Implementing Demand Planning and Inventory Optimization Software with the Right Data

Data verification and validation are essential to the success of the implementation of software that performs statistical analysis of data, like Smart IP&O.  This article describes the issue and serves as a practical guide to doing the job right, especially for the user of the new application.

The less experience your organization has in validating historical transactions or item master attributes, the more likely it is there were problems or mistakes with data entry into the ERP that have so far gone unnoticed.  The garbage in, garbage out rule means you need to prioritize this step of the software onboarding process or risk delay and possible failure to generate ROI.

Ultimately the best person to confirm data in your ERP is entered correctly is the person who knows the business and can assert, for example, “this part doesn’t belong to that product group.”  That’s usually the same person who will open and use Smart. Though a database administrator or IT support can also play a key role by being able to say, “This part was assigned to that product group last December by Jane Smith.” Ensuring data is correct may not be a regular part of your day job but can be broken down into manageable small tasks that a good project manager will allocate the time and resources to complete.

The demand planning software vendor receiving the data also has a role.  They will confirm that the raw data was ingested without issue. The vendor can also identify abnormalities in the raw data files that point to the need for validation.  But relying on the software vendor to reassure you the data looks fine is not enough.  You don’t want to discover, after go-live, that you can’t trust the output because some of the data “doesn’t make sense.”

Each step in the data flow needs verification and validation.  Verification means the data at one step is still the same after flowing to the next step.  Validation means the data is correct and usable for analysis

The most common data flow looks like this:

Implementing Demand Planning and Inventory Optimization Software with the Right Data set

Less commonly, the first step between ERP master data and the interfacing files can sometimes be bypassed, where files are not used as an interface.  Instead, an API built by IT or the inventory optimization software vendor is responsible for data to be written directly from the ERP to the mirrored database in the cloud.  The vendor would work with IT to confirm the API is working as expected.  But the first validation step, even in that case, can still be performed.  After ingesting the data, the vendor can make the mirrored data available in files for the DBA/IT verification and business validation.

The confirmation that the mirrored data in the cloud completes the flow into the application is the responsibility of the vendor of software as a service.  SaaS vendors continually test that the software works correctly between the front-end application their subscribers see and the back-end data in the cloud database. If the subscribers still think the data doesn’t make sense in the application even after validating the interfacing files before going live, that is an issue to raise with the vendor’s customer support.

However the interfacing files are obtained, the largest part of verification and validation falls to the project manager and their team.  They must resource a test of the interfacing files to confirm:

  1. They match the data in the ERP. And that all and only the ERP data that was necessary to extract for use in the application was extracted.
  2. Nothing “jumps out” to the business as incorrect for each of the types of information in the data
  3. They are formatted as expected.

 

DBA/IT Verification Tasks

  1. Test the extract:

IT’s verification step can be done with various tools, comparing files, or importing files back to the database as temporary tables and joining them with the original data to confirm a match.  IT can depend on a query to pull the requested data into a file but that file can fail to match. The existence of delimiters or line returns within the data values can cause a file to be different than its original database table.  It is because the file relies heavily on delimiters and line returns to identify fields and records, while the table doesn’t rely on those characters to define its structure.

  1. No bad characters:

Free form data entry fields in the ERP, such as product descriptions, can sometimes themselves contain line returns, tabs, commas, and/or double quotes that can affect the structure of the output file.  Line returns should not be allowed in values that will be extracted to a file.  Characters equal to the delimiter should be stripped during extract or else a different delimiter used.

Tip: if commas are the file delimiter, numbers greater than 999 can’t be extracted with a comma. Use “1000” rather than “1,000”.

  1. Confirm the filters:

The other way that query extracts can return unexpected results is if conditions on the query are entered incorrectly.  The simplest way to avoid mistaken “where clauses” is to not use them.  Extract all data and allow the vendor to filter out some records according to rules supplied by the business.  If this will produce extract files so large that too much computing time is spent on the data exchange, the DBA/IT team should meet with the business to confirm exactly what filters on the data can be applied to avoid exchanging records that are meaningless to the application.

