How do you know Min/Max policy is working well for you?

The Smart Forecaster

Pursuing best practices in demand planning, forecasting and inventory optimization

What is a Min/Max policy? How do you know is working well for you? Smart IP&O gets Min/Max right!

The Min/Max inventory policy is one of four available Replenishment methods in SIO. When the inventory level drops to or below the Min, a replenishment order is generated. The reorder quantity is the number of units needed to raise the stock up to the Max. How do you know your Min/Max settings are working well and triggering replenishment orders at the right time and for the right quantities? If you are like most companies, setting Min/Max levels is based on rules of thumb or simple averaging techniques that don’t expose the trade off curve between service level and inventory cost. This makes it impossible to predict which items are likely to have overstocks and shortages in the future. In this Video Blog we elaborate on this and describe how Smart Inventory Optimization can help.

 

 

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TOP 3 COMMON INVENTORY POLICIES

TOP 3 COMMON INVENTORY POLICIES

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How do you know Min/Max policy is working well for you?

How do you know Min/Max policy is working well for you?

The Min/Max inventory policy is one of three available in SIO. When the inventory level drops to or below the Min, a replenishment order is generated. The reorder quantity is the number of units needed to raise the stock up to the Max.

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Smart Software has been named an Epicor platinum partner, the highest designation in the ISV Partner Program

Smart Software named an Epicor platinum partner, the highest designation in the ISV Partner Program

Belmont, Mass., January  2020 –  Smart Software is pleased to announce that it has been named an Epicor platinum partner as a leading provider of demand planning and inventory optimization solutions.  Epicor ERP customers leverage Smart’s web native platform for Inventory Planning and Optimization (Smart IP&O) to develop consensus forecasts, manage demand, and optimize stocking policies.

“Smart Software helps Epicor ERP customers by delivering business analytics for inventory modeling and forecasting. Having too much or not enough inventory are costly problems that typically require a great deal of manual planning and costs. Using Smart IP&O, our customers are able to automate manual planning processes, forecast demand more accurately, and shape inventory strategy to align with the business objectives.” notes Jennifer Schulze, VP Product Marketing, Epicor

Smart Software’s certified bi-directional integration to Epicor ERP makes all transactional data in Epicor such as shipments, sales orders, supplier receipts, inventory on hand, and more, available in Smart IP&O’s data model for analysis.  Smart IP&O leverages field-proven analytics, probabilistic modeling, and the latest advancements in  forecasting technology to predict future demand, prescribe optimal stocking policies, and identify opportunities for operational improvement.  Users can transfer forecast results, order quantities, and stocking policies to Epicor ERP in a few mouse-clicks.

Greg Hartunian, CEO of Smart Software stated “In today’s supply chain, traditional forecast modeling, rule of thumb inventory planning approaches, and Excel spreadsheets just don’t cut it anymore.  It’s no longer enough to simply manage your inventory.  Customers leveraging Smart IP&O are better able to effectively  wield inventory assets, improve their operations, lower costs, improve customer service, and outperform the competition. We look forward to continuing to work closely with Epicor to help our joint customers achieve these key benefits.”

Epicor-Alliance-ISV-Partner-Platinum-RGB-Logo-0518

About Smart Software, Inc.
Founded in 1984, Smart Software, Inc. is a leader in providing businesses with enterprise-wide demand forecasting, planning and inventory optimization solutions.  Smart Software’s demand forecasting and inventory optimization solutions have helped thousands of users worldwide, including customers at mid-market enterprises and Fortune 500 companies, such as Otis Elevator, Mitsubishi, Siemens, Disney, FedEx, MARS, and The Home Depot.  Smart Inventory Planning & Optimization gives demand planners the tools to handle sales seasonality, promotions, new and aging products, multi-dimensional hierarchies, and intermittently demanded service parts and capital goods items.  It also provides inventory managers with accurate estimates of the optimal inventory and safety stock required to meet future orders and achieve desired service levels.  Smart Software is headquartered in Belmont, Massachusetts and can be found on the World Wide Web at www.smartcorp.com.


For more information, please contact Smart Software, Inc., Four Hill Road, Belmont, MA 02478.
Phone: 1-800-SMART-99 (800-762-7899); FAX: 1-617-489-2748; E-mail: info@smartcorp.com

 

 

 

Backing into Safety Stock is the Safe Play

The Smart Forecaster

Pursuing best practices in demand planning, forecasting and inventory optimization

We frequently encounter confusion about the process of setting safety stock levels. This blog hopes to clarify the issue.

Safety stock is a critical component in any system of inventory management. Indeed, some inventory software treats safety stock as the key decision variable in the quest to balance inventory cost against item availability. Unfortunately, that approach is not the best way to strike the balance.

First, realize that safety stock is part of a general equation:

Inventory Target = Average Lead Time Demand + Safety Stock.

