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Logistics Technology: Inventory Optimization: Game of Strategy
Friday, 09 October 2009 00:00

IO technology provides significant ROI, and it isn't as complex as it once was. However, it's yet to gain significant traction among logistics professionals. Our tech correspondent sets the record straight on IO and explains how Dell made a strategic move to put it to good use.

In good times, it's simple enough for shippers to stock up on products that may or may not "fly off the shelves" in a timely fashion. When things get tight, however, inventory management becomes crucial as companies can't afford to tie up precious dollars in stagnant stock. In other words: today, the leaner the better.

Inventory management can be challenging for organizations of all sizes, especially for those with multiechelon distribution networks where inventory resides in multiple locations. Enter inventory optimization (IO), a supply chain software option that's come into its own by helping firms achieve optimal product deployment and improve operational performance by calculating more accurate inventory targets.

Marketed by vendors like Oracle, IBM, JDA, Optiant, SmartOps, SmartTurn, ToolsGroup, and i2 just to name a few, IO software has become an important tool to aid manufacturers and retailers in managing their overall supply chain inventories more efficiently or by helping companies better understand the impact that specific business decisions have on overall inventory investment.

"Inventory optimization technology has moved beyond its previous 'black box' perceptions and has increasingly been adopted and deployed by leading-edge companies," says Simon Ellis, practice director for supply chain strategies at the analyst firm IDC Manufacturing Insights. "Decision processes such as overall sales, inventory, and operations planning (SI&OP); profitable proximity sourcing; and new product innovation can all be aided by this technology as well," he adds.

Sure, this sounds great on paper; but how do logistics and supply chain professionals go about assessing whether now is the right time to make the investment in a tech-based inventory management system? Over the next few pages we'll examine the benefits and challenges that shippers can expect when investing in inventory optimization software. We'll also assess the technology's current status in the marketplace and then look behind the walls of a cutting edge supply chain operator that's currently reaping the rewards of its IO investment.

Gaining Traction?

Inventory optimization software is starting to gain some traction in the marketplace, especially now when more companies are racing to find ways to work smarter, better, and faster—but it's yet to catch fire.

In a recent survey of manufacturers using inventory optimization solutions, Ellis says Manufacturing Insights found that, depending on the specific inventory problem, return on investment for IO can be "significant and meaningful." Deployment typically takes four to six months, with key inventory and related benefits evident in less than 12 months.

Typical business questions that an inventory optimization application can address, according to Ellis, include:

  • How much inventory should I hold of each product?
  • Where is the most cost-efficient point to store that inventory?
  • My products are often seasonal or cyclical in terms of demand, so how do I most efficiently plan and deploy overall inventory?
  • What business policies are driving inventory investment across the entire supply chain?
  • If I must improve service, how much incremental inventory investment will I need?
  • Conversely, if I decrease service levels, how much inventory can I free up?

With the answers to these questions in hand, Noha Tohamy, vice president of research for AMR Research, says that companies will be better equipped to meet the challenges they're facing in today's business environment. "The economy has increased the focus on inventory optimization, as every shipper wants to minimize or optimize working capital," says Tohamy. And despite the rising interest in IO, Tohamy says "we have just scratched the surface from an adoption standpoint."

Ellis concurs, adding that while he expects investment in such applications to grow over the next three years, inventory optimization is "still a relatively small category."

Steve Banker, Boston-based ARC Advisory Group's director of supply chain management, says inventory optimization applications' lack of traction at this stage can be blamed on the fact that the category itself isn't very well understood. Plus, he states, existing demand management systems are constantly being upgraded and enhanced, which means it's only a matter of time before shippers gain inventory optimization capabilities from their existing vendors.

"Companies know that they can just wait around and eventually—the next time they upgrade their supply chain software—they'll get the optimization functionality with it," says Banker.

"Users are going to their vendors of conventional inventory optimization tools to see if there's a way to buy software services from them," says Tohamy, who adds that standalone inventory optimization systems from vendors like SmartOps or Optiant can require multimillion dollar investments to cover both the license and the consulting services.