Tip: Bear in mind that Active/Inactive or item lifecycle information should not be used to filter out records.  This information should be sent to the application so it knows when an item becomes inactive.

  1. Be consistent:

The extract process must produce files of consistent format every time it is executed.  File names, field names, and position, delimiter, and Excel sheet name if Excel is used, numeric formats and date formats, and the use of quotes around values should never differ from one execution of the extract one day to the next. A hands-off report or stored procedure should be prepared and used for every execution of the extract.

 

Business Validation Background

Below is a break down each of validation step into considerations, specifically in the case where the vendor has provided a template format for the interfacing files where each type of information is provided in its own file.  Files sent from your ERP to Smart are formatted for easy export from the ERP.  That sort of format makes the comparison back to the ERP a relatively simple job for IT, but it can be harder for the business to interpret.  Best practice is to manipulate the ERP data, either by using pivot tables or similar in a spreadsheet.  IT may assist by providing re-formatted data files for review by the business.

To delve into the interfacing files, you’ll need to understand them.  The vendor will supply a precise template, but generally interfacing files consist into three types: catalog data, item attributes, and transactional data.

  • Catalog data contains identifiers and their attributes. Identifiers are typically for products, locations (which could be plants or warehouses), your customers, and your suppliers.
  • Item attributes contain information about products at locations that are needed for analysis on the product and location combination. Such as:
    • Current replenishment policy in the form of a Min and Max, Reorder Point, or Review Period and Order Up To value, or Safety Stock
    • Primary supplier assignment and nominal lead time and cost per unit from that supplier
    • Order quantity requirements such as minimum order quantity, manufacturing lot size, or order multiples
    • Active/Inactive status of the product/location combination or flags that identify its state in its lifecycle, such as pre-obsolete
    • Attributes for grouping or filtering, such as assigned buyer/planner or product category
    • Current inventory information like on hand, on order, and in transit quantities.
  • Transactional data contains references to identifiers along with dates and quantities. Such as quantity sold in a sales order of a product, at a location, for a customer, on a date.  Or quantity placed on purchase order of a product, into a location, from a supplier, on a date. Or quantity used in a work order of a component product at a location on a date.

 

Validating Catalog Data

Considering catalog data first, you may have catalog files similar to these examples:

Implementing Demand Planning and Inventory Optimization Software 111

Location Identifier Description Region Source Location  etc…
Location1 First location North    
Location2 Second location South Location1  
Location3 Third location South Location1  
…etc…        

 

Customer Identifier Description SalesPerson Ship From Location  etc…
Customer1 First customer Jane Location1  
Customer2 Second customer Jane Location3  
Customer3 Third customer Joe Location2  
…etc…        

 

Supplier Identifier Description Status Typical Lead                 Time Days  etc…
Supplier1 First supplier Active 18  
Supplier2 Second supplier Active 60  
Supplier3 Third Supplier Active 5  
…etc…        

 

1: Check for a reasonable count of catalog records

For each file of catalog data, open it in a spreadsheet tool like Google Sheets or MS Excel. Answer these questions:

  1. Is the record count in the ballpark? If you have about 50K products, there should not be only 10K rows in its file.
  2. If it’s a short file, maybe the Location file, you can confirm exactly that all expected Iidentifiers are in it.
  3. Filter by each attribute value and confirm again the count of records with that attribute value makes sense.

2: Check the correctness of values in each attribute field

Someone who knows what the products are and what the groups mean needs to take the time to confirm it is actually right, for all the attributes of all the catalog data.

So, if your Product file contains the attributes as in the example above, you would filter for Status of Active, and check that all resulting products are actually active.  Then filter for Status of Inactive and check that all resulting products are actually inactive.  Then filter for the first Group value and confirm all resulting products are in that group.  Repeat for Group2 and Group3, etc.  Then repeat for every attribute in every file.

It can help to do this validation with a comparison to an already existing and trusted report.  If you have another spreadsheet that shows products by Group for any reason, you can compare the interfacing files to it.  You may need to familiarize yourself with the VLOOKUP function that helps with spreadsheet comparison.

