Inventory Optimization Process
Only 11% of companies indicate that their inventory optimization solution fits their requirements. Balancing supply and demand is the key element of traditional S&OP. Often that has been accomplished by increases in inventory. This, of course, erodes profit margins. Companies that are evolving to Integrated Business Planning process are expecting sustainable inventory reductions in their distribution channels. They are motivated to improve return on assets to free up cash for innovation and financial stability by investing in decision-support systems that optimize inventory.

To implement integrated business planning, companies are moving beyond the traditional definitions of S&OP and incorporating new technologies to address critical business performance needs. For instance, a leading lubricant manufacturer in Europe implemented an inventory optimization solution from a best of breed solution provider as part of their overall S&OP process to address their critical need of arriving at accurate safety stock targets based on demand profiles and service level information. Their supply chain director says: “We have seen dramatic increase in our service level with significant reductions in inventory across Europe.”

In discrete manufacturing environments and distribution intensive environments, customer service results in pressure to reduce lead-times as well as out of stocks. Yet, many companies are still using weak approaches for planning customer service levels and deriving inventory targets, and are getting equally weak results. Good forecast quality is fundamental to the quality of the S&OP plan--but is not intrinsically sufficient, as inventory serves as the hedging factor to protect against uncertainty. Reduction of this hedge inventory results in reduction of working capital. Some companies are taking planning for inventory to the next level by factoring VMI strategies and planning around it in their S&OP process. This allows the consumption of inventory that is not on the balance sheet (e.g. suppliers, manufacturers, partner inventory) with reliable lead-times.

The world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines uses an inventory optimization solution to optimize its dealer and factory inventory using a multi-echelon inventory optimization solution. This tool satisfies different service levels at different nodes in the supply chain with the lowest total investment in inventory. The algorithms employed find the optimal target inventory positions, by item and location, for every period that minimizes the total inventory investment across items, locations, and time. The modeling framework allows the flexibility to include service times, lead-time variability, time-varying inputs such as capacities, forecasts, and forecast errors, different review periods, and lot-size constraints (among other capabilities). This has resulted in 16% reduction in total inventory and 20% reduction in customer lead-times. Please refer to Aberdeen Group’s research titled “Are Your Inventory Management Practices Outdated?, March 2005” for more details on Inventory Management best practices.

Supply Planning
Fully 84% of companies state that their current supply planning technologies have inadequacies. The following are some of the characteristics that Best in Class companies have identified as part of their supply planning solution capabilities. These capabilities are especially important in environments that are highly capacity and material constrained, and have complex manufacturing, distribution or transportation processes. Companies that appropriately plan:

• Consider the cost and profitability of decisions within the entire supply chain
• Identify the supply plan that is most profitable, while considering the factors of production, materials, distribution , inventory, and allocated demand
• Facilitate in-memory/in-database scenario management. Some respondents say their current solution is too complex for finalizing their supply chain constraints due to a long process that involves transferring data to offline databases and reporting
tools and processes that are not closed loop
• Provide intuitive user interfaces for end users that are business focused rather than supply chain jargon intensive

Profit-based Supply/Demand Balancing
Fully 88% of companies have indicated that their current technology solutions are unable to fulfill their requirements for profit-based supply/demand balancing. Approximately 68% of the companies surveyed indicated that supply demand balancing based on S&OP was simply not possible with the current technologies and processes that they have in place and indicated that it was a nice vision. And 9% of the companies indicate that they don’t have adequate data to support this process.