| Optimising replenishment means making sure that the | | | | changes throughout your supply chain to allow you to |
| relationship with your suppliers is as efficient as | | | | react quickly to changes. |
| possible. This allows you to decrease lead times, | | | | With these functions in mind, it's obvious that it can |
| lower prices and get better service levels. | | | | be very costly to have high service levels on all |
| Replenishment is an important aspect of supplier | | | | items. You need a system that allows you to ensure |
| relationship management (SRM). The goal of SRM is | | | | that you have different service levels on different |
| to streamline and make the processes between an | | | | items/warehouses. |
| organisation and its suppliers more effective. It | | | | Many inventory models prescribe a flat percentage as |
| enables effective communication between the | | | | safety stock for virtually all products. This model is |
| different parties, who may use quite different | | | | fine when you only have a limited number of |
| business practices and terminology. As a result, SRM | | | | products with little-to-no variance in demand. But such |
| is designed to increase the efficiency of processes | | | | models, as simply stated, are too simple to give a |
| associated with acquiring goods and services, | | | | serious return on investment. The 'simple' approach |
| managing inventory and processing materials. | | | | breaks down when the variation in demand is high. |
| The relationship with suppliers, as far as inventory is | | | | These situations require more advanced supply chain |
| concerned, has four main issues: safety stock levels; | | | | management techniques, supported by advanced |
| service levels; economic order quantity; and supply | | | | inventory management functionality, that will tell you |
| chain visibility and management. | | | | where the issues and problems are now. Working |
| Safety stock is the level of inventory you need to | | | | under the 'management by exception' concept, you |
| have in place to cover all contingencies. You calculate | | | | let the system do 80-90 per cent of the mundane |
| that level based on the changes in demand for | | | | work automatically. It points you to where you |
| individual products, applicable lead-times and the | | | | should apply your expertise to make a difference, |
| desired service levels for those products. The results | | | | where there is a problem or an 'exception'. |
| are constantly and automatically adjusted as | | | | There are a number of issues with replenishment |
| circumstances change and exception reports are | | | | that add to the complexity. You need to consider the |
| produced when outside the normal variances. | | | | forecast, the cost of placing and shipping each |
| Service levels are set according to product | | | | purchase order, the bundled capital in stock, and the |
| profitability, total revenue, the number of sales, and | | | | discount that we can receive by buying large |
| the quantity of sales. These factors vary by territory | | | | volumes. And if you have several warehouses, you |
| or region, as well as by specific products for key | | | | have to decide how to work with replenishment. It's |
| customers. All information is automatically updated by | | | | also very important to be able to do planning and |
| a system that is constantly checking for changes and | | | | forecasting on a multi-company level. By doing |
| adjusting for thousands of products. You need to | | | | aggregated forecasting, you can get much better |
| allow for differences throughout your supply chain | | | | agreements with your suppliers. |
| based on strategic decision-making. Service level | | | | By monitoring and adjusting your inventory |
| reports should alert you when changes in your supply | | | | replenishment processes across the entire supply |
| chain's demand or supply affect other areas. | | | | chain - ensuring that the right products are at the |
| Economic order quantity (EOQ) is a calculation that | | | | right place at the right time and, importantly, in the |
| lets you know the best quantity of a product to | | | | right quantities and at the right price - you have |
| order so that you can minimise the total variable | | | | achieved what you set out to do with inventory |
| costs involved in ordering and holding that product in | | | | optimisation. |
| inventory. EOQ calculations give you an automatic | | | | You have analysed performance, categorised your |
| ability to maximise line buy discounts with the right | | | | products, calculated forecasts, and now you've |
| products, exception reports that warn you of | | | | streamlined your replenishment system. Service levels |
| changes in demand or supply throughout your supply | | | | have increased to their best possible levels. Costs are |
| chain and provide you with the tools to react quickly. | | | | minimised to as low as they can go. Capital is not tied |
| Supply chain visibility is vital in inventory management. | | | | up in dead inventory and can be used more |
| You need to be able see your entire supply chain | | | | effectively and efficiently elsewhere in the |
| from the manufacturing end to the final consumer. If | | | | organisation. The various management requirements, |
| there are any problems, such as one component is | | | | whether from finance, sales and marketing, or CEO |
| late in arriving or there is a change in consumer | | | | level, have been fulfilled, frustration is low, and |
| demand, you can react and adjust your processes | | | | satisfaction is high. |
| accordingly. This allows you to service customers in a | | | | So you can sit back and relax, right? |
| priority sequence that you decide upon. You can set | | | | Wrong. Inventory optimisation is a continual process. |
| service levels based on sound financial judgment, and | | | | Demand never stagnates at a particular level - there |
| invest in the inventory that will maximise your | | | | are new products to consider, new technologies with |
| returns. You can also analyse and react to | | | | new demands, and tastes that inevitably change, not |
| exceptions, and reduce dead inventory. | | | | least thanks to the efforts of your sales and |
| Implementing an inventory optimisation solution that | | | | marketing people. But you will find that your |
| covers these functions will result in reduced working | | | | inventory system is now able to cope with such |
| capital and increased customer service. It can also | | | | changes more effectively and more efficiently than |
| result in reduced transaction costs because a lot of | | | | ever before, and will continue to do so as long as |
| the processes can be fully automated. At the same | | | | you maintain its operations, and be alert to the |
| time, it gives more time to spend on those | | | | changes you will need to implement to ensure that |
| transactions and items that are most important for | | | | the inventory process is continually optimised. |
| the business. | | | | This completes the discussion of the five steps |
| In summary, then, to do all this accurately and | | | | involved in inventory optimisation. But the story |
| quickly, particularly with a large number of products, | | | | doesn't end there. Read on for information on real |
| you will need a system that will do a range of tasks. | | | | world examples of organisations that have put this |
| These include: create forecasts; calculate proper | | | | system into practice. And find out how inventory |
| safety stock levels; determine EOQ; determine best | | | | optimisation is a whole-of-organisation issue - beyond |
| discount quantities; automatically get the right | | | | the warehouse, beyond the logistics department, |
| products to maximise line buy minimums; produce | | | | right up to the boardroom and down to the factory |
| exception reports for review; auto-adjust for | | | | floor. Our addendum document, "Inventory |
| variances; and provide you with complete visibility of | | | | Optimisation in the Real World", outlines these issues. |