Validating Item Attribute Data

1: Check for a reasonable count of item records

The item attribute data confirmation is similar to the catalog data.  Confirm the product/location combination count makes sense in total and for each of the unique item attributes, one by one. This is an example item data file:

Implementing Demand Planning and Inventory Optimization Software 22

2: Find and explain weird numbers in item file

There tends to be many numerical values in the item attributes, so “weird” numbers merit review.  To validate data for a numerical attribute in any file, search for where the number is:

  • Missing entirely
  • Equal to zero
  • Less than zero
  • More than most others, or less than most others (sort by that column)
  • Not a number at all, when it should be

A special consideration of files that are not catalog files is they may not show the descriptions of the products and locations, just their identifiers, which can be meaningless to you.  You can insert columns to hold the product and location descriptors that you are used to seeing and fill them into the spreadsheet to assist in your work.  The VLOOKUP function works for this as well.  Whether or not you have another report to compare the Items file to, you have the catalog files for Products and Location with show both the identifier and the description for each row.

3: Spot check

If you are frustrated to find that there are too many attribute values to manually check in a reasonable amount of time, spot checking is a solution. It can be done in a manner likely to pick up on any problems.  For each attribute, get a list of the unique values in each column.  You can copy a column into a new sheet, then use the Remove Duplicates function to see the list of possible values.   With it:

  1. Confirm that no attribute values are present that shouldn’t be.
  2. It can be harder to remember which attribute values are missing that should be there, so it can help to look at another source to remind you. For example, if Group1 through Group12 are present, you might check another source to remember if these are all the Groups possible.  Even if it is not required for the interfacing files for the application, it may be easy for IT to extract a list of all the possible Groups that are in your ERP which you can use for the validation exercise.  If you find extra or missing values that you don’t expect, bring an example of each to IT to investigate.
  3. Sort alphabetically and scan down to see if any two values are similar but slightly different, maybe only in punctuation, which could mean one record had the attribute data entered incorrectly.

For each type of item, maybe one from each product group and/or location, check that all its attributes in every file are correct or at least pass a sanity check.  The more you can spot check from a broad range of items, the less likely you will have issues post go live.

 

Validating Transactional Data

Transactional files may all have a format similar to this:

Implementing Demand Planning and Inventory Optimization Software 333

 

1: Find and explain weird numbers in each transactional file

These should be checked for “weird” numbers in the Quantity field.  Then you can proceed to:

  1. Filter for dates outside the range you expect or missing expected dates entirely.
  2. Find where Transaction identifiers and line numbers are missing. They shouldn’t be.
  3. If there is more than one record for a given Transaction ID and Transaction Line Number combination, is that a mistake? Put another way, should duplicate records have their quantities summed together or is that double counting?

2: Sanity check summed quantities

Do a sanity check by filtering to a particular product you’re familiar with, and filter to a relatable date range such as last month or last year, and sum the quantities.  Is that total amount what you expected for that product in that time frame?  If you have information on total usage out of a location, you can slice the data that way to sum the quantities and compare to what you expect.  Pivot tables come in handy for verification of transactional data.  With them, you can view the data like:

Product Year Quantity Total
Prod1 2022 9,034
Prod1 2021 8,837
etc    

 

The products’ yearly total may be simple to sanity check if you know the products well.  Or you can VLOOKUP to add attributes, such as product group, and pivot on that to see a higher level that is more familiar:

Product Group Year Quantity Total
Group1 2022 22,091
Group2 2021 17,494
etc    

 

3: Sanity check count of records

It may help to display a count of transactions rather than a sum of the quantities, especially for purchase order data.  Such as:

Product Year Number of POs
Prod1 2022 4
Prod1 2021 1
etc    

 

And/or the same summarization at a higher level, like:

Product Group Year Number of POs
Group1 2022 609
Group2 2021 40
etc    

 

4: Spot checking

Spot checking the correctness of a single transaction, for each type of item and each type of transaction, completes due diligence.  Pay special attention to what date is tied to the transaction, and whether it is right for the analysis.  Dates may be a creation date, like the date a customer placed an order with you, or a promise date, like the date you expected to deliver on the customer’s order at the time of creating it, or a fulfilment date, when you actually delivered on the order.  Sometimes a promise date gets modified days after creating the order if it can’t be met.  Make sure the date in use reflects actual demand by the customer for the product most closely.

