Inventory Management Archives

Using Inventory Modeling to Develop a Holistic Inventory Strategy

Guest Commentary | By Vikram Srinivasan • 10/08/2015

Top supply chain officers across the industry were recently surveyed¹ on their biggest barriers to effective inventory management. Their top two responses were “Can’t Optimize Network Holistically” and “Demand Volatility”. It’s no wonder: often inventory placement decisions are made in a vacuum without considering the end-to-end supply chain impact. In addition, product demand has become more volatile and hard to predict over time. How do you predict how much inventory to build when you can’t predict the demand?

Without a way to digitally model supply chain operations and inventory policies, companies need to experiment in the real world, which is time-consuming and extremely risky. Supply chain design enables companies to create living models of the end-to-end supply chain, encompassing physical infrastructure, policies, demand and inventory. These models provide a true holistic view of all the interdependencies and trade-offs with each supply chain question and enable true data-backed decision support instead of risky and often costly real-world testing.

Considerations for Inventory Strategy Development
Influencing Factors and Interdependencies
There are many varied questions that need to be addressed as you begin to build an inventory strategy, including:

What service levels should we have?
Where should we stock our inventory?
How much do we need to stock?
Where should our stock flow through and with what production and distribution network?
How do I consider product shelf life and short product life cycles when right sizing inventory?

There are also many other aspects of stock besides safety stock that need to be considered, each interdependent and directly related to supply chain network design decisions that have already been made. It is essential to have tools that enable you to not only look at these decisions from an inventory perspective but analyze how changes in inventory effect the entire supply chain network and performance.

Understanding Demand Patterns/Variability
How well do you understand your demand? Most demand has high levels of variability and is not consistent from period to period. You need the ability to classify your demand to make high level segmented supply chain decisions to drive stocking and overall inventory strategies.

Demand Propagation and Analysis
When making inventory decisions based on demand, focusing on just one individual customer will give you a false reading of what correct aggregate demand actually is. You may have many customers with erratic demand but in aggregate you will create smooth demand that is easier to analyze. Armed with this information you can work with manufacturing to better understand how changes in production will effect inventory and service levels at each distribution center.

Building an Inventory Strategy: Where to Begin
The business problem(s) should be identified as the first step to building an inventory strategy to tackle them. Understanding demand and the root cause of inventory issues should be next, then technology assessment and finally model development and scenario analysis. Creating inventory strategy needs to be considered a continuous process and a best practice. Supply chains are dynamic. With constant changes, analyzing inventory processes in a company only every three to five years could become a huge competitive disadvantage.

Tips for Choosing Technology Partners to Support Your Inventory Strategy

There are a variety of capabilities to consider as you build your inventory strategy

Look for technologies that:

Can help you to track and predict demand
Optimize inventory across all tiers of the supply chain
Can help make decisions on when to prebuild inventory, where to hold inventory, and whether to build more capacity instead of prebuilding
Provide service level optimization and stratification to help you decide what the best levels of service are for all of your product SKUs
Include simulation to test how inventory changes affect the supply chain

By understanding your current demand levels, the root cause of inventory issues and choosing the right modeling technology, you can better position your organization to right-size inventory for continuous improvements in cost, service and risk.

¹Chief Supply Chain Officer Insights, 2011

Vikram Srinivasan is Product Manager of Inventory Optimization at LLamasoft and is primarily responsible for managing the inventory product life cycle, defining and prioritizing market requirements. Vikram’s expertise spans across Network & Inventory optimization. Prior to his Product Manager role, Vikram worked as a Senior Consultant at LLamasoft on multiple projects solving various supply chain design problems. He received his M.S in Industrial Engineering (Major: Operations Research) at The Ohio State University.

Is Supply Chain “The” Source of Greater Economic Stability?

Inventory Management | By Clint Reiser • 06/10/2015

On Saturday I engaged in a rare weekend activity for myself – I actually thought about supply chain. I thought about the transition from “push” processes to greater use of demand pull in replenishment; how retailers are sharing downstream POS data with their suppliers to develop a more efficient supply network; how multi-echelon inventory optimization is now widely adopted; and how lean manufacturing and inventory management practices have evolved. In general, I was thinking about the vast improvements in supply chain processes and technologies over the last 25 years.

