By Larry Peckham
President, LPA Software

This twin squeeze on inventory — keep less on hand to lower costs while responding to option-laden customer demand in a matter of hours or days — has led to an explosion of new requirements and capabilities in the supply chain systems that support the inventory management field.

Manufacturers are now using a new breed of information systems to rapidly forecast, plan and allocate materials across worldwide supply chains to balance inventory cost and service levels so they can satisfy their customers while maintaining profitability.

In so doing, they are breaking new ground in such areas as:

• Linking finished goods
• Aftermarket upgrades and service parts into a single planning stream
• Flexibly managing inventory for substitution of components during the product lifecycle
• Using new forecasting methodologies not exclusively dependent on historical demand patterns; applying "consensus" forecasting to integrate demand plans from sales, marketing and manufacturing; and using "reverse" logistics to factor returns into the inventory equation
• Analyzing and purging excess inventory.

And they are getting results.

APICS-certified planners at Nordson Corp. increased annual inventory turns from four to 12, returning $2.5 million to the bottom line in the first year alone. Six months after implementing a new system, AlliedSignal has substantially reduced active inventory while simultaneously realizing significant increases in fill rates, leading to better customer service. Cisco Systems has kept its inventory flat across 8,500 part numbers while growing at 80 percent a year. Xerox has increased service levels and reduced inventory while handling 200,000 to 300,000 transactions daily across 74 countries.

Using supply chain planning systems to support inventory management, planners are working at single, integrated desktop screens to view and manipulate the myriad elements of their inventory strategy, enhancing their own role and the status of the inventory management function as they enable their corporations to deliver highly configurable parts on time without excessive inventory.


Planning at the component level
A key element of these new systems is their ability to plan at the component level. This is especially critical in complex products — within industries such as high technology, aerospace, automotive, medical and scientific equipment, industrial products, and utilities — where individual and cumulative lead times for the multiple, often outsourced components that constitute a product or replacement part routinely sabotage the delivery schedule for the finished good.

Some manufacturers quote two-day ship dates to customers for products whose inner components are available in a variety of optional configurations and carry lead times of many weeks. These companies must be able to set target levels for their goods and then use information technology to "march down" the product bill so they can reconcile demand and supply at the lowest common component level to drive their inventory purchasing and material allocation decisions.

Another layer of complexity is added to complex products by virtue of the fact that one part is often substituted for another during the product lifecycle, effectively creating multiple "sub-product" lifecycles during the life of the original good. Modern supply chain planning systems are now providing inventory planners with the capability to handle this "supercession" or "chaining" requirement to manage the substitution/lifecycle curve and minimize obsolescence of replaced parts.

Where there is potential for obsolescence, some systems now let users compare inventory vs. preset thresholds to determine the amount of excess, recommend solutions — such as transshipment to underserved locations — and analyze supply and demand to anticipate where excess is likely to emerge in the future.

Repairable parts — from partial breakdowns, lease returns or customers upgrading to newer versions of a product — are also being linked into the inventory management scheme via "reverse" logistics, providing a source of reusable components (sometimes as much as 10 percent of required inventory) that can be netted out against demand and available supply.


Planning is the key
The increasing complexity of inventory management points squarely toward enhanced planning as the vehicle that will enable the corporation to maintain its assets in the most flexible state, postponing manufacturing as long as possible and then taking a product "shell" and populating it quickly and flexibly to respond rapidly to the customer requirement.

The current emphasis on scheduling and optimization is all well and good — even overdue — and a proper complement to good planning. But the fact is, if you promise delivery in two days for something that is built from individual components that have 16-week lead times, all the short-horizon scheduling and optimization tools in the world won't enable you to get that good out the door if you haven't planned properly at the item level to ensure that the components you need are in stock.

Part of that good planning involves forecasting demand. Here, supply chain planning systems are letting users do things such as forecast where there is no previous history — using leading indicators such as continuity or lifecycle curve — as well as applying "consensus" forecasting techniques, where demand is projected by sales, marketing and operations. The views are then blended and displayed graphically to assist the organization in creating its forecast.

These forecasts — along with demand history, bills of material, configuration data, and on-hand, in-transit and confirmed-order inventory balances from inventory control and warehouse management systems — are then fed into the supply chain planning systems, which output proposed orders, order changes and material move recommendations.

All this information is now available to planners on a single screen, allowing them to manage huge databases. These integrated workspaces will include information such as item and part data, option and kit bills of material, forecasts, replenishment orders, demand history, inventory (including projected returns and repairs), level of service and material moves along with the ability to drill down quickly for additional detail.

Coming next will be Internet- and intranet-enabled supply chain planning for inventory management, where individuals outside the planning function — even outside the enterprise — will use browser-based technology to run queries on inventory balances and revenue projections. Sales people will push their forecasts to the planning organization through a Web interface and, ultimately, customers and suppliers will collaborate online around a mutually beneficial inventory management strategy.


Inventory management comes of age
The information and tools provided by supply chain planning systems are allowing planners responsible for inventory management to work at their screens as if they were cockpit displays, providing a comprehensive, integrated view into demand and supply.

These systems are also doing much of the work, running automatically for large numbers of inventory items — Xerox has automated 60 percent of its inventory planning decisions for spare parts — and alerting planners to exceptions that require attention through postings in a work queue.

This eliminates the drudgery of data collection and routine processing, freeing up planners to perform more value-added tasks in the area of inventory management. For example, planners are running simulations of varying levels of customer service, comparing the financial investment in inventory that is required to provide each level of service.

These and other simulations let corporate executives set revenue targets and then push those numbers down all the way to the item level so the company can map inventory requirements against projected targets and produce investment-oriented inventory analysis.

This ability to model scenarios to find the inventory management strategy that best serves the corporation, along with the financial implications of that strategy, positions planners with responsibility for inventory management as critical "business analysts" with a major impact on corporate performance. All in all, it's an exciting time in inventory management, with incredible opportunities for breakthrough contributions to corporate strategy and profitability.

Copyright © 2020 by APICS — The Educational Society for Resource Management. All rights reserved.

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