What to do about bad data 

If the mis-entries are few or one-off, you can edit the ERP records by hand as they are found, cleaning up your catalog attributes, even after go-live with the application.  But if large swathes of attributes or transaction quantities are off, this can spur an internal project to re-enter data correctly and possibly to change or start to document the process that needs to be followed when new records are entered into your ERP.

Care must be taken to avoid too long a delay in implementation of the SaaS application while waiting on clean attributes.  Break the work into chunks and use the application to analyze the clean data first so the data cleansing project occurs in parallel with getting value out of the new application.

 

 

7 Digital Transformations for Utilities that will Boost MRO Performance

Utilities in the electrical, natural gas, urban water and wastewater, and telecommunications fields are all asset intensive. Generation, production, processing, transmission, and distribution of electricity, natural gas, oil, and water, are all reliant on physical infrastructure that must be properly maintained, updated, and upgraded over time. Maximizing asset uptime and the reliability of physical infrastructure demands effective inventory management, spare parts forecasting, and supplier management.

A utility that executes these processes effectively will outperform its peers, provide better returns for its investors and higher service levels for its customers, while reducing its environmental impact. Impeding these efforts are out-of-date IT systems, evolving security threats, frequent supply chain disruptions, and extreme demand variability.  However, the convergence of these challenges with mature cloud technology and recent advancements in data analytics, probabilistic forecasting, and technologies for data management, present utilities a generational opportunity to digitally transform their enterprise.

Here are seven digital transformations that require relatively small upfront investments but will generate seven-figure returns.

1. Inventory Management is the first step in MRO inventory optimization. It involves analyzing current inventory levels and usage patterns to identify opportunities for improvement. This should include looking for overstocked, understocked, or obsolete items.  New probabilistic forecasting technology will help by simulating future parts usage and predicting how current stocking policies will perform.  Pats planners can use the simulation results to proactively identify where policies should be modified.

2. Accurate forecasting and demand planning are very important in optimizing MRO service parts inventories. An accurate demand forecast is a critical supply chain driver. By understanding demand patterns that result from capital projects and planned and unplanned maintenance, parts planners can more accurately anticipate future inventory needs, budget properly, and better communicate anticipated demand to suppliers. Parts forecasting software can be used to automatically house an accurate set of historical usage that details planned vs. unplanned parts demand.

3. Managing suppliers and lead times are important components of MRO inventory optimization. It involves selecting the best vendors for the job, having backup suppliers that can deliver quickly if the preferred supplier fails, and negotiating favorable terms.  Identifying the right lead time to base stocking policies on is another important component. Probabilistic simulations available in parts planning software can be used to forecast the probability for each possible lead time that will be faced. This will result in a more accurate recommendation of what to stock compared to using a supplier quoted or average lead time.

4. SKU rationalization and master data management removes ineffective or out-of-date SKUs from the product catalog and ERP database. It also identifies different part numbers that have been used for the same SKU. The operating cost and profitability of each product are assessed during this procedure, resulting in a common list of active SKUs.  Master data management software can assess product catalogs and information stored in disparate data bases to identify SKU rationalizations ensuring that inventory policies are based on the common part number.

5.  Inventory control systems are key to synchronizing inventory optimization.    They provide a cost-efficient way for utilities to track, monitor, and manage their inventory. They helps ensure that the utility has the right supplies and materials when and where needed while minimizing inventory costs.

6. Continuous improvement is essential for optimizing MRO inventories. It involves regularly monitoring and adjusting inventory levels and stocking policies to ensure the most efficient use of resources. When operating conditions change, the utility must detect the change and adjust its operations accordingly. This means planning cycles must operate at a tempo high enough to stay up with changing conditions. Leveraging probabilistic forecasting to recalibrate service parts stocking policies each planning cycle ensures that stocking policies (such as min/max levels) are always up-to-date and reflect the latest parts usage and supplier lead times.

