As we approach the midpoint in 2013, there is still a lot of economic uncertainty complicating your supply chain planning processes. Some look at this shaky economy and postpone needed investments that can position their organizations for a strong future.

However, this is not the time to retreat from your supply chain improvement initiatives. Rather, it’s a time to double-down on your efforts to prepare for the inevitable business opportunities that lie ahead.

Economic recovery is a time of sales opportunities. You want to make sure that you’re prepared to take advantage of them. Good demand and inventory planning can help.With the right software and planning processes, you can achieve a sound statistical basis for decision-making going forward while making informed adjustments as circumstances dictate. You can improve your ability to read demand signals, spot trends, model future events, and bring your inventory into balance with demand.

Here are six areas of demand and inventory planning where changes you make now can lead to big payoffs when new opportunities arise:

1. Optimize your inventories

When the customer calls, you want to be able to ship. At the same time, you want to control your costs. The surest way to meet that goal is to find the inventory “sweet spot.” That’s where you have the minimum amount of inventory required to satisfy product demand over a specified lead time and at a desired service level.

The ability to accurately set safety stock and inventory levels can set you apart from the competition, and make a difference in your bottom line. However, getting to that point requires a shift in your planning focus from just forecasting future demand to optimizing stocking levels to fill future orders.

If you’d like to know more about achieving the “sweet spot,” you can find a good article published in APICS Magazine here.

2. Implement intermittent demand forecasting solutions

Companies in the service parts, auto aftermarket, and capital goods industries commonly experience intermittent, “slow moving” demand for a large percentage of their inventory items. Accurately forecasting demand and estimating safety stock levels for these types of items is probably the toughest challenge demand planners face. If you can accurately forecast your intermittently demanded parts and products, and have the correct amount of inventory and safety stock on the shelf, you’ve got most of the competition beat!

The reason for this is that items that have intermittent demand do not have normal demand patterns or distributions, making them difficult to forecast using traditional forecasting methods (see the diagram below).

Bar chart illustrating intermittent demand

So, if you have an accurate means of forecasting intermittent demand and estimating safety stock requirements, you’ll be ahead of your competitors that don’t.

If you’d like to know more about forecasting and planning items with intermittent demand, you can find an informative white paper here.

3. Improve lead times

The economic downturn has forced companies to rethink their sourcing strategies because of uncertain demand back home, long lead times to obtain their goods, rising labor costs abroad, and increasing transportation costs. Shortening replenishment lead times can reduce the time required to get the products you need and helps make your supply chain more efficient. It also makes it easier to react to changes in demand when recovery comes.

4. Prioritize service levels

Prioritizing service levels for your products can help insure that the items important to your sales are given the attention they need. For items that are highly demanded, consider setting service levels higher than for those with less demand. Also try doing a revenue-based ABC analysis of your company’s stock-keeping units (SKUs) and set service levels accordingly in your software planning solution.

For example, you might set the service levels for your “bread and butter” items at 95-99% or higher, while setting service levels much lower (at 70-80% or even less) for other items. In this way, you may find that you need much less stock for some of your SKUs and more stock for others to effectively achieve your overall service level goals.

5. Use more recent demand history in creating your forecasts

Because the economy has been changing so fast, it may be time to shorten the demand history used in generating your forecasts so more emphasis is placed on recent trends and demand patterns—reflecting the “new normal”—rather than those contained in outdated history from 3 or 4 years ago. This, of course, should be done in consultation with your management team and preferably as part of an organized S&OP process that thoroughly evaluates both the risks and benefits of adopting this strategy.

6. Invest in technologies and resources that help you capitalize on opportunities

Investing in the right tools and processes increases your competitive advantage. If you aren’t doing so already, here are some valuable things to consider:

• Start an S&OP process, or fine tune your current process, to include key stakeholders in the supply chain and also ensure that demand forecasting and inventory planning provide key inputs in that planning process.

• If your forecasting software is not good at picking up trends, or cannot handle the portion of your inventory with intermittent demand, find software that’s up to the task.

• Find software that will take your forecast results and generate accurate inventory stocking levels to satisfy demand for your products, components or raw materials over specified lead times and at service levels you desire.

• Look for software solutions that are scalable, yet have a relatively low total cost of ownership, fast payback and high ROI.

• Finally, don’t scrimp on training; get all the training and consulting you need to get the “biggest bang” from your software investments.

Do you have anything to add? What are you doing to prepare for the economic recovery? Please leave a comment.

Charles Smart is the founding President of Smart Software. He currently serves as Vice Chairman, on Smart Software’s Board of Directors, as a company spokesman and in development of strategic business relationships. Prior to founding Smart Software, he was a management consultant at the Stanford Research Institute (SRI International) and Policy Analysis, Inc., and served as a Lieutenant in the U.S. Navy.

