As a supply chain professional, you have two main goals: reduce inventory carrying costs while still maintaining a high level of customer service. But when you have thousands of products, multiple locations, and a complex network of suppliers, this is easier said than done. Stock outs, missed shipments, and cost overruns that result from expediting production or shipping arrangements are, unfortunately, very common roadblocks experienced by supply chain professionals everywhere. Far too often, we’ve heard companies complain that they’re spending too much time and energy putting out fires instead of investing in and growing their business.
Does any of this sound familiar? If so, you can take comfort in the fact that plenty of others are struggling with this very issue. Better still, there’s a silver lining that will provide you with some relief: it’s absolutely possible to turn inventory forecasting into an asset. You only need to implement a few inventory management and replenishment planning best practices, and you’ll be well on your way to making inventory forecasting work for you.
The benefits of inventory management and replenishment planning
We recommend that all manufacturers and suppliers explore ways to optimize their inventory management and replenishment planning processes. But it’s especially important for those with a complex network of warehouses and suppliers. There are numerous benefits to introducing best practices, such as:
- It drives efficiency in the planning process
By automatically integrating input data and setting parameters to reflect business strategies, a replenishment plan provides an efficient way to supply warehouses and prepare for customer orders. In some organizations, this represents a significant process change that can elevate the planner’s responsibilities and free them up to focus on higher-level initiatives. Because planners won’t need to spend time gathering data and maintaining spreadsheets, they will be able to focus on making exceptions to the plan when specific cases arise as well as fine-tuning policies and other parameters over time, ultimately resulting in further inventory reductions year-over-year.
- It provides visibility across multiple locations
Replenishment planning generates a time-phased plan for supplying warehouses or distribution centers from a source location, supplier, or manufacturer. This allows vendors or plants to produce capacity plans and order raw materials needed to meet demand. Plans typically extend three to six months out, particularly for long lead time components or where finished products are shipped by boat, such as those sourced from Asia.
- It can even help you help your customers
Vendor Managed Inventory (VMI) is a special replenishment case where the network extends out to customer locations. Integrating customers’ inventory, receipts, and shipment or order data allows the business to plan these locations as if they were internal sites to ensure there are no stock-outs. This is important for key customers that represent a large portion of the business where high service levels are required.
The importance of using the right tools
You simply can’t do this on your own. You need the support of a powerful software solution specifically designed to help navigate the many steps required to implement a comprehensive inventory management strategy. Otherwise, your replenishment plan will not be actionable; it will be unwieldy, inefficient, and subject to a large degree of human error due to it being highly manual.
Consider instead using a tool that automates important aspects of inventory management, incorporates the latest forecasting models and best practices, and allows for transparency and collaboration — like John Galt’s Atlas Planning Suite. Atlas provides you with the platform needed to efficiently manage the complexities of inventory management, link business strategy to execution, optimize inventory levels, reduce costs, and improve customer service.
Critical first steps for your replenishment and inventory management plan
Once you’ve got the right technology supporting you, there are two main elements to tackle when actually setting up your replenishment plan: 1) establishing your company’s business goals and targets, and 2) building a solid forecast and demand plan through consensus and collaboration.
Defining business strategies
First, companies must define their specific business goals and determine how those will be reflected in a demand plan. Specific overarching considerations include: what portion of the overall budget should be dedicated to financial inventory investment, how many regional warehouses to maintain, and whether to make or buy products. Yet to reflect these business strategies in the planning tool requires you to get even more granular.
From a financial standpoint, most companies have fixed limits for total inventory investment as well as goals for inventory turnover. A critical task for those involved in inventory management is taking the total investment numbers — both the targets and the limitations — and translating that into actionable numbers for individual products, while also ensuring customer service levels are not adversely affected. Segmenting products based on value, lifecycle, and other factors provides a solid framework for setting strategies that meet your company’s overall financial goals.
Another important step is to decide whether the replenishment is defined as push, as in make-to-stock, or pull, as in make-to-order. This decision drives how specific parameters within the tool are set. It’s important to note, however, that success is not black or white. Many companies have adopted a blended strategy based on product segmentation, such as ABC or forecastability analysis.
Forecasting and then managing demand
Having the most accurate forecast possible is critical to an effective replenishment plan. While it’s perhaps obvious to many why this may be key when dealing with make-to-stock items, this is just as important with make-to-order items. Planners still need to generate capacity plans, order raw materials, and negotiate with vendors, so an accurate forecast is crucial.
Managing demand in an automated tool begins with setting the demand signal, which defines how to use orders and forecast for replenishment. Depending on the demand signal selected, forecast quantities are consumed by shipments and open orders; other options include make-to-order, or the greater of orders and forecasts. The demand signal is set by product based on the ability to forecast and the sensitivity to stock-outs; predictable demand can use forecast consumption where low value items can be make-to-order. The rules selected in this process have a significant impact on the replenishment plan and the resulting inventory.
