Executive Briefings

Why Optimize Inventory? Because That's Where the Money Is!

Analyst Insight: When asked why he robbed banks, Slick Willy answered, "Because that's where the money is!" Where's the money in your company? Capital for new projects is a real challenge, with an appropriation process that is complex, political and arduous, commanding the attention and scrutiny of the executive committee. Yet, planners and schedulers armed with custom spreadsheets routinely make million-dollar working capital decisions every day! - Rich Sherman, Principal Essentialist, Trissential

Why Optimize Inventory? Because That's Where the Money Is!

When I joined the board of Lead Time Technology, the former DuPont engineers that comprise the company convinced me that inventory optimization is not an event. If not embedded into the inventory management process and executed on a daily basis, decisions of planners/schedulers will rely more on spreadsheets than enterprise systems. And, their million-dollar capital decisions are generally made in isolation from the factors that influence a correct decision.

Nearly all operational supply chain decisions rely on a forecast or demand plan, usually generated on a weekly basis.  Economic order quantities, production run lengths, procurement and production cycle times, and other factors resulting in inventory (working capital) rarely are frequently recalculated for each item by location.

Forecasts get handed down at the start of the week, and by noon, they're all wrong. The firefighting begins: custom spreadsheets are initiated, inventory created, and prayers made that the error will not be too costly in capital or service performance.

While inventory optimization tools are intended to support better decisions, most are executed outside the daily operating processes. They set guidelines, determine optimal quantities/run lengths, account for seasonality, events, and various demand and lead-time variability, but they don't provide the daily decision support tools to enable planners/schedulers to actually manage procurement, production and deployment of inventory; and neither does the enterprise system.

The lack of enterprise system support provided to the planner/scheduler to make daily and often hourly adjustments to actual production requirements results in the perpetuation of custom spreadsheets and reliance on tribal knowledge to manage inventory, let alone optimize it.

While most inventory optimization tools provide significant ROI (the opportunity is that significant), only a few can provide the real solution: operating decision support with embedded optimization that is integrated across the organization to enable planners/schedulers to adjust their decisions to volatility and variability as they occur.

Why don't enterprise systems typically address or support these requirements? Most of the unique application requirements and variability, AKA "customization", exists in operations. No two production facilities are alike. Engineers constantly improve equipment and facilities. It's not an ideal off-the-shelf application environment. The result is that tools are generally developed by best-of-breed software developers, academics and boutique consulting firms that are generally not on the IT department's approved vendor list.

A larger number of companies are "discovering" the path to true inventory management and optimization and the sources to support implementation. Enterprise solution providers are also coming to a similar conclusion. Until embedded optimization becomes mainstream, millions of working capital dollars will remain locked in the inefficiency of custom spreadsheets and tribal knowledge.

                                                    The Outlook

In 2014, expect to see the enterprise system providers addressing inventory management and optimization shortcomings. As companies experience more attrition due to retirements, custom spreadsheets and tribal knowledge will need to be replaced by more formalized processes and technology. Expect to see more success and consolidation among the inventory optimization tools from developers, academics and boutique consulting firms as more companies understand the financial impact that end-to-end daily inventory management and optimization offers.

When I joined the board of Lead Time Technology, the former DuPont engineers that comprise the company convinced me that inventory optimization is not an event. If not embedded into the inventory management process and executed on a daily basis, decisions of planners/schedulers will rely more on spreadsheets than enterprise systems. And, their million-dollar capital decisions are generally made in isolation from the factors that influence a correct decision.

Nearly all operational supply chain decisions rely on a forecast or demand plan, usually generated on a weekly basis.  Economic order quantities, production run lengths, procurement and production cycle times, and other factors resulting in inventory (working capital) rarely are frequently recalculated for each item by location.

Forecasts get handed down at the start of the week, and by noon, they're all wrong. The firefighting begins: custom spreadsheets are initiated, inventory created, and prayers made that the error will not be too costly in capital or service performance.

While inventory optimization tools are intended to support better decisions, most are executed outside the daily operating processes. They set guidelines, determine optimal quantities/run lengths, account for seasonality, events, and various demand and lead-time variability, but they don't provide the daily decision support tools to enable planners/schedulers to actually manage procurement, production and deployment of inventory; and neither does the enterprise system.

The lack of enterprise system support provided to the planner/scheduler to make daily and often hourly adjustments to actual production requirements results in the perpetuation of custom spreadsheets and reliance on tribal knowledge to manage inventory, let alone optimize it.

While most inventory optimization tools provide significant ROI (the opportunity is that significant), only a few can provide the real solution: operating decision support with embedded optimization that is integrated across the organization to enable planners/schedulers to adjust their decisions to volatility and variability as they occur.

Why don't enterprise systems typically address or support these requirements? Most of the unique application requirements and variability, AKA "customization", exists in operations. No two production facilities are alike. Engineers constantly improve equipment and facilities. It's not an ideal off-the-shelf application environment. The result is that tools are generally developed by best-of-breed software developers, academics and boutique consulting firms that are generally not on the IT department's approved vendor list.

A larger number of companies are "discovering" the path to true inventory management and optimization and the sources to support implementation. Enterprise solution providers are also coming to a similar conclusion. Until embedded optimization becomes mainstream, millions of working capital dollars will remain locked in the inefficiency of custom spreadsheets and tribal knowledge.

                                                    The Outlook

In 2014, expect to see the enterprise system providers addressing inventory management and optimization shortcomings. As companies experience more attrition due to retirements, custom spreadsheets and tribal knowledge will need to be replaced by more formalized processes and technology. Expect to see more success and consolidation among the inventory optimization tools from developers, academics and boutique consulting firms as more companies understand the financial impact that end-to-end daily inventory management and optimization offers.

Why Optimize Inventory? Because That's Where the Money Is!