To circumvent such a large investment, Tohamy says some companies are focusing on the tactical side of the inventory management issue by sourcing goods from low-cost countries, assessing supplier bases on a quarterly or biannual basis, and/or ensuring that organizational goals are properly aligned with inventory management goals across all networks, suppliers, DCs and customers.

"If you have regional DCs that are incentivized to keep inventory low, regardless of whether it's in the overall company's best interest...then you won't be able to optimize inventory levels across your entire multi-echelon network," says Tohamy.

Dell Puts IO to Use

Well known for its innovative manufacturing and distribution strategies, Dell is one shipper benefiting from a global inventory optimization implementation that took place in mid-2008. Based in Round Rock, Texas, and serving a worldwide customer base, the company designs, develops, manufactures, markets, and supports desktop PCs and workstations, notebook computers, servers, networking products, and storage solutions.

Always looking for ways to work smarter, better, and faster, Dell kicked off its inventory management improvement efforts in 2007 with two inventory optimization pilots, including one that spanned the firm's North American operations. "At the time, we were concerned less about the accuracy of the data and more about inventory management and setting policies across our various locations," says Ramesh Rajagopalan, enterprise architect for Dell's global supply chain.

A regionally-specific pilot followed that revealed various misaligned areas within Dell's inventory management system. "In some areas we had too much inventory, and in other parts we had too little," recalls Rajagopalan, adding that the exercise also revealed that replenishment cycles weren't always coordinated with consumption.

Armed with those conclusions—and the prediction that inventory could be reduced from $6 million to $3.5 million, and without affecting service levels—Rajagopalan approached senior management about investing in i2's inventory optimization, a software that was selected based on its "vigorous analytic capabilities," he says. After getting the go ahead, he and his team selected two of Dell's largest parts suppliers and rolled it out to those vendors in February 2008.

Implementation—which Dell refers to as a "process pilot"—took about 90 days, and was focused primarily on managing suppliers and replenishment processes via a constant inventory policy. Over time, that policy would allow Dell to set inventory policies by individual part numbers—and at specific locations across the globe—while managing supplier replenishment based on those target numbers.

By the end of 2008, Rajagopalan was able to show senior management a one-time reduction of inventory of 55 percent of parts from the two initial vendors. The solution was slowly rolled out to the remainder of Dell's supplier base, allowing the manufacturer to more closely integrate with its vendors via a collaborative platform that didn't previously exist.

More importantly, the manufacturer now has a tool that can analyze its supply chain activities and utilize the findings to ferret out root causes and identify potential problems. Having that information in hand helps Dell make good decisions regarding its inventory management, even if it simply means updating materials requirement planning (MRP) and notifying suppliers of those updates.

"There are many simple actions that you can take and that go a long way in effectively managing business processes," says Rajagopalan. "While the inventory optimization tool itself is the enabler, the real benefits for us have come from the simple, corrective actions that produce significant results across the supply chain."

Significant and Growing

In its recent inventory management survey, Aberdeen Group of Boston found that 91 percent of companies are currently reviewing opportunities for improving inventory performance through process changes. Sixty-one percent say they've made—or, have been asked to make—inventory-related technology recommendations within the previous six months.

Whether the need for improved inventory management techniques is being driven by the economy or by companies' growing awareness of the impact that inventory has on the bottom line, the need for solutions that address the issue continues.

Nari Viswanathan, vice president/principal analyst of supply chain with Aberdeen, says the technology vendors that focus less on the technology itself and more on the people and processes involved with inventory optimization are the ones that will gain traction in the marketplace over the next few years. "You can get some incremental benefit by maintaining customer service levels while reducing inventory," he says, "but the biggest advantages come from making structural changes within your supply chain."

While the inventory optimization market is relatively small compared to overall supply chain management (SCM) spending, IDC's Ellis says it's still a "significant and growing" segment. Based on Manufacturing Insights' IT spending taxonomy and vendor tracking, Ellis estimates the current global market for inventory optimization to be about $60 million.

"We believe that over the next five years the segment will experience healthy growth in the 10 percent per year range," says Ellis. "Inventory optimization technology provides significant value, and the technology itself isn't as complex as it once was. Any company that's not at least looking at these options right now is doing itself a disservice."

Logistics Management, 10/2009