The Great Moderation: Change in US GDP Source Wikipedia — The Great Moderation: Change in US GDP
Source Wikipedia

Shortly thereafter, I stumbled upon a reference to a concept that Economists refer to as The Great Moderation. The moderation refers to a major decrease in the volatility of economic growth beginning sometime in the 1980s. This concept spread to the mainstream when former Federal Reserve Chairman, Ben Bernanke, gave an often quoted speech on the subject. My recollection of the speech was that Bernanke attributed the moderation to improvements in monetary policy. But wait! I thought. I know that inventory is a volatile segment of the US economy, and production and inventory management practices made great strides at about the same time as the great moderation. We talk about the positive corporate benefits of supply chain improvements, but is it possible that this major increase in macroeconomic stability was driven not by monetary policy but by the improvements in supply chain? Or was I way off base to even consider the connection?

Well, after doing some additional research, the answers to my self-imposed questions are “Yes, partially; and No.” I re-read the transcript from the Bernanke speech and the following line is included toward the beginning of the article:

“Some economists have argued, for example, that improved management of business inventories, made possible by advances in computation and communication, has reduced the amplitude of fluctuations in inventory stocks, which in earlier decades played an important role in cyclical fluctuations.”

I like that some economists are crediting productivity (often termed “structural changes”) rather than focusing exclusively on monetary policy. What did these economists have to say? Well, in 2000 McConnell and Perez Quiros noted that the ratio of inventory to sales of durable goods has been declining steadily since the 1980s. They state the following:

”One hypothesis is that changes in inventory management, such as the use of `just-in-time’ techniques, have brought about the reduced share of durables inventory and the associated stability of aggregate output.“

In support of this hypothesis, they also referenced a concurrent increase in the proportion of PMI survey respondents ordering production materials with short lead times (15 days or less or 30 days or less).

A paper written by Peter Summers and published by the Kansas City Fed discusses the potential causes of the great moderation and analyzes data across countries. He concludes that decreases in GDP volatility exist internationally and suggests that improved monetary policy and improvements in inventory management techniques may have contributed to the Great Moderation. He supports this suggestion with a chart that shows eight major economies of the world where inventory volatility and GDP volatility show statistically significant correlation.

Inventory Volatility and GDP Volatility Source: Peter Summers, Kansas City Fed — Inventory Volatility and GDP Volatility
Source: Peter Summers, Kansas City Fed

So give yourselves credit a pat on the back. Although we at Logistics Viewpoints often write about the organizational benefits and efficiency gains from supply chain investments, it appears that your efforts are also contributing to the macroeconomic stability of nations across the globe!

ProMat 2015: There’s More Than One Way to Skin a Cat

Inventory Management | By Clint Reiser • 03/25/2015

There is more than one way to skin a cat. And the fat cat at ProMat is the high-volume of small, multi-line item orders being fulfilled by today’s distribution operations. ProMat 2015 has 808 exhibitors (and 35,000 attendees), so It’s difficult to boil down such a large and diverse set of offerings to one concept, but the changing fulfillment requirements driven by e-commerce is the closest thing to it. The warehouse automation and software vendors at ProMat address these requirements from many different angles, as distinct fulfillment requirements are best addressed by different technologies and approaches. Providers are highlighting the adaptability, flexibility, and cost-effectiveness of their solutions. This is in contrast to the heightened focus that was placed on throughput in the past. Clearly efficiencies and throughput are objectives, but they are being attained through different approaches.

Warehouse Automation Equipment
Shuttle systems are a cornerstone technology for high-volume e-commerce fulfillment operations. Dematic is demonstrating its Multishuttle, Swisslog is showing its AutoStore, and Intelligrated introduced its new OLS shuttle. The OLS shuttle, like Dematic’s Multishuttle Flex, can change width to accept multiple load sizes, providing enhanced fulfillment flexibility.

