Inventory. Surely, it's the boon and bane of the supply chain. Too much or too little, and your company's lifeblood is seriously at risk. Get levels just about right, and it should be smooth sailing. That could be called enterprise inventory optimization, a phrase that SmartOps founder and CEO Sridhar Tayur claims his company coined, by the way. To get a better understanding of EIO, SupplyChainBrain sat down in September with Tayur and others at the annual SmartOps Forum, held this year in Chicago.

Other company participants included Martin Barkman, executive vice president, global sales and marketing, and John Lopus, senior vice president, operations. Among end users were Luciano Miranda, senior supply chain consultant with Celestica, and Dave Winstone, global supply chain manager for Dow AgroSciences. SAP, a SmartOps partner, was represented by Rick Wenger, director of the SCM Value Network of SAP America.

Q: Let's define our terms, first. What is enterprise inventory optimization?

Barkman: It's the process of determining the exact amount of inventory to keep of every item at every location so that in replenishing to your inventory target you can meet your customer-service level with less capital tied up in unnecessary inventory.

Q: What's does the picture of a successful inventory optimization program look like?

A: Supply chain managers have to constantly balance and meet the needs of marketing from a sales standpoint, of finance from a working capital standpoint and manufacturing from a capacity standpoint - all their needs simultaneously.

This becomes hard. If your job is to figure out how much inventory to keep to meet service levels, you're often balancing conflicting priorities, and this becomes personal. You're often sitting in meetings where people say, we need to do more marketing promotions and have enormous amounts of inventory to meet those service-level goals. And the manufacturing guys are saying, look we can't do that, it's just not possible.

With [EIO], when somebody says, what if my demand spikes 10 percent, what's the implication on inventory, now for the first time they can come to the table with real answers. And whatever path is chosen, you can operationalize it.

In some organizations this is called S&OP, which has been a tricky process. EIO has proved to be a key enabler of S&OP.

Q: Sridhar, why did you start this company back in 2000?

Tayur: The simplest answer is that people made investments in technology and consultants, and despite all of this, they didn't get the benefits of inventory optimization.

I'm a professor at Carnegie Mellon, and usually professors stay out of this real-world stuff. But it became quite intriguing that people would spend all this effort to reduce inventory, but at the end of the journey feel they had not accomplished what they hoped for.

Q: But other inventory reduction programs were already available. What did you hope to accomplish?

Tayur: This was not about inventory reduction. It was about inventory rightsizing. Because if their inventory was about what it needed to be, there should have been no service level problems. So, how can somebody have an inventory problem and a service level problem at the same time - it must be that they have the wrong stuff in the wrong place at the wrong time.

I think we gained credibility when we showed in certain cases that their inventory levels were too low. They should actually increase them.

Q: We were just coming off the internet bubble in 2000. How much of an obstacle was that for your start-up?

Tayur: It was exciting [because] we were fighting deep skepticism about technology. The real challenge was that people had to admit that there was a gap. It was one of those things like, to get help you must first admit that you need help.

So my first year I think I made over 100 trips to prospects. I had probably two folks who quietly told me, I know what you're trying to tell me, professor, but it's politically incorrect to go back to my CFO and say, 'You know all that stuff we did? It isn't going to give us inventory benefits anyway.'

Q: John, 10 years after that initial skepticism, what do you tell prospects is the value of inventory optimization software?

Lopus: They buy solutions not just to execute transactions but to deliver certain types of value. One is around customer service and variability. The second is around inventory working capital. We see the pendulum swing from customer service to inventory depending on economic conditions and their own sales and cycles and seasonal factors. A solution helps balance against those swings and helps set inventory levels at correct levels to achieve customer service.

Q: What metrics indicate a solution is successful?

Lopus: In distribution-type companies and in consumer goods, high-tech, etc., they measure customer service such as fill rates or on-time metrics. But for retail environments, you don't have the luxury of knowing customer demand when it happens. So they measure stock transfers, out-of stocks, etc. So we're always looking for KPIs around customer service. The second area is around inventory - in terms of days of supply, in terms of dollars - what you're looking for is an understanding of where they are today, historically, seasonal impacts; making sure we have a robust baseline of comparison so we know going forward if the solution is delivering value.