7. Planning for intermittent demand with modern Spare Parts Planning Software.  The result is a highly accurate estimate of safety stocks, reorder points, and order quantities, leading to higher service levels and lower inventory costs.   Smart Software’s patented probabilistic spare parts forecasting software simulates the probability for each possible demand, accurately determining how much to stock to achieve a utility’s targeted service levels.  Leveraging software to accurately simulate the inflow and outflow of repairable spare parts will better predict downtime, service levels, and inventory costs associated with any chosen pool size for repairable spares.

 

Spare Parts Planning Software solutions

Smart IP&O’s service parts forecasting software uses a unique empirical probabilistic forecasting approach that is engineered for intermittent demand. For consumable spare parts, our patented and APICS award winning method rapidly generates tens of thousands of demand scenarios without relying on the assumptions about the nature of demand distributions implicit in traditional forecasting methods. The result is highly accurate estimates of safety stock, reorder points, and service levels, which leads to higher service levels and lower inventory costs. For repairable spare parts, Smart’s Repair and Return Module accurately simulates the processes of part breakdown and repair. It predicts downtime, service levels, and inventory costs associated with the current rotating spare parts pool. Planners will know how many spares to stock to achieve short- and long-term service level requirements and, in operational settings, whether to wait for repairs to be completed and returned to service or to purchase additional service spares from suppliers, avoiding unnecessary buying and equipment downtime.

Contact us to learn more how this functionality has helped our customers in the MRO, Field Service, Utility, Mining, and Public Transportation sectors to optimize their inventory. You can also download the Whitepaper here.

 

 

White Paper: What you Need to know about Forecasting and Planning Service Parts

 

This paper describes Smart Software’s patented methodology for forecasting demand, safety stocks, and reorder points on items such as service parts and components with intermittent demand, and provides several examples of customer success.

 

    Extend Epicor Prophet 21 with Smart IP&O’s Forecasting & Dynamic Reorder Point Planning

    In this article, we will review the inventory ordering functionality in Epicor P21, explain its limitations, and summarize how Smart Inventory Planning & Optimization (Smart IP&O) can help reduce inventory, minimize stock-outs and restore your organization’s trust in your ERP by providing robust predictive analytics, consensus-based forecasting, and what-if scenario planning.

    Replenishment Planning Features within Epicor Prophet 21
    Epicor P21 can manage replenishment by suggesting what to order and when via reorder point-based or forecast-driven inventory policies.  Users may compute these policies externally or generate them dynamically within P21.  Once the policies and forecasts have been specified, P21’s Purchase Order Requirements Generator (PORG) will create automated order suggestions of what to replenish and when by reconciling incoming supply, current on hand, outgoing demand, stocking policies, and demand forecasts.

    Epicor P21 has 4 Replenishment Methods
    In the item maintenance screen of Epicor P21, users can choose from one of four replenishment methods for each stock item.

    1. Min/Max
    2. Order Point/Order Quantity
    3. EOQ
    4. Up To

    There are additional settings and configurations for determining lead times and accounting for order modifiers such as supplier-imposed minimum and maximum order quantities.  Min/Max and Order Point/Order Quantity are considered “static” policies.  EOQ and Up To are considered “dynamic” policies and computed within P21.

    Min/Max
    The reorder point is equal to the Min.  Whenever on hand inventory drops below the Min (reorder point) the PORG report will create an order suggestion up to the Max (for example, if on hand after the breach is 20 units and the Max is 100 then the order quantity will be 80).  Min/Max is considered a static policy and once entered into P21 will remain unchanged unless overridden by the user.  Users often run spreadsheets to compute the Min/Max values and update them from time to time.

    Order Point/Order Quantity
    This is the same as the Min/Max policy except instead of ordering up to the Max, an order will be suggested for a fixed quantity defined by the user (for example, always order 100 units when the order point is breached). OP/OQ is considered a static policy and will remain unchanged unless overridden by the user.  Users often run spreadsheets to compute OP/OQ values and update them from time to time.