Wynright, Dematic, and others are demonstrating robotics applications. Wynright is showing its new trailer loader/unloader, while Dematic is showing the application of robotics to split case picking. There is currently moderate use of robotic arms in distribution operations. However, these examples are novel applications of robotic arms in the warehouse.

There were conveyor or sortation systems displayed at many booths, but they were mostly of secondary focus. However, some vendors highlighted new approaches and alternative value propositions. For example, Intelligrated is displaying its Dynamic Discharge Compensation system that coordinates the discharge of packages from different lines to increase fulfillment accuracy. And Wynright is promoting its AutoRoll+ Greenline conveyor that only runs its motors when packages enter the zone, providing safety and energy efficiency enhancements.

Warehouse Software Systems
It looks like the Warehouse Execution Systems (WES) term is starting to catch-on. Intelligrated discussed its software offering, consisting of WMS, WCS, and other functionality, and applied the WES term to this integrated solution set. Easy integration and holistic process optimization are the primary value drivers of such a system. Dematic placed focus on its software solutions and emphasized the performance improvements that software intelligence can deliver through real-time adaptations to operational requirements such as last minute order changes.

The performance improvements enabled by software in manual operations were also emphasized. Manhattan Associates is demonstrating its new Mobile Distribution Management solution that combines information and processes from WMS and labor management. The mobile application is geared toward supervisors and includes a graphical user interface that provides real-time insights into the status of tasks, waves, and labor performance, and also allows the user to take action against tasks while on the warehouse floor. Meanhwile, HighJump is emphasizing its Retail Advantage solution that enables efficient in-store fulfillment of e-commerce orders.

In general, the conference exhibitors that provide solutions supporting e-commerce fulfillment are upbeat and many have stated or implied that their revenues are growing at double-digit rates. It appears to be a good time to be a supplier to distribution operations. As I stated in a previous post, I wish I had the foresight to invest in these companies years ago.

Is Your Supply Chain Weatherproof?

Inventory Management | By Clint Reiser • 02/11/2015

Individuals living in the higher latitudes will tell you that ice dams on your roof are an omen of bad things to come. I learned this first-hand last week after record snowfall in the Boston area. To minimize future damage, I set out to purchase a roof rake to clear the snow off of my roof. I drove to one big-box home improvement store – out of stock. I called the major competitor -also out of stock. As a long shot, I decided to call the small TrueValue Hardware store down the street. They had plenty of roof rakes in stock, with a number of models to choose from.

This personal experience motivated me to discuss weather’s effect on supply chains and the methodologies employed to manage the variability, disruptions, and uncertainty associated with weather events. How are supply chains currently planning for and adjusting to weather events, and how do their processes differ from one another? Was TrueValue just lucky in this event? Maybe they tend to overstock all items? Or maybe they planned better than their competitors?

Planning for Weather Events
I view planning for weather events as something that can be done fairly well for the long-term (season to season) or for the short term (7-10 days), but not so well between those time horizons. The company Planalytics provides functionality that focuses almost exclusively on weather related analytics and other capabilities to manage weather’s business effects. Steve previously wrote about Nestle’s use of Planalytics for weather-driven demand planning, noting that past weather events and their effects are embedded in sales history that is then used for forecasting. It is important in forecasting to identify and remove these effects to correct for past anomalies, then explicitly add back inventory expectations related to weather. Forecasting product demand stemming from discrete, infrequent weather events is a probability related exercise that is likely to result in a regional inventory decision, rather than for a specific site or location. Therefore, depending on the specific case, it is likely that a probability forecasting algorithm similar to those used by spare parts inventory optimization would effectively support such planning.

Mid-term weather forecasting still appears to be the “wild-west” of meteorology. But I did recently came across a company with a website (http://www.weatherplanner.com) that provides “interval forecasts” for as long as one year in advance. I am unsure of their record of accuracy but I plan to test it over the next couple months. But assuming variation from one winter (or hurricane season) to the next is essentially random, the challenge then falls to adaptation at an operational level.

