Inventory Planning and Optimization

Inventory and the Middle Market

Middle Market companies often have a love/hate relationship with inventory. Inventory provides a feeling of comfort that comes from knowing when a customer places an order their company will have inventory available to fill their orders. In fact, many middle market companies value that comfort so highly that they continue to buy and make more inventory than they would reasonably need to fill customer orders. Further supporting the need for this inventory “buffer,” corporate executives in sales and operations may bristle at the mere mention of the reduction of inventory as a way to reduce operating costs. Whereas sales and operations promote maintaining high levels of inventory as “positive for client service,” corporate finance and investors see excess inventory as a working capital cost that impacts the financial performance of the company. And often, when excess inventory is maintained, a portion can go out of date or otherwise become unsaleable, which results in inventory write-offs and reduction to profits.

The optimal path forward for all parties involved in making inventory decisions is to first recognize that it is possible to increase on-time and in-full (OTIF) rate with their customers while reducing the amount of inventory they currently have in the manufacturing facilities and distribution centers.

Right Product, Right Price, Right Place, Right Time

FortéOne has worked for years to optimize inventory for middle market companies. Furthermore, we understand what it takes to balance demand and supply while improving customer OTIF rate. So we know establishing and maintaining this balance is not easy, especially for companies that are either growing, or for those with thousands of SKUs.

In our supply chain work with middle market businesses, we balance people, process, and technology to help our clients reach their optimal inventory goals while improving customer service. We accomplish this by identifying and integrating the needs of the entire company. It starts with demand planning to supply projected volumes, which feed material planning, production planning, and transportation planning. When these business functions are optimized, consistent demand-supply balancing on an ongoing basis can occur, and inventory business goals will be met. In many cases, FortéOne consultants play the role of interim inventory planner until employees can be trained or new employees are hired.

Do You Have an Inventory Problem?

If you have an inventory management problem, the symptoms are easy to identify—and they are usually chronic/recurring.

• Shipping late or incomplete customer shipments due to (lack of) inventory availability.
• Lacking enough raw material or component materials to manufacture the products that customers are buying.
• Inventory costs increase significantly over time, at a higher rate than sales, while customer order fill rate (i.e., OTIF) decreases significantly.

Because inventory issues are often complex, with symptoms masking the root causes, companies often have no idea how to correct the issue. Some companies attack problems by hiring a new person to fix the problem. While thought leadership is important when it comes to addressing the imbalance in demand and supply, rarely does a single individual have adequate experience to address all the people, processes, and technology necessary to fix the root causes of inventory planning and optimization —and keep them from reoccurring. This approach is similar to expecting a general practitioner to diagnose and treat all health-related issues. Much like a patient must see multiple specialists to address multiple ailments, inventory optimization usually requires a multi-specialist approach.

At FortéOne, we have a team of supply chain specialists who have deep knowledge and expertise on all the inventory planning functions from demand planning through transportation planning. Depending on the client needs, we may use a team of professionals with differing skills to maximize engagement success. One may have an expertise in demand and supply planning, and another could have detailed expertise in material planning and manufacturing planning. In some cases, it is appropriate to use personnel with ERP setup and configuration experience. For some of our clients, it takes a coordinated team of supply chain experts working with your personnel to diagnose and treat the symptoms of an imbalance in demand and supply. In most cases, when the solution is implemented, it pays handsome dividends in financial performance and increased client service levels.

FortéOne’s Inventory Optimization Approach

The Sales, Inventory, and Operations Planning (SIOP) process is a daily, weekly, and monthly process that balances demand and supply to meet customer expectations. This process is usually led by a sales and/or supply chain executive who works to plan and execute a planning process on a weekly and monthly basis of a 120- to 180-day planning horizon. These planning sessions build consensus across the organization and enable demand and supply balancing. In addition to the monthly executive SIOP planning session, we have seen great benefit with daily and weekly demand and supply reviews with sales and operations personnel to accommodate client needs caused by unanticipated events.

Demand Planning

It begins with understanding a company’s (i.e., their clients’) demand. FortéOne analyzes 2-3 years of detail order history to evaluate SKU-level demand patterns over time. Using a variety of visualization and quantitative modeling techniques, we use observed demand trends to determine the best forecasting method and stock-keeping level for each SKU. In many cases, the ultimate forecasting and demand is accomplished by using a company’s demand planning capabilities in their ERP solution. Most ERP solutions have multiple heuristic forecasting models to support forecasting, so it is critical to use the best fit model for each SKU’s forecast. Our analysis allows us to choose and test the most appropriate model and set appropriate accuracy metrics such as mean absolute percentage error (MAPE) to evaluate the accuracy of the forecast. New product development and launch follows a similar evaluation approach as these SKUs become available for sale. If a company does not have an ERP solution, we can develop forecasting and demand management capabilities in solutions such as Excel.

