Inventory Optimization in the Digital Age

Stephen DeAngelis

June 3, 2015

Mae West reportedly stated, “Too much of a good thing can be wonderful.” While that may apply to some areas of your personal life, it certainly doesn’t apply to business inventory. Having too much inventory is both wasteful and costly. That’s why inventory optimization remains a hot topic. Sean P. Willems, Associate Professor of Operations and Technology Management at Boston University’s School of Management, notes, “The pressure to optimize inventory is only increasing.”[1] Frustration is the inevitable result of increasing pressure to produce results with no clear means of doing so. That is why Lora Cecere (@lcecere), founder of Supply Chain Insights, writes, “When it comes to the management of inventory in value chains, frustration abounds.”[2] Willems agrees with Cecere “that inventory optimization intimidates and frustrates people working in supply chain.”

 

Cecere insists that “misconceptions abound” in the area of inventory management. She specifically discusses seven of those misconceptions and how to avoid them. She writes:

1. Inventory Management Is the Same as Replenishment. Inventory management and replenishment are separate, but interrelated processes. While inventory management includes the design of inventory strategies to set inventory targets including the execution of supply chain processes to design and manage the form and function of inventory, replenishment is a about flow. Replenishment is usually push-based logic, based on a series of rules, based on dependent, as opposed to independent, demand. As a result, traditional replenishment logic amplifies and distorts the demand signal. The greater the demand error, and the greater the supplier volatility, the greater the need for multi-tier inventory management.

2. Inventory Is a Cost to Be Managed. Finance wants to actively manage inventory. A frequent mistake made in the management of inventory in the extended supply chain is a blanket reduction — a corporate mandate to reduce inventory — without rationalizing the requirements for inventory in the value chain. Inventory should never be managed to a financial target. Instead, it needs to be based on the requirements of customer policy and the supply chain strategy. For many, this understanding is the toughest to close. Finance needs education.

3. The Management of Inventory Does Not Need Technology. To get good at the management of inventory, companies need technologies. The supply chain is a complex system that cannot be adequately managed through calculations on a spreadsheet. As a result, companies need to blow up their spreadsheet ghettos within the organization and challenge the supply chain team to think more holistically about the role of inventory in the market-driven value network.

4. I Can Use New Technologies without Changing My Planning Organization. The use of new technologies requires time for planners to use them, and when implemented correctly leads to a new set of business processes. Do not make the mistake of buying and installing the technologies, but not getting the benefit because the planners did not have adequate time to plan, or you have not taken the time to rethink the processes to use the new technologies.

5. Implement with Knowledgeable Resources. At first when you read this recommendation you might say, ‘DUH!?’ However, let’s face facts. There are too few people in the world who are really knowledgeable about inventory management software tools. While many consultants will talk about inventory, we find few to be knowledgeable in the technologies. Instead, we find the technology’s provider to be the most knowledgeable on the use of the technologies. There are also a few boutique consultancies around the world that have built strong teams around inventory optimization. These are usually small, and focused consultancies with a strong inventory heritage.

6. The Market Leaders in Inventory Management Technology Have the Best Solutions. The companies with the greatest market share — Oracle and SAP — have the weakest references. While both Oracle and SAP will hotly debate this fact, we find a growing gap between the vendors’ perception of the use of their solutions market and satisfaction levels of their clients.

7. All of the Solutions Have the Same in Functionality. There are major differences in the technologies to manage inventories in the extended supply chain. It is too complex to be described in a four-box model. As a result, companies should buy inventory management technologies based on process requirements, IT standardization and cultural fit. While many think that solutions with a common name — technologies purchased from a common vendor — are integrated, often the situation in the market is vastly different. Most of the inventory technologies have been sold and resold multiple times in the market, with many best of breed solutions having better integration than the ERP providers touting integration.

In addition to the misconceptions discussed by Cecere, another thing that contributes to the frustration noted by Willems and Cecere is proliferating SKUs. As someone once said, “Variation breeds inventory.” Rob Dolci (@setsail88), chief information officer with System Group and country manager with aizoOn, told the SupplyChainBrain editorial staff, “SKU proliferation is a result of the economic crisis of recent years, which prompted retailers to find ways to increase their offerings. … The trend has led to seemingly endless variations in products and packaging by sales and marketing organizations, creating part numbers that might number in the tens of thousands, many of which overlap.”[3] As a result, Dolci agrees with Cecere that new technologies are required to address the problem and help relieve the frustration that supply chain professionals are feeling.

 

One of the technologies with the potential to help is artificial intelligence (AI). The right AI tools, Dolci notes, can help inventory managers conduct both semantic and geometric searches of product variations. Another SupplyChainBrain article reports, “Inventory optimization vendors are starting to leverage artificial intelligence as a means to optimize complex supply chains for large stock holdings and multiple stocking locations, according to the Technology Value Matrix for Inventory Optimization released by Nucleus Research.”[4] The article continues, “The matrix shows that vendors applying machine intelligence to their solutions can more quickly identify emerging patterns and fix supply chain issues in near real time, as they arise. Additionally, leading vendors are adding predictive and tracking features to improve functionality.” To learn more about how AI can help improve inventory optimization, read my article entitled “Inventory Optimization and Cognitive Computing.”

 

Professor Willems insists that companies need to stop following “ad hoc rules of thumb” to manage inventories and start using “scientific single stage inventory calculations.” He provides an excellent explanation of what he means in his article. He believes there are five impediments that have to be removed to achieve success. They are: “First, the intuition for how to correctly solve the problem is completely wrong. Second, corporate metrics reinforce the wrong behavior. Third, people lack faith in the results from a ‘simple’ scientific inventory formula. Fourth, they don’t realize how much money they are leaving on the table by staying with rules of thumb targets. Fifth, they don’t realize the ease with which they can change to scientifically calculated targets.” If you want to understand why he sees these as impediments and you want to learn how to overcome them, read his article.

 

I suspect there will always be some frustration associated with inventory management. Nevertheless, in the digital age, that frustration can be greatly reduced if companies will adopt some of the new inventory optimization tools coming to market. Cognitive computing tools are especially helpful since they can deal with complexity in ways that have previously been impossible.

 

Footnotes

[1] “Demystifying Inventory Optimization,” Supply Chain 247, 4 May 2015.
[2] “Seven Misconceptions on Managing Inventory in a Market-Driven World,” Supply Chain Shaman, 3 May 2015.
[3] “The Brave New World of SKU Proliferation,” SupplyChainBrain, 24 March 2015.
[4] “Artificial Intelligence Meets Inventory Optimization,” SupplyChainBrain, 22 January 2015.