Q: Luciano, as a contract manufacturer, Celestica is truly a global operation. How would you describe your inventory optimization needs?

Miranda: At Celestica we want to be recognized for delivering the most effective and innovative supply chain in the industry, and tools like this help us deliver that.

Basically, it means that you can look at defending against forecast inaccuracies either in segments or as a team. By a team, I mean a holistic supply chain. Instead of defending against inaccuracies with just finished goods and then subassemblies on their own or components on their own, you actually do it combined. Before, this was done in segmented manner, where North America would do things on its own or Asia would act alone and then try to connect. This is now done all at once. It gives a huge advantage and allows better service and value to customers.

Q: What synergy, if any, has been achieved?

Miranda: When you deploy a solution like this, you deploy it as a process. You can look at and view the entire supply chain in one shot. It allows you to much more effectively manage your supply chain.

Q: As a result of this process, are you seeing any changes in supply chain behavior?

Miranda: The biggest change is, you go from being a reactive supply chain to a proactive one. In our business, things change very rapidly. You need to always be on your toes and anticipate what changes there will be. An inventory optimization tool allows us to do that. Also, it takes the emotion away from the decision. As an example, when a planner runs out of a part, he makes a decision: I need a lot of safety stock because I don't want to feel that pain. From an historical point of view, that decision may have been made based on a single point in time. So a solution like this helps make decisions based on the entire history of what's happening, not just on one data point but on a collection of data points.

Q: Dave, your unit became an IO pilot when your parent company, Dow Chemical, acquired Rohm and Haas. How has that gone?

Winstone: What we actually found in the implementation was that we were able to go from a small-scale pilot right to implementing the whole company in one step. So, the scalability, the ability to transform large amounts of data quickly, was pretty impressive.

Q: And the benefits you're looking for?

Winstone: We had a fairly conservative estimate of benefits: a five-percent saving in overall inventory. One of the big things we found as we dug in was that our inventory targets involved only about 20 percent of our inventory overall. So, we focused on that, but the bigger benefit was the understanding we got around the other 80 percent of our inventory.

Understanding the fundamental drivers behind that, being able to see that, the visibility of that was very useful. We intend to take advantage of that going forward and probably see bigger benefits.

Q: What's the challenge in training people in inventory optimization?

Winstone: You want them to understand the fundamentals, theory and concept behind multistage inventory optimization, to get them to understand what I call the magic "and" - you know, how you actually get inventory levels down and service levels up at the same time. Without people understanding the concepts behind that, they tend not to get why you can achieve both of those at the same time. Most traditional educational material tell us there's a trade-off between inventory and service. It's only when you fully understand the concept behind multistage inventory optimization that you can see you can achieve both.

Q: Rick, what's the value of enterprise inventory optimization to your clients?

Wenger: SAP supply chain management customers leverage our platform to optimize their supply chains and get global visibility into where inventory movements are throughout the world. The core of that is to reduce variability in the supply chain.

What EIO software does on top of that is provide the insights based on that variability. So, based on that improved forecast accuracy, based on that reduction in lead time, based on that global visibility, they now know how to set the most critical parameter or component of any advanced planning system, and that's safety stock.

Q: Can you quantify the benefits of optimized stock?

Wenger: From a balance sheet perspective, reducing inventory or days in inventory, is only one component. Another key reason to invest in EIO is to make sure you can increase the customer service level at minimal cost. So it's at both ends of the equation, on the inventory side and also making sure we're fixing the inventory mix to optimally service the customer.

Finally, there's huge costs involved in inventory. If you think about it, why do we hold inventory? It's to plan for those uncertainties. One of the key things that EIO is helping reduce from a planning perspective is the cost around obsolescence or expediting or overall supply chain cost.

So in general, we're reducing inventory, we're improving customer service and lowering costs. And that's getting the attention of a lot of executives out there.