Once the statistical forecast has been created, we work with your demand planners and sales force to convert the sales forecast into a demand plan. A demand plan incorporates market intelligence, promotional activities and other demand-shaping factors along with the statistical forecast to produce a consensus demand plan. The accuracy of both the statistical forecast and demand plan is calculated and monitored to improve accuracy over time.

A by-product of our demand analysis is a preliminary SKU rationalization analysis that allows companies to review the demand for all products. Obviously, not all SKUs have the same demand. In fact, many SKUs have no recent (past 12 months) demand, yet they continue to be bought or made—and marketed—because they have historic demand. We have found it best to have our team work with sales and operations to develop a SKU rationalization approach and process that allows a company to reduce non-selling SKUs through a defined process on a regular and predictive basis.

We also work with a company’s demand planning staff to help educate and train them in better quantitative techniques. Many times, we find that no one (or everyone) attempts to quantify and understand the company’s demand, but no formal process or supporting technology is used. We play a variety of supportive roles in teaching, training, and showing individuals how to perform accurate demand planning on an ongoing basis until we can be replaced by employees.

Supply Planning

The quality of the demand signal drives how a supply is constructed and executed. For example, low SKU forecast accuracy drives the need for increased safety stock to balance supply and demand. Inventory stocking policies and stocking levels of each finished good’s SKU are the responsibility of the supply planner. If the capability exists with the company ERP system, the supply planner may use the demand resource planning functionality in the system to set inventory levels. In addition, the supply planner works with new product development and demand management to create inventory stocking policies for product introductions and ongoing inventory support.

While supply planning and execution is a separate planning process with a different skill set than demand planning, the demand and supply planning functions are performed by the same individual in many middle market companies. Conjoining these roles is possible if 1) the demand planning is highly automated, 2) there are a limited number of new SKUs added on a monthly basis, and 3) there are a limited number of suppling locations. It is best to determine the roles and responsibilities for your planners based on the characteristics of your business.

Material Planning

Like supply planning, material planning is dependent upon using the demand signal to determine what and when raw material should be bought and delivered to support the manufacturing process. Using material resource planning functionality within the company ERP system, material planners set days of supply and inventory lead times, and create purchase orders to buy the necessary raw materials on a timely basis to support the manufacturing process. Material planners also secure and vet new raw material suppliers on an ongoing basis to ensure that raw material quantities and supplies can be obtained to support the manufacturing or distribution process.

Based on key performance indicators (KPIs) or metrics, material planners, along with demand and supply planners, ensure that raw material meets quality, timeliness, and order completeness standards needed to support operations. Material planners work in conjunction with sales and operations to ensure finished product can be produced based on the jointly developed manufacturing schedule.

Manufacturing Planning

What to make, how much to make, and when to make it. In most middle market companies, manufacturing planners use master production scheduling functionality to plan and schedule the manufacturing lines or cells. The manufacturing planner uses planning logic within the ERP system, including master production scheduling, to determine demand—and to determine when individual products are produced to meet customer demand. FortéOne often assists in developing this master production planning and scheduling process.

Transportation Planning

Transportation planning manages the inbound transportation of materials to the manufacturing site and the outbound transportation of customer orders. Many middle market companies plan and manage their inbound and outbound transportation via a Transportation Management System (TMS) provided within their ERP solutions or provided to them by their outsourced logistics provider. Like other planning activities, when we work with a client, we analyze shipment and transportation data to understand the company’s transportation network. FortéOne has expertise in all types of freight including local and national trucking (FT and LTL), rail, overwater, and air freight. We are also able to optimize regional warehousing networks, which is especially important when companies merge or when client concentration shifts regionally.

With many middle market companies, we find that they buy transportation services via the transportation spot market and do not have ongoing transportation supplier contracts in place. Because freight carriers provide favorable rates to clients that are able to both predict their lane-related demand, and who can provide certain minimum guarantees, it is critical to establish transportation supplier relationships and pricing where it is appropriate. Many times, we are able to introduce a third part logistics (3PL) entity that manages all transportation transaction from tendering through freight payment and reconciliation at a lower cost than in-house management. One model does not fit all middle market companies. FortéOne works with middle market companies to optimize their inbound and outbound transportation services and costs, taking into account the many factors that are unique to each client.

Summary

Integrated enterprise inventory planning is critical to balancing supply and demand across your enterprise to meet and exceed customer expectations. Once considered important and necessary only for Fortune 500 companies, middle market companies are now asked to play an expanded planning and execution role with their suppliers and customers in order to remain market relevant. Customer expectations are no longer measured by the size of a company but rather by the quality and service they provide to the customer.

At FortéOne, we work with middle market companies to ensure they meet or exceed customer expectations with efficient and predictable internal processes. Integrated business planning from demand planning through transportation planning improves customer service, reduces the cost to serve a customer, and makes middle market companies more profitable.