Companies that both produce and distribute products need to employ an expanded sales and operations planning model that uses inventory as a critical input to the process, says Girish Bakshi, senior director of solutions and services at ToolsGroup.

As with traditional S&OP, the model known as sales, inventory and operations planning (SIOP) has as its primary objective the alignment of production with sales. However, in some companies, especially those that both manufacture and distribute products, the role of inventory becomes more critical. "These companies have to consider the trade-off between working capital and service levels throughout the supply chain, from production all the way to the end customer," says Bakshi. "Inventory is the way that working capital manifests, so they have to think about inventory as an active input into the S&OP process."

This means looking not only at safety stock but at pipeline stock and work in progress, he says. "An understanding of inventory at all levels is needed to apply appropriate strategies to ensure that customer demands are met with the highest possible service and the lowest possible working capital investment," he says. An understanding of this trade-off can then help companies make other decisions, such as whether to shift to an alternate factory or use an alternate mode of transport, or even whether to increase promised delivery times for some customers, he says.

"Basically, making inventory an input into what becomes an SIOP process means actively considering the trade-off between working capital and service levels, and making decisions based on that about how you are going to service your customers," says Bakshi.

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