Average Lead Time Demand is defined as the average units demanded multiplied by the average replenishment lead time. Example: If daily demand averages 2 units and the average lead time is 7 days, then the average lead time demand is 2 x 7= 14 units. Keeping 14 units on hand suffices to handle typical demand.

But we all know that demand is random, so keeping enough stock on hand to cover the average lead time demand invites stockouts. As we like to say, “The average is not the answer.” The smart answer is to add in some safety stock to accommodate any random spikes in demand. But how much?

There’s the problem. If you try to guesstimate a number for the safety stock, you are on thin ice. How do you know what the “right” number is?  You may think that you don’t have to worry about that because you have a good-enough answer now, but that answer has a sell-by date. Lead times change. So do demand patterns. So do company priorities. That means today’s good answer may become tomorrow’s blunder.

Some companies try to wing it using a crude rule of thumb approach. For instance, they may say something like “Set safety stock at an additional two weeks of average demand.” This approach is seductive: It only needs simple math, and it is clear.  But for the reasons listed in the previous paragraph, it’s foolish. Better to get a good answer than a convenient answer.

You need a principled, objective way to answer the question that takes account of the mathematics of randomness.  More than that, you need an answer that is linked to the key performance indicators (KPI’s) of the system: inventory cost and item availability.

Simple logic gives you some sense of the answer, but it doesn’t provide the number you need. You know that more safety stock increases both cost and availability, while less safety stock decreases both. But without knowing how much those metrics will change if you change the safety stock, you have no way to align the safety stock decision with management’s intent for striking the balance between cost and availability.

Rather than flying blind, you can back into the choice of safety stock by first finding the right choice for inventory target. Once you’ve done that, the safety stock pops out by a simple subtraction:

 Safety Stock = Inventory Target – Average Lead Time Demand.

Manager In Warehouse With ClipboardOften times, companies will state that they don’t carry safety stock because the safety stock field in their ERP system is blank. Nearly always, safety stock is built into the targeted inventory level they have established.  So, using the above formula to “back out” how much safety stock you are building into the plan is quite helpful.  The key is not just to know how much safety stock you are carrying but the link between your inventory target, safety stocks, and its corresponding KPI’s.

For instance, suppose you can tolerate only a 5% chance of stocking out while waiting for replenishment (inventory texts call this interval the “period of risk.”). Software can examine the demand history of each item and work out the odds of stockout based on the thousands of different demand scenarios that can occur during the lead time. Then the right answer for the inventory target is the choice that leads to no more than a 5% stockout risk. Given that target and knowing the average lead time demand, the appropriate safety stock value falls right out by subtraction. You also get to know the average holding, ordering and shortage costs.

That’s what we mean by “backing into the safety stock.” Start with company objectives, determine the appropriate inventory target, then derive the safety stock as the last step. Don’t start with a guess about safety stock and hope for the best.

Leave a Comment

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Gaming Out Your Logistical Response to the Corona Virus

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This short note is about one way your business can develop a plan to adjust to one of the likely fallouts from the virus: sudden increases in the time it takes to get inventory replenishment from suppliers. Supply chains around the world are being disrupted. If this happens to you, how can you react in a systematic way?

TOP 3 COMMON INVENTORY POLICIES

TOP 3 COMMON INVENTORY POLICIES

In this Video Dr. Thomas Willemain, co–Founder and SVP Research, defines and compares the three most used inventory control policies. These policies are divided into two groups, periodic review and continuous review. There is also a fourth policy called MRP logic or forecast based inventory planning which is the subject of a separate video blog that you can see here. These videos explain each policy, how they are used in practice and the pros and cons of each approach.

How do you know Min/Max policy is working well for you?

How do you know Min/Max policy is working well for you?

The Min/Max inventory policy is one of three available in SIO. When the inventory level drops to or below the Min, a replenishment order is generated. The reorder quantity is the number of units needed to raise the stock up to the Max.

Recent Posts

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    BC Transit values its newfound ability to forecast the financial impact of stocking decisions. They are able to balance capacity against criticality and the cost of inventory. […]
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    This short note is about one way your business can develop a plan to adjust to one of the likely fallouts from the virus: sudden increases in the time it takes to get inventory replenishment from suppliers. Supply chains around the world are being disrupted. If this happens to you, how can you react in a systematic way? […]
Smart Software President and CEO to Present at Microsoft Dynamics NAV 2019

Smart Software to lead Microsoft Dynamics NAV Summit Session on Inventory Optimization and Intermittent Demand

Belmont, Mass., October, 2019 – Smart Software, Inc., provider of industry-leading demand forecasting, inventory planning, and inventory optimization solutions, today announced that CEO Greg Hartunian, will present at the Microsoft Dynamics NAV Summit from October 15-18 in Kissimmee, FL.

Greg Hartunian and Bruce Kennedy, Senior Consultant at ArcherPoint will present “Inventory Optimization and Intermittent Demand – Why Forecasting Isn’t Enough.”  The session details how to plan optimal inventory levels for thousands of items when demand is intermittent. Seemingly random, sporadic demand is the worst case scenario for accurately forecasting demand and inventory requirements. Typical planning approaches such as reliance on sales forecasts and rules of thumb methods, why they often fail, and how probabilistic forecasting methods can make a big difference to the bottom line will be discussed. They will demonstrate practical examples, working through a service level-driven methodology to manage risk and find the optimal balance between inventory investment and availability, and then send corresponding replenishment drivers to Business Central 365/NAV to make it so.

The presentation is scheduled for Oct. 16, 1-2 PM. Smart Software will be also exhibiting at the conference showcasing Smart Inventory Planning & Optimization and bi-directional integrations to Microsoft Dynamics NAV,  Microsoft Dynamics 365 Business Central, and Microsoft Dynamics AX.

 

Summit Group America Smart Software

About Smart Software, Inc.

Founded in 1984, Smart Software, Inc. is Microsoft Dynamics Gold Partner and full-service provider for Dynamics NAV and Dynamics 365, a leader in providing demand forecasting, planning and inventory optimization solutions.  Smart Software’s demand forecasting and inventory optimization solutions have helped thousands of users worldwide, including customers at mid-market enterprises and Fortune 500 companies, such as Otis Elevator, Mitsubishi, Siemens, Disney, FedEx, MARS, and The Home Depot.  Smart Inventory Planning & Optimization gives demand planners the tools to handle sales seasonality, promotions, new and aging products, multi-dimensional hierarchies, and intermittently demanded service parts and capital goods items.  It also provides inventory managers with accurate estimates of the optimal inventory and safety stock required to meet future orders and achieve desired service levels.  Smart Software is headquartered in Belmont, Massachusetts and can be found on the World Wide Web at www.smartcorp.com.

SmartForecasts and Smart IP&O are registered trademarks of Smart Software, Inc.  All other trademarks are the property of their respective owners.


For more information, please contact Smart Software, Inc., Four Hill Road, Belmont, MA 02478.
Phone: 1-800-SMART-99 (800-762-7899); FAX: 1-617-489-2748; E-mail: info@smartcorp.com

2019 Microsoft Dynamics NAV User Group Summit

Smart Software to Present at NESCON 2019

Smart Software to lead NESCON keynote address on Planning for the “Un-Plannable”.

Belmont, Mass., July 8, 2019 – Smart Software, Inc., provider of industry-leading demand forecasting, planning, and inventory optimization solutions, today announced that it will present at the NESCON 2019, New England Supply Chain Conference & Exhibition Keynote in Malborough, MA. The presentation is scheduled for Oct. 7, 12:15-1:30 PM.

Greg Hartunian, CEO of Smart Software, under the tittle “Planning for the Un-Plannable”, will present how to plan optimal inventory levels and purchase quantities for thousands of items, when demand is intermittent, constantly changing, or affected by unexpected events. Random, sporadic demand is the worst case scenario for planning and procurement, and leads to excess inventory levels, and costly stock outs. Greg will discuss traditional inventory planning and forecasting approaches, present practical examples of how they can fail, and share how probabilistic modeling methods can make a big difference to your bottom line. The Keynote is a good opportunity  to learn how to reduce stock outs and inventory costs, by leveraging data driven decisions that identify the financial trade-offs associated with changes in demand, lead times, service level targets, and costs.

Greg_Hartunian_CEO_President_Smart_Software

About Smart Software, Inc.

Founded in 1984, Smart Software, Inc. is a leader in providing businesses with enterprise-wide demand forecasting, planning and inventory optimization solutions.  Smart Software’s demand forecasting and inventory optimization solutions have helped thousands of users worldwide, including customers at mid-market enterprises and Fortune 500 companies, such as Otis Elevator, Mitsubishi, Siemens, Disney, FedEx, MARS, and The Home Depot.  Smart Inventory Planning & Optimization gives demand planners the tools to handle sales seasonality, promotions, new and aging products, multi-dimensional hierarchies, and intermittently demanded service parts and capital goods items.  It also provides inventory managers with accurate estimates of the optimal inventory and safety stock required to meet future orders and achieve desired service levels.  Smart Software is headquartered in Belmont, Massachusetts and can be found on the World Wide Web at www.smartcorp.com.

SmartForecasts and Smart IP&O are registered trademarks of Smart Software, Inc.  All other trademarks are the property of their respective owners.


For more information, please contact Smart Software, Inc., Four Hill Road, Belmont, MA 02478.
Phone: 1-800-SMART-99 (800-762-7899); FAX: 1-617-489-2748; E-mail: info@smartcorp.com