Putting strategies and rules into practice by using planning parameters
Once inventory strategies have been determined, an accurate forecast has been produced, and the demand signal has been selected, planning parameters for each item and location combination are used to drive the details of the replenishment plan. These parameters, which fall into the categories described below, work together to recommend purchasing or manufacturing orders and movement between locations. They are:
- Replenishment type
- Order policies
- Safety stock type
The replenishment type defines how purchase or manufacturing orders are triggers. The type selected must reflect the product’s importance relative to customer lead time; shorter lead time products or those with lesser value can be set to reorder point where re-supply is not triggered until the inventory drops to a predefined threshold.
Order policies define how often orders are placed or how large each order can be using rules such as min/max. They can be set based on consistency in frequency or quantity, or calculated using an EOQ formula; where demand forecasting is reliable, it is possible to manage orders consistently, where unpredictable items are better handled with an EOQ or other fixed order quantity.
Safety stock is an important part of inventory planning to maintain enough stock to account for unexpected demand or supplier variability. Many planners use rules of thumb to generate safety stock levels but this approach often lags behind changing business conditions and doesn’t account for seasonal changes in demand or lead times. Methods like periods of coverage and statistical safety stock provide a better balance between desired service levels and inventory carrying costs across multiple demand channels.
John Galt’s Inventory Management tool provides a Safety Stock Simulator to show the relationship between service levels and investment required. This evaluation helps planners set the right parameters for each SKU (product/location) once they have been grouped by value and forecastability.
Generating your replenishment plan
Finally, after the planning parameters are set, the business is ready to generate the replenishment plan. The plan is synchronized with the execution system by integrating information like on-hand inventory, open orders, forecasts, and expected receipts from purchase, transfer, or manufacturing orders. Fortunately, this integration is automated with John Galt’s batch scheduling so plans can be re-generated as new information becomes available. With the distribution network and planning parameters in place, the system calculates updated recommended orders based on the lead times and service levels provided.
Load building and releasing orders
As soon as the recommended orders are generated, they need to be released to the execution system for processing. Planners can filter by location or supplier to build loads by vendor or manufacturing location. In most cases, it is best to build containers or truck loads, grouping items into a shipment for release. Optimizing containers and truck loads using constraints like total weight, dimensions, or cost reduces transportation fees. For replenishment from overseas, load building avoids unnecessary costs and delays that can occur with freight consolidation. With John Galt’s Inventory Management, purchase, transfer, or manufacturing orders can be automatically released to the ERP system for execution, saving considerable planning time and effort. Once the orders are released, they become expected receipts for the next run of the replenishment plan.
Action messages help demand planners deal with the unexpected
While the initial replenishment plan can be carried out automatically, it must be monitored regularly for exceptions. As the plan is executed, customer orders are prepared and shipped, vendors send material with an expected arrival date, manufacturing produces to re-supply warehouses. But every once in awhile, something unexpected happens. In those cases, exceptions are generated with action messages based on those events.
These action messages are designed to maintain a high level of customer service while keeping inventory down. If customer orders are greater than forecasted for a particular item, there will be an expedite message indicating that the purchase order should be shipped earlier than planned or that the quantity must be increased. If orders are less than the forecast, the system may suggest expediting or delaying the purchase order. In other cases, there may be a transfer recommendation if there is excess inventory at an alternate warehouse. By responding only to the action messages and adjusting recommended orders, planners save time and increase efficiency, while still meeting critical business objectives.
Summing it all up
Successfully achieving an inventory management goal can sometimes be a double-edged sword, as demand planners and supply chain professionals well know. The goals the executive team sets for you can sometimes conflict with one another. For example, if you raise customer service performance, you may end up seeing an increase in inventory levels. But increasing inventory turns can result in a decrease in operating margins. It can turn into a never-ending cycle, where you only ever partly achieve success.
John Galt’s Inventory Management helps harmonize these goals by translating strategies into tactics and execution for procurement, manufacturing, and replenishment planning. When you combined with industry best practices with the automated data integration, plan generation, action messages, and load building that a powerful software tool like Atlas provides, planners can proactively manage replenishment. Instead of managing data, planners will be able to spend their time and energy on addressing exceptions and developing policies; that is, they will have more time to spend on business analysis instead of populating spreadsheets. Ultimately, this results in lower supply chain costs and higher fill rates, putting companies on the path to continued growth and success.
Over 5,000 companies have profited from our solutions. We’ve helped our customers hone their processes, ultimately producing forecasts that are up to 50% more accurate. We’ve also assisted them in reducing excess inventory levels by anywhere from 5% to 40%. To learn more about how we can help you integrate industry best practices with your company’s specific processes, check out this webinar on the benefits of inventory management with Atlas and schedule a demo with one of our Forecast Xperts today.