July 14th, 2016
In many competitive situations, product availability is often the deciding factor in winning business. Companies who consistently achieve better product availability increase their sales.
We have witnessed several cases where companies have attempted to improve product availability solely by improving forecast accuracy. Initially there are improvements; forecasting does get better and then the focus switches to operations to meet the forecast to improve availability. Asking customers to share their forecast seem is great, but it is normally non-binding and typically the customer tends to over forecast to ensure product availability for their own products. This then reinforces the strategy that better forecast accuracy will drive better product availability and more and more focus is put on Sales to improve their forecast accuracy. In our experience the improvements, especially at individual product level, become more and more difficult to achieve.
Forecasting accuracy may even drop back a few percentage points, the targets service levels are not achieved and frustration creeps in.
The myth that an accurate forecast is the only answer
A more accurate forecast is NOT the only answer nor is filling up a warehouse with high levels of inventory. So what else should you consider?
Reduce product options
Reducing the options for a product will improve stock level accuracy and therefore availability.
Late point configuration
If you can’t reduce the options then keeping stock at a semi-finished state and finishing to order will help to reduce overall stock requirements whilst optimising availability.
Optimise inventory based on profiling and understanding historical performance
In unpredictable markets what has happened in the past is often the only reliable information you have. Using an accurate view of past orders and shipments to identify the likely future demand has been proven to be more reliable than using sales forecasts. For example, many products exhibit relatively stable demand (regardless of how Sales may see it) or at least with a known and predictable level of variability. Understanding this and managing inventory levels accordingly can be a more effective strategy than reacting to forecasts that are actually more variable than the underlying demand.
The Consultancy Company uses its own Inventory Optimisation Model that takes historical data, at an SKU level, to form the baseline for optimal stock levels. It has been proven to deliver high levels of availability, coupled with predictable and manageable levels of inventory, and reduced levels of excess and obsolete stock (Figure 1)
Example of using The Consultancy Company’s Inventory Optimisation Model and Approach:
Our Inventory Optimisation Model can be integrated with almost any ERP system. It uses industry standard functionality and algorithms in a customisable way to deliver solutions in all kinds of industries and markets. It can be used dynamically so that on an ongoing basis you can adjust stock levels and policies based on what is really happening in your markets. Dynamically optimising your inventory maybe, the ONLY answer to chasing the unachievable dream of an accurate forecast. Here are some examples:
Edwards Vacuum: The fundamental objective was to balance its unpredictable market cycles with high-growth, consistent service revenues, for a product portfolio of 36,000 SKUs across its 83 global locations. Using the TCC Stock Model, has helped Edwards to achieve a major improvement in service performance of up to 10%, with no long-term increase in stock levels and a significant reduction in obsolescence. From an organisational perspective, it established the best mix of central control and local autonomy that are able to adapt quickly to changes in the market dynamics. This also enhanced visibility and flexibility, creating a new confidence in the service sales team, enabling them to cross-sell a wider range of services in a more responsive and effective way.
Fenner: They recognised they were losing business opportunities through a lack of product availability and inconsistent delivery performance, coupled with unacceptably high level of stock level across the whole supply chain. With the TCC Inventory optimisation process they have achieved a consistent 95% OTIF delivery performance, without incurring excessive levels of inventory to achieve it.
GE Healthcare: When an ongoing drive to reduce working capital within the business had started to impact customer service and with improvements in manufacturing cycle times, short-term decisions were starting to have a long-term impact on supply chain capability and cost. With no integrated global operating model, it was difficult to get a strategic view of the overall supply chain in terms of operational cost, working capital and service deliverable. They used the TCC Stock Model to statistically profile the effectiveness of stock at all locations in the supply chain from primary manufacture to in-market distribution centres (Figure 2)
Does this sound familiar? If so, we can quickly help you to get an idea of the benefit your organisation would derive from optimising its inventory management. With a simple extract of data from your ERP system, we’ll analyse the data and present you with a detailed summary of the potential benefits. The only cost is a small amount of your time to prepare the data.
Contact Mark Shaw to discuss how The Consultancy Company can help you achieve better stock level performance. Email Mark at ku.oc1532201359.ycna1532201359tlusn1532201359oc-eh1532201359t@wah1532201359S.kra1532201359M1532201359 or call +44 (0) 7407 022264