Inventory optimization can increase your
profitability
(Source www.ibs.net)
(Source www.ibs.net)
One of the largest capital expenses for many distributors
and wholesalers is stock. Finding the balance between ensuring products are
available when customers need them and not holding too much, is business
critical. However, most companies make these decisions without looking at the
full picture. The critical point is accuracy. In order to get accurate
forecasting the statistical forecast figures have to be based on requested
demand rather than delivery statistics. In addition, casual factors such as events
and promotions, as well as collaborative input from the organization and
trading partners have to be included or considered. An inventory optimization
system is designed to help companies increase accuracy and overcome these
issues in order to enhance customer service and lower operational costs.
What is inventory optimization?
The core objective of a good inventory management system
is to provide the best possible customer service within the restraint of the
lowest practical inventory costs. Good service is the result of ordering the
right items and quantities of stock at the right time. Inventory optimization
tools help companies make reliable decisions on product replenishment. Making
these correct decisions quickly improves efficiency and profitability by
improving the forecasting of future demand and through more economic stock
holding. Reducing the volume of stock held at any given time has a massive
impact on the capital outlay an organization has to make. However, this has to
be balanced with the need to maintain customer satisfaction through stock
availability.
Many companies are faced with a tug of war between the
CEO’s desire for improved profitability; the sales team’s demand for more of
everything in order to improve customer service and the CFO’s demand for lower
inventory costs. It’s generally hard work for a purchase department to fulfill
such demands.
The physical distribution network is the basis for an
effective inventory and supply chain management solution. An efficient
inventory management system requires a multi-level distribution network for
each product. This covers where the product is stored, either at an external
supplier or within internal production or warehouse locations. Replenishment
recommendations created by inventory optimization software can help companies decide when to buy, produce
or ship goods between warehouses, thereby optimizing the total inventory
situation.
Most distributors and wholesalers have fast moving
products that need to be available all the time. However, there may be some
specific products that are required much more rarely. They may be expensive but
if the customer asks for them and they are not available, they aren’t going to
wait. A dedicated solution for optimizing inventory helps ensure the right
products are available when and where they are needed.
In addition, by automating many of the procedures
required for effective inventory management, the people who deal with
purchasing can concentrate on more profitable items.
Demand planning
In order to achieve inventory optimization, companies
need to ensure they can provide accurate Demand Forecasting. There are two
principles of forecasting that companies can carry out to achieve this. Statistical
forecasting provides an accurate report on previous selling volumes and
patterns. While this is useful information, it cannot deliver true inventory
optimization because very few supply chains are consistent year on year and
this leads to inaccurate forecasting data. For example, for many consumer
electronics products, the life cycle is only a few months. This does not lend
itself to accurate year on year statistical analysis.
In combination with statistical forecasting inventory
management software from IBS offers advance demand planning
capabilities, allowing the flexibility to enter many more variables to add
greater accuracy to the forecasting process. It allows companies to enter
details of sales demands, marketing budgets and campaigns, geographic trends
and other key information that demand planning uses to generate detailed
forecasting reports. The system can also bring in statistical data and, through
an advanced and intuitive graphical user interface, allows users to work with
data either at a very high level for a broad, strategic view of the business,
or at a lower detailed level to establish specific tactics, such
as defining promotion forecasts for a certain product or product group.
Implementing inventory optimization generates several
options for forecasting demand with greater accuracy. It creates an automatic
analysis of the demand history for each product as well as pinpointing
slow-moving products. It can use this information to combine with customers’
own forecasts to create an Efficient Consumer Response (ECR) solution as a
basis for future demand forecasting.
Several different forecasting methods can be applied
separately to item segments, to suit differing demand patterns. Inventory
optimization can also keep track of demand figures for each customer and
calculate demand data on items, warehouses and time periods. With the right
system and setup in place, these demand plans can be performed automatically to
become a key component in the on-going business plan.
Managing the business
For many years, software companies have enabled
businesses to manage and control their operations at a much higher level. The
reality of this is that their ability to carry out repeatable processes is much
more effective and supply chains have adapted to meet these improvements. A
company that, five years ago, delivered to customers on a weekly or monthly
basis, is now able to manage that relationship at a micro-level depending on
specific requirements, such as the need many wholesalers have to deliver to customers
daily or more.
In order to remain competitive, many companies are
expected to provide higher service levels, executing higher numbers of
individual transactions with customers on a higher level of frequency. However,
the flip side is that often the volume of actual business is not increasing and
more frequently the actual real value of the business is decreasing due to
continuous pressure on prices. This results in continued pressure on the bottom
line margin.
In order to meet these exacting demands, companies are
being forced, more than ever, to look at their supply chain operations and processes
to identify how they can reduce the overall cost per
transaction to its lowest level in order to maintain profitability. Companies
need to increase collaboration with trading partners within the supply chain in
order to reduce the overall cost per transaction. Many internal costs cannot be
reduced without tight collaboration with trading partners; this is where most
money can be saved.
Once again, this is evidence of the way that effective IT
systems both forces cultural change on a company and can be used to assist that
change. The use of IT to provide Business Process Automation is helping to
reduce operational transaction costs and maximize efficiency as well as
providing the ability to monitor all aspects of the business and supply chain
performance. This impacts the business in many positive ways, but it means the
organization has to adapt not only its culture, but also its understanding of
the business processes across the supply chain in order to fully realize the
benefits.
