By Julie Fraser

Setting appropriate service levels is often not obvious. You need to simultaneously consider total actual costs, lead times, work load, safety stock and demand patterns. These days, computer hardware can process details as well as aggregation, which could be key to happy customers at lower cost. You can now set service levels by: broad categories of A, B and C items; specific products or SKUs; particular types of channels; or specific customer. The challenge is to find tools that can both handle that detail and provide clean summary views for management.

A variety of supply chain software vendors are assisting with tools and optimizing routines that target costs; these include Numetrix, Chesapeake, Bender Consulting and GAINSystems. Logility is taking the next step beyond available-to-promise and capable-to-promise — profitable-to-promise. This is not an obvious calculation either. Lowest total delivered cost may not come with lower inventory levels. In some cases, inventory may cost less than expediting and transportation. In others, transshipment may cost less than production changeovers. Generating a realistic view of costs requires a broad view of direct and indirect costs, spanning from supply to transportation for each trading partner, and ideally across trading partners.

Three of the major characteristics to look for in supply chain solutions are: forecast accuracy and sharing; agile planning and execution; and data visibility and feedback loops.

The trick is to identify which tools to use and how, based on the specific needs of your industry and channels.

Improved forecast accuracy and planning around known forecast error has led companies such as Mitsubishi Engine North America to achieve 100 percent fill rates on A and B items. Mitsubishi's Mike Wood reports that before installing the GAINS system, the company had a problematic service reputation and very high expediting costs from Japan.

Forecasting vendors have nearly all announced advanced and causal forecasting mechanisms for better accuracy. Search out a product that gives you visibility to the forecast error; you need it to help you set safety stock levels.

Another factor in uncertainty that forces inventory buffers comes from supply side lead time and reaction time. Advanced planning tools, which take in forecasting data as a starting point, can improve plan accuracy. In production, flow manufacturing and good finite scheduling tools can improve reliability, along with improved production and administrative processes. Manufacturing execution systems are key to effective processes and work-in-process inventory visibility.

Visibility is a key element in smoothing inventory levels. Even reasonably simple tools for smaller manufacturers provide much of this benefit, as Distinction Software is proving. Implementing forecasting, planning, EDI and inventory tracking systems is a start, but processes and trust are key. Leaders in this area are starting to share end customers' data to drive the forecasts for each partner in the supply chain.

Nabisco has improved its accuracy by using account teams that include customers and suppliers in the collaboration cycle, and providing Numetrix planning tools to share common data. Results can improve further when results from each stage feedback into other processes; this is part of the attraction of broad supply chain product suites.

Industries and specific supply chain needs must drive your choices and methods for inventory optimization. For example, VMI (vendor managed inventory) looks different in retail and industrial distributor settings. As an example, Panduit Corp., an electrical products manufacturing company, fills orders at 98 percent in 48 hours to thousands of store-level distributors. Panduit's Jim Winger reports that with very limited human interaction, their set of homegrown and GAINS systems provides VMI cost-effectively without full truck shipments, and not on a fixed schedule. In contrast, the common approach in retail is to ship full truckloads of a broad range of products to distribution centers on a regular schedule.

Systems are becoming available that improve customer service levels and total cost — which implies the ability to optimize inventories. To totally optimize inventory in a supply chain, every company in the chain must play, and today that's highly unlikely. However, those who are trusting enough to share information that's accurate, and who have implemented strong execution processes are going to become preferred partners in the leading supply chains.