In a recent post at SupplyChainBrain, Robert Bowman takes a look at excellence in demand planning. Focusing on admirable qualities and techniques, it should be an interesting read for any demand planner seeking to improve his or her craft.

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Are you a hero?

The executive suites at most companies are populated by leaders who became corporate “heroes.” These exceptional performers led—and continue to lead—transformative initiatives that drive revenue growth, reduce costs and increase shareholder value.

Heroic accomplishments require a bold new approach, often fueled by a ground-breaking product or service. Harvard Business School professor Clayton M. Christensen speaks of “disruptive innovation,” the extreme case of a product or practice that creates a fundamentally new market or business approach. (The Harvard Business Review YouTube channel features an interview with Prof. Christensen on the subject here.) The trick is to recognize the possibility, and have the courage to do something about it.

This presents challenges on both sides of the fence. The “best in class” technology provider will have a hard time being heard—getting past entrenched vendors and established practices. The heroic practitioner has to want to hear what’s possible, be open to change and have the drive to execute. Building a community of believers and getting that shot to make a difference can be difficult, but that’s why this work is heroic.

You may be a budding hero, or an executive who can spot opportunities and “hero-making” opportunities in your team. I have encountered many of you over the years, and your successes have been our successes. My advice is simple: go for it. Life is short, possibilities are limitless and your courage will be rewarded.

Nelson Hartunian, PhD, co-founded Smart Software, formerly served as President, and currently oversees it as Chairman of the Board. He has, at various times, headed software development, sales and customer service.

The destructive impact of Hurricane Sandy has been both staggering and instructive. Our thoughts and best wishes for rapid recovery go out to all who have suffered personal or economic loss or damage. Now, in Sandy’s aftermath, we find ourselves thinking about accelerating recovery and planning for the next unforeseen event.

Our work with clients in the heavily hit mass transit sector presented a sobering view of damaged infrastructure, heavy equipment, and losses of essential inventory. Those most affected have seen a crush of work as inventory managers take stock of what they have, what they need and procure a mountain of replacement parts and products. This uniquely massive replenishment cycle presents all sorts of opportunities and considerations. For those who are still in this phase, and to help our collective preparation for the Next Big Event, here are a few thoughts:

Opportunity to immediately “right size” inventory

You may be in a position to receive a large, one-time infusion of funding for replacement inventory. It could be insurance money, federal relief or rainy day funds from your own treasury. Use the funding to establish the best possible inventory mix. Do not order to previously established Min/Max levels. Doing so may simply repeat excesses and shortfalls of the past.

A major event like Sandy presents a rare opportunity to transform your inventory. Start with an accurate demand forecast over the replenishment period, and generate safety stocks and reorder points that would address your critical needs. This can be accomplished in a matter of hours or days. Ordinarily, implementing optimal inventory levels may occur over several years, as excess inventory is gradually depleted. Now, however, you have a one-time opportunity to jump to the right answer. This shift can substantially reduce replenishment spending, freeing hundreds of thousands of dollars for other, more critical recovery uses.

Prioritize classes to be replenished

Be clear on what you need for crucial operations, and prioritize your replenishment. Which parts have long lead-times, and which are readily available? Obviously short lead-time items can be acquired in stages—getting just enough now, making funds available for the longer lead-time items.

Determine how much is “just enough”

This is where an accurate demand forecast, safety stocks and reorder point calculations come into play. Consider the service level you require—the likelihood that products will be on the shelves when you need them—which is really your tolerance for risk. Do this for each item, or class of items. This will tell you how much safety stock, in addition to your expected lead time forecast, you should have on hand. Iterating on service level-driven requirements will enable you to maximize the value of the replenishment budget at hand.

Statistical forecasting for intermittent demand vs. ‘rule of thumb’ methods

Now is the time to shift from ‘the way we’ve done it’ to the most accurate demand forecasting and inventory optimization process available to you. Greater forecast accuracy requires less safety stock—again, making inventory dollars available for other users. The greatest single category for improvement is intermittent demand. Most organizations do not apply solid statistical methods to this, instead resorting to the “heavy hammer rule”—have lots on hand because no one knows. Here is an area where SmartForecasts is especially adept, with a patented solution for forecasting intermittent demand. The resulting safety stock recommendations hit the service level goal nearly 100% of the time. Getting this right will save lots of spending now, and help minimize the potential for excess, obsolete inventory in the future.

Nelson Hartunian, PhD, co-founded Smart Software, formerly served as President, and currently oversees it as Chairman of the Board. He has, at various times, headed software development, sales and customer service.

Contributed to The Smart Forecaster by Dr. Greg Parlier (Colonel, U.S. Army, retired). Details on Dr. Parlier’s background conclude the post.

For over two decades, the General Accounting Office (GAO) has indicated that the Defense Department’s logistics management has been ineffective and wasteful, and that the Services lack strategic plans to improve overall inventory management and supply chain performance.

For the US Army, this problem is directly related to a persistent inability to link inventory investment levels and policies with supply chain effectiveness to achieve combat equipment readiness objectives required for globally deployed forces. This shortcoming has been attributed to numerous complexities associated with managing geographically dispersed, independently operating organizations, further compounded by a lack of visibility, authority and accountability across this vast global enterprise.

Unlike the corporate world, where powerful forces encourage innovation to drive competitiveness and efficiency, the Army is not a revenue generating organization focused on “quarterly earnings” and profitability. Certainly, the Army wants to be an efficient consumer of resources—but unlike the private sector’s focus on profit as a bottom line, the surrogate motivator for the Army is ‘force readiness’. This includes equipment availability and weapon system readiness for current operations in Afghanistan, as well as future capability requirements directed by the National Command Authority.

To sustain that equipment availability, the Army must synchronize disparate organizational components using myriad processes with disconnected legacy management information systems across numerous supply support activities which frequently relocate to support deploying forces.

Today, while still engaged in Afghanistan, the Army is also committed to a comprehensive and ongoing transformation. Central to this effort is recognition that dramatic improvements must be achieved in logistics operations and supply chain management. Owning one of the world’s largest and most complex supply chains, the Army is now investing in historically unprecedented efforts to fully capitalize on the promises offered by new information-based technologies. For example, the “Single Army Logistics Enterprise” is believed to be the most ambitious and expensive Enterprise Resource Planning (ERP) implementation project ever undertaken.

These ERP implementation projects have met with very mixed results. While the evidence suggests that dramatic performance improvements for competitive advantage can be achieved in the commercial sector, this has occurred only where so called “IT solutions” are applied to an underlying foundation of mature, efficient and appropriate business processes.

The reality of most cases in recent years, however, has not been this success. Rather, attempts have been made to “bolt on” a solution (like an ERP system, for example) to existing business processes, in misguided efforts to replicate legacy management practices. Such efforts to automate existing processes have, all too often, simply created chaos. In fact, these attempts have not only failed to achieve anticipated improvements, but have actually resulted in reduced performance.

The general pattern has been: the greater the IT investment and organizational scope, the more likely “failure” occurs, in the form of cost overruns, missed schedules, and even project failure—where the effort has finally been abandoned.

We believe the way to enable a coordinated, comprehensive approach for logistics transformation is by creating an “engine for innovation” to accelerate and sustain continuous performance improvement for Army logistics and supply chain management. We are developing a ‘Center for Innovation in Logistics Systems’ to systematically evaluate major organizational components, conduct root cause analyses, diagnose structural disorders and prescribe integrated solutions. We have now identified several ‘catalysts for innovation’ to reduce supply side variability and demand uncertainty—the proximate causes of the notorious ‘bull whip effect’. These include what we refer to as the ‘readiness equation’, ‘mission-based forecasting’, ‘readiness-based sparing’ and ‘readiness responsive retrograde’.

Our goal is to develop a comprehensive modeling capacity to generate and test these innovation catalysts along with several other initiatives in order to estimate cost effective approaches before they are adopted as policy and implemented in practice. We are looking at performance analysis, organizational design, management information and decision support concepts, enterprise systems engineering and workforce considerations including human capital investment needs.

Examining the ‘catalysts’ in isolation, we have seen significant potential for improvement which could yield hundreds of millions of dollars in savings. When combined into new, integrated management practices, however, the potential magnitude for improvement is truly dramatic—billions of dollars in further savings are likely. More importantly, it becomes possible to relate investment levels to current readiness and future capabilities.

The center is capable of developing ‘management innovation as a strategic technology’ by integrating advanced analytics with transformational strategic planning. By harnessing, focusing and applying the power of analysis, we are promoting both qualitative and quantitative common sense—the compelling analytical arguments for necessary change to pursue a common vision. With this power, we are beginning to educate the Army’s leadership, motivate logistics managers to action and provide a source for innovation the culture can embrace. During our journey, we have certainly adapted and applied much from both academic domains and the corporate sector. They, in turn, might now benefit from what we have been able to learn and achieve as well.

Prior to his retirement, Colonel Parlier was the Army’s senior, most experienced operations research analyst and served as Army Aviation and Missile Command’s (AMCOM) Deputy Commander for Transformation. He is the author of Transforming U.S. Army Supply Chains: Strategies for Management Innovation, describing the analytical framework of a multi-year Army Materiel Command (AMC) research and development project providing operations research insights for use by the Army and Department of Defense.