Accurate replenishment
The expected demand, inventory storage method, existing
stock levels and the physical supply network form calculable situations whereby
replenishment suggestions can be made by an inventory control system. These
suggestions are available online for evaluation and can be integrated directly
into the core ERP system to enable automatic entry onto purchase orders.
Accuracy is one of the most critical factors when it
comes to inventory control. For example, faulty lead-time figures in inventory
calculations have a direct and negative impact on subsequent calculations. To
assure accuracy and to measure current performance, inventory optimization
provides multiple methods for analyzing current performance. These cover the
volume and value of stock, seasonal trends, excess, lead-time analysis, demand
variation analysis and automatic user-defined purchasing suggestions.
It is also important to have a fully integrated system
that captures true demands and requests instead of simply uploading delivery
statistics from the ERP system. The system needs to be ‘clever’ enough to know
that if a customer is asking for a blue pen from one
warehouse but, because these are unavailable they receive a red pen from
another warehouse, the demand figures should show the original request,
particularly as this is what the customer will probably ask for next time.
Handling customer requests and returns
In highly competitive distribution industries, service is
often a crucial differentiator. Companies need tools that support
decision-making and provide more flexibility to help face business challenges.
They also need to respond effectively to requests to suppliers for rebates, as
well as handling incoming customer returns.
When a product is returned, there are a number of
variables associated with it. Was it delivered in error? If so, it probably
needs to be returned to stock. Was it a damaged or poor quality product? If so,
it will need to be returned to the supplier and a request for reimbursement
created. These are processes that can be automated as part of an inventory
optimization system.
There are some issues, such as batch recalls, that need
to be carried out as quickly and efficiently as possible. To handle these
effectively requires software that can track particular batches and ensure they
are collected for return to manufacturers or suppliers. Quality control can be
carried out on the stock returned by customers and these results can be
reflected in the request, regardless of whether or not there are any faulty
items.
Conclusion
Companies that will be successful in the long run are
those that realize the answer lies in maximizing supply chain efficiency. This
means exploiting integrated applications that increase automation and
collaboration throughout their businesses, allowing them to meet customer
demands faster and more accurately, generating greater competitiveness and
profitability.
Case study - 25% stock reduction at Swiss pharmaceutical
wholesaler Galexis
Swiss pharmaceutical wholesaler Galexis AG has
significantly improved its stock management and replenishment with an inventory
management system from IBS. Galexis has achieved tangible cost savings in
procurement and goods reception, and has also been able to reduce its stock
levels while maintaining a high availability rate. The optimization of Galexis’
processes was made possible by continuously monitoring and adapting the
potential of the standard inventory management software on the basis of
business experience and the sales development of the products. As well as the
core modules, which form part of the comprehensive solution implemented at
Galexis, the Swiss wholesaler also relies on the industry-specific software IBS
Pharma to cover all its supply chain processes in pharmaceutical wholesale,
from order processing to delivering products to pharmacies.
“The goals we set for ourselves were sustainable and
reasonable stock reduction and increased automation of the replenishment
processes,” says Niklaus Sägesser, procurement manager at Galexis and
responsible for the optimization project. “These goals have been reached
dead-on: Meanwhile all of the 40,000 items stocked in the three distribution
centers have been integrated into the new system and a warehouse concept based
on optimum stock levels has replaced the one based on minimum stock levels. As
a result we have reduced stock levels by 25% and increased stock turnover from
12 to 17 times for common products and even up to 22 times for specialty Pharma
products – without influencing availability which has always been considerably
high. The proportion of fully automated procurement has risen from 38% to a
current 50%.”
Joint project
IBS and Galexis set up a precise roadmap for optimizing
procurement planning, which was rapidly and successfully implemented at Galexis
distribution centers at Bern-Schönbühl, Zürich-Schlieren and Lausanne-Ecublens.
At the center of this inventory control software is a matrix with a volume
value code, which quantifies the revenue ratio of each product based on
traditional ABC classification. It also contains a movability code, which defines the
throughput time from slow-movers to non-movers.
This provides a stable basis for a sophisticated solution
that can cope with the various parameters for each stock item. For example, to
lower stock levels for some segments and to minimize procurement and reception
processes for others. This two-dimensional matrix provides an accurate
segmentation of the 40,000 stock items and supports accurate purchasing
suggestions, which improves inventory availability and reduces the time and
effort required for effective procurement. The potential for increased efficiency,
speed and profitability became evident after a very short time across all three
distribution centers. “In the reception area, too, the reduction of reception
lines by 20% will lead to a tangible increase of efficiencies,” adds Sägesser.
Increased efficiency through automation
A purchase suggestion generated automatically by the
system, based on past orders as well as current and future stock data, is much
more efficient, accurate and cost-effective than a manual suggestion. Galexis
defines a purchase suggestion as “automatic” when the quantity suggested by the
system is transferred to a purchase order without further review. In the
optimization process the automation rate has been increased from 38% to 50%.
In addition, seasonal profile control and trend analyses
are planned to refine forecasts and hence to improve the quality of purchase
suggestions. Further aspects concerning product life cycles will also play a
more important role in the calculations.
Convincing results
Investment in the optimization of existing standard
solutions has been a real success for Galexis in many ways. For a comparatively
small effort, Galexis now has a purpose-specific control instrument, which
significantly improves critical processes in stock and procurement management.
The solution also comprises tools that verify which items
have been ordered according to the system’s suggestions. This allows Galexis to
quantify the automation rate in processing purchase suggestions, and give
procurement planners a reliable tool to check the relationship between system
parameterization and procurement behavior.