    EOQ
    The EOQ policy is a reorder point-based method.  The reorder point is dynamically generated based on P21’s forecast of demand over lead time + demand over the review period + safety stock.  The order quantity is based on an Economic Order Quantity calculation that considers holding costs and ordering costs and attempts to recommend an order size that minimizes total cost.  When on hand inventory breaches the reorder point, the PORG report will kick out an order equal to the computed EOQ.

    Up To
    The Up To method is another dynamic policy that relies on a reorder point.  It is computed the same way as the EOQ method using P21’s forecasted demand over the lead time + demand over review period + safety stock.   The order quantity suggestion is based on whatever is needed to replenish stock back “up to” the reorder point.  This tends to equate to an order quantity that is consistent with the lead time demand because as demand drives stock below the reorder point, orders will be suggested “up to” the reorder point.

    Epicor Prophet 21 with Forecasting Inventory Planning P21

    P21’s Item Maintenance Screen where users can specify the desired inventory policy and configure other settings such as safety stock and order modifiers.

    Limitations

    Forecast Methods
    There are two forecast modes in P21:  Basic and Advanced.  Each use a series of averaging methods and require manual configurations and user determined classification rules to generate a demand forecast.  Neither mode is designed with an out-of-the-box expert system that automatically generates forecasts that account for underlying patterns such as trend or seasonality.  Lots of configuration is required that tends to inhibit user adoption and modification of the assumed forecasting rules defined in the initial implementation that may no longer be relevant.  There isn’t a way to easily compare the forecast accuracy of different configurations.  For example, is it better to use 24 months of history or 18 months?  Is it more accurate to assume a trend should be applied when an item grows by 2% per month or should it be 10%?  Is it better to assume the item is seasonal if 80% or more of it’s demand occurs in 6 months of the year or  4 months of the year? As a result, it is common for classification rules to be too broad or specific resulting in problems such as application of an incorrect forecasting model, using too much or too little history, or over/understating the trend and seasonality.   To learn more about how this works, check out this blog post (coming soon)

    Forecast Management & Consensus Planning
    P21 lacks forecast management features that enable organizations to plan at multiple hierarchy levels such as product family, region, or by customer.  Forecasts must be created at the lowest level of granularity (product by location) where demand is often too intermittent to get a good forecast.  There isn’t a way to share forecasts, collaborate, review, or create forecasts at aggregate levels, and agree on the consensus plan. It is difficult to incorporate business knowledge, assess forecasts at higher levels of aggregation, and track whether overrides are improving or hurting forecast accuracy. This makes forecasting too one-dimensional and dependent on the initial math configurations.  

    Intermittent Demand
    Many P21 customers rely on static methods (Min/Max and OP/OQ) because of the prevalence of intermittent demand.  Otherwise known as “lumpy”, intermittent demand is characterized by sporadic sales, large spikes in demand, and many periods with no demand at all. When demand is intermittent, traditional forecasting and safety stock methods just don’t work.  Since distributors don’t have the luxury of stocking only high movers with consistent demand, they need specialized solutions that are engineered to effectively plan intermittently demanded items. 80% or more of a distributor’s parts will have intermittent demand.  The stocking policies that are generated using traditional methods such as those available in P21 and other planning applications will result in incorrect estimates of what to stock to achieve the targeted service level.  As illustrated in the graph below, it isn’t possible to consistently forecast the spikes.  You are stuck with a forecast that is effectively an average of the prior periods.

    Epicor Prophet 21 with Forecasting Inventory Management

    Forecasts of intermittent demand can’t predict the spikes and require safety stock buffers to protect against stockouts.

     

    Second, P21’s safety stock methods allow you to set a target service level but the underlying logic mistakenly assumes that the demand is normally distributed.  With intermittent demand, the demand isn’t “normal” and therefore the estimate of safety stock will be wrong.   Here is what wrong means: when setting a service level of, for example 98%, the expectation is that 98% of the time the stock on hand will fill 100% of what the customer needs from the shelf.  Using a normal distribution to compute safety stocks will result in large deviations between the targeted service level and actual service level achieved.  It is not uncommon to see situations where the actual service level misses the target by 10% or more (i.e., targeted 95% but only achieved 85%).

     

    Epicor Prophet 21 with Forecasting Inventory Analