And in many ways this is the essence of multi-echelon thinking.
True omni-channel players are reaping huge rewards in their brave new world of optimum visibility and agile stock keeping. Maybe the retailers are setting the tone for inventory optimisation.
Rather than viewing inventory as a passive cost, a burden to be moved, stored and otherwise dealt with, there is a huge potential to be had from putting it to work. Beyond just reducing stock levels, there are evidently huge savings and business benefits at stake from actively getting to know your inventory, keeping track of it, and putting it to work to inform decisions eliminate inefficiency and drive sales.
CASE STUDY: Freeing up working capital
Stanley Works and Black & Decker merged in 2010 to become a global manufacturer and marketer of hardware and tools.
Prior to the merger Black & Decker initiated a global inventory management programme to help improve fill rates and customer service while freeing up working capital tied up in inventory.
This was then rolled out across the new merged firm.
The project revolved around rebalancing the supply chain and re-mixing inventory to get a better service with less capital investment.
Stanley Black & Decker looked to Logility’s Voyager Inventory Optimisation to provide the analytics, optimisation and flexibility.
With this, because inventory optimisation operates at both tactical and strategic planning levels, inventory targets can be created automatically on a weekly or monthly cycle.
Stanley Black & Decker found that previous “rule of thumb” inventory policies were disjointed.
Michael Martin manager, global supply chain strategy said: “So much of what is done without a disciplined methodology is reactive, for example, when fill rate is bad for one customer you respond by padding inventory everywhere in your supply chain and then when inventory gets out of whack you have to cut it.”
Voyager Inventory Optimisation calculates inventory targets based on the updated demand and supply information such as manufacturing and distribution footprint changes, support of minimum order quantity and lead time reduction efforts, and evaluates customer-driven changes to distribution or terms.
This has allowed the company to reduce the targeted finished goods days of stock from one of its largest manufacturing plants by 25 per cent.
It also reduced the amount of raw materials and components in the same plant by 17 per cent, with no adverse impact to service levels. Stanley Black & Decker also saw a 27 per cent decrease in finished goods inventory.
CASE STUDY: Supporting growth at World Duty Free
World Duty Free Group, the airport retailer, operates more than 500 shops across 21 countries, selling 25,000 individual items to a potential customer base of over 500 million passengers every year.
In 2012, the company generated £1.7 billion in annual sales. The rapid turnover of goods in its UK airport shops means a minimum of one, but usually up to three or four deliveries per day for most of its stores.
The one-off nature of its sales, combined with the seasonality of many goods, makes speed of order fulfilment business-critical. Consequently WDFG’s UK operation has a 12-hour lead time for Heathrow and up to 24 hours for the rest of the country.
As a bonded warehouse, there are many tax and duty free standards as well as HMRC regulations that WDFG must adhere to.
In peak weeks, 1.2 million units arrive into the central distribution centre involving 250 deliveries from 300 suppliers.
Following a series of mergers and acquisitions, WDFG ended up with a set of disparate and unconnected systems, which it says were simply not capable of supporting the business’ growth.
Paper-based systems meant that stock accuracy was estimated to be as low as 75 per cent. Picking accuracy was little better and believed to be around 80 per cent.
The HMRC penalties for stock loss at the time had reached around £500,000 per year.
So, the decision was taken to review the company’s supply chain strategy and the systems used to execute it. WDFG selected Manhattan Associates’ Warehouse Management solution for its UK operations, running on IBM’s server technology.
Within three months of the initial implementation, delivery accuracy rose from 98.5per cent to 99.5 per cent, and by the end of the first year, logistics costs were down by 10 per cent.
Within six months of the original implementation of Manhattan’s WMS, stock and picking accuracy both rose to over 99 per cent. The speed of these improvements was also borne out with an ROI for the original project in only 18 months.
The first major upgrade of the Manhattan WMS coincided with WDFG’s decision to implement Vocollect voice technology in the warehouse. The upgraded, voice-enabled version of Manhattan’s WMS, gave the CDC an overall pick rate improvement of more than 25 per cent, and up to 40 per cent for some pickers.
WDFG CDC has subsequently implemented Manhattan’s Slotting Optimisation solution to help keep fast moving products together and manage popular brands, such as cosmetics which are displayed by brand.
The introduction of Slotting Optimisation and improved stock accuracy and allowed WDFG to introduce single-picking for all product categories except tobacco, liquor and confectionery. This improved overall inventory optimisation while “stock-into-reserve” was reduced from 70 per cent to 25 per cent.
On the most recent upgrade, Dan Curran, head of supply chain at WDFG, says: “It took a while to set the rules to the optimum level, but once we got there, we saw incredible numbers on our efficiency reports.”
And there are plans to hone inventory management further. “We next want to extend the voice element of the CDC from picking into put-away and replenishment,” says Curran.
“This will create further efficiencies and will let us manage delivery loads more effectively.”
Originally printed in Logistics Manager 06/2014