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Over the span of one’s business career, one learns effective inventory management could prevent outcomes becoming a detriment to business performance. Examples abound, but the following few can shed light on the importance of effectively managing inventory decisions.
A director of finance of an auto assembly plant stopped assembly production because no finished vehicles could fit in the assembly plant delivery patio, affecting production plan runs and, consequently, creating a backlog for suppliers ready to deliver parts. Unfortunately, production restarted after a comprehensive discount was rolled out to auto dealers to clear such inventory. The expected economies of scale in assembly production and material flow of raw materials were lost to profit margin loss after the company was forced to set price discounts to the auto dealers.
A newly introduced premium dog food brand exceeded demand forecast expectations. However, because its supply chain network was designed with a single source vendor for a key component ingredient with a long production and transportation lead time, supply stalled and sales slumped for months. After leaders of production and procurement scrambled to contract co-packers to increase finished goods production and negotiate an expansion of a new production line with the component ingredient vendor, supply started meeting demand, but lost sales and increased contracted production and procurement costs limited profitability expectation of the newly introduced product.
What do these two example cases share?
A supply chain diagnosis could unveil many variables, but we could list a few:
- Supply decisions divorced from customer demand. Supply decisions for upstream processes do not have visibility or consume customer demand signals from downstream locations of the supply chain network.
- Supply decisions made in silos, or not considering end-to-end supply chain networks, disrupt material flow, leading to inventory excesses or shortages that deteriorate profitability.
But how can businesses prepare their supply chains to address such concern?
It starts with a supply chain planning process for inventory with an advanced planning system that considers:
- Connecting demand and supply processes in every echelon of the end-to-end supply chain network that makes inventory build decisions.
- External (customer) demand and variability.
- Customer service level.
- Internal and external sourcing variables such as lead times, corresponding variabilities, and lot sizes.
- Internal sourcing relationships for distribution transportation, manufacturing/assembly, bill of materials, and vendors.
- Propagation of customer demand and variability to upstream locations, including bill of materials for work in-process materials and raw material sourcing.
Fortunately, a solution exists to prepare supply chains with robust inventory plans that lead to better supply chain execution performance.
SAP Integrated Business Planning for inventory (“SAP IBP for inventory”) generates time-series inventory plans based on an optimization function with a comprehensive model that connects end-to-end supply chain networks while consuming multiple demand and supply variables, and recommending inventory targets at right time, right place, and right quantity. The solutions open the opportunity to rethink your inventory planning process or to build a new inventory planning process where you can optimize your inventory plans while protecting customer service levels, and the flow of materials across your supply chain networks.
SAP IBP Analytics Story: Inventory Analysis.