Operationally Adapting to Weather Events
Demand sensing applications are used for refining replenishment plans by leveraging POS data as it becomes available. Traditional demand sensing may be beneficial to updating replenishment plans for ongoing weather trends like the one we are experiencing in Boston, but it’s not likely to be beneficial to isolated, short-term weather events. These situation require accurate and comprehensive inventory visibility across the network, and adaptability to allocate inventory to appropriate nodes in the supply chain. However, this needs to be done in an environment where the weather is also causing transportation delays and capacity constraints. As Mark Derks noted in his post on the subject, these weather events can greatly increase the cost of shipping due to tight lead times, routing guide substitution, and accessorial charges. These cost increases can be mitigated by analyzing your transportation network and developing a plan to leverage available resources.

There is also some interesting development in routing applications worth noting. Steve previously discussed the application developed by Quintiq that uses past demand and delivery routes as a framework for future demand, then adapts this framework with real orders as they occur and runs an optimization algorithm to route the deliveries efficiently. One of the core benefits of this methodology is that the plan-to-actual variance provides a cost-to-serve estimate that can be used to evaluate the cost-benefit trade-off for demand opportunities. I believe a similar methodology would be beneficial to regional fulfillment of inventory driven by discrete weather events.

Another example of sophisticated routing that is currently used by select carriers is the Esri GIS solution. Steve and I were briefed on its use in transportation. The Esri GIS solution allows carriers to overlay their routing with maps, routes, traffic patterns, and weather events. This allows users to determine and forecast delays on various routes, determine alternate routes, and compare the impact of various alternatives. This differs from hub and spoke models because the distances and times are more accurate, and it is also more sophisticated in its ability to select a given geographical region, and apply a multi-factor analysis to the region. These factors can include weather, altitude, as well as slope and grade.

Forecasting Black Swan Events?
During lunch today, I went out to purchase another snow rake (my parents borrowed mine). This time TrueValue was out of rakes. I also checked ACE Hardware, and they were all sold out as well. I went to the Planalytics website earlier in the week to view the case study videos as Steve suggested in his post from a number of years ago. Interestingly, ACE Hardware is a Planalytics user and they have a video presentation on the site. It looks like proper weather planning wasn’t enough to meet the uncharacteristic demand from the recent storms. This leads me to the distinction between variability and uncertainty. Some events, termed “black swan” events in the economics trade, are so rare they often not worth planning for. I guess that’s when insurance comes into play.

Stay warm and well.

Warehouse Automation Makes e-Commerce Viable

Inventory Management | By Clint Reiser • 01/21/2015

In 2012, Amazon spent $775 million to acquire Kiva Systems, a distribution center robotics developer with about $100 million in revenues. Yes, that is a valuation multiple of seven times revenues. This is the most succinct way I can express the importance of warehouse automation to the e-commerce channel.

ARC is currently producing a market outlook study on the global warehouse automation & control market. This research project evolved from our interest in the evolution and ongoing convergence of the WMS, WCS, and warehouse automation markets. The research process includes the analysis of large amounts of information and interviews with executives from numerous warehouse automation and control system providers; and the process concludes with the publication of ARC’s Warehouse Automation & Control Global Market Research Study.

If this research process has confirmed one thing, it is that the growth of e-commerce is propelling no market more than it is boosting the business of warehouse automation and control system providers. E-commerce has placed extraordinary strain on fulfillment operations. The larger number of smaller orders has increased warehouse activity levels, labor costs, and complexity overall. What used to be pallet orders are now cases, and what was a case order is now a piece pick. Operations with low to medium complexity or volumes continue to use various levels of manual processes. However, those operations with increasing throughput requirements are stepping up technology investments to manage the increased volume and complexity. Some of the key technologies are pick and put-to-light to increase efficiency of labor when managing multiple line item orders, and mini load AS/RS to handle moderate sized loads, shuttle technology to handle smaller loads, and other goods to man automation to facilitate the organization and movement of these order items. However, e-commerce isn’t just increasing demand from retailers. Parcel carriers and 3PLs are also investing in warehouse automation to adapt to the increased volumes and changing requirements driven by e-commerce. Parcel carriers are experiencing increased shipment volumes from e-commerce orders, and they’re also witnessing increased returns processing exacerbated by flexible (free) return policies offered by retailers.

The changing order profile from e-commerce is also “backfilling” to increase demand for other warehouse automation technologies. For example, the ideal profile and geographic location of warehouses is changing from large DCs in rural areas to smaller DCs closer to urban centers. This progression increases the cost per square foot, making high-bay warehouses with stacker cranes more economically feasible and cost justifiable. In addition, the shipping of mixed pallets is becoming more common, increasing the value of technology that facilitates this process. For example, packaging and palletizing optimization software is being applied to efficiently manage these types of processes. Also, many warehouses manage both traditional store replenishment and e-commerce order fulfillment. Many of these facilities are looking to automate their store replenishment processes along with e-commerce fulfillment. Finally, companies are getting innovative with the use of garment on hanger technology to sort a wide variety of items beyond the standard garment profile.

I find the progression and application of technology in the today’s warehouse to be fascinating, impressive, and exciting. Technology in this industry continues to progress to meet the market’s changing demands. And my discussions with automation and control vendors indicate that they are diligently developing their technology to meet these demands and to deliver capital investments with even greater returns.

ARC is conducting a Warehouse Performance Improvement survey. Every valid respondent will get a detailed Strategic Report that explains the findings. Click Here to take the survey

“We Want Our CEO Back!” – A New Supply Chain Disruption

Food & Beverage Industry | By Chris Cunnane • 07/23/2014

Supply chain disruptions are not a new thing. I’ve written about them quite a bit this year, whether they were due to bad weather, political unrest, driver shortages, or faulty equipment. And we’ve certainly seen supply chain disruptions due to employee strikes or walk-outs. These incidents are usually due to what employees feel are unfair wages, benefits, or working conditions. Well Demoulas Market Basket has a new one: they want their CEO back.

Demoulas Super Markets, Inc, which uses the trade name Market Basket, is a chain of 71 supermarkets in New Hampshire, Massachusetts and Maine in the United States, with its corporate headquarters located in Tewksbury, MA. Market Basket is well known as a low price grocer, with a diehard following, and incredibly busy weekends. In 2008, Arthur T. Demoulas, CEO and grandson of Market Basket’s founders, was elected as President of the company by the board of directors. It’s been a rocky ride, and he nearly lost his position in 2013. About a month ago, Arthur T. Demoulas and two top executives were fired by the board of directors. Two consultants have since been brought on board to run the company.

Market Basket employees were not happy with this decision. Employees demanded that Demoulas be re-instated as CEO, and threatened a walkout and strike if their demands were not met. When they didn’t hear an answer by the middle of last week, they issued an ultimatum to the board, saying they needed an answer by 4:30 p.m. The answer (which would allow some employees to meet and speak with the board) was not satisfactory, so a walkout ensued.

Employees held a rally at the Tewksbury headquarters and warehouse, essentially deciding not to work. With the warehouse not operating, trucks could not be loaded or unloaded, and deliveries could not be made. All of this meant a complete halt to shipping receiving store inventory. The halting of inventory has brought the company to a standstill, and has left store shelves empty. This is certainly one way to get management’s attention. Individual stores have also joined in the protest, either by striking and not stocking shelves, or by blocking outside carriers to make deliveries. The produce, meat, and dairy cases in stores are completely devoid of merchandise. As far as supply chain disruptions go, this one has no end in sight, and a stalemate is expected from both sides.

And customers are taking notice (and taking to Twitter). Social media has seen a slew of posts and pictures detailing the lack of inventory availability at stores. And this is becoming a big issue as well. Most Market Basket customers are loyal to the store. However, if they can’t get the products they need, they will shop somewhere else. It is going to be interesting to see how this all plays out, and when trucks will begin to make deliveries and store shelves will be stocked again. If the days turn into weeks, Market Basket will have to make a big move. It’s just a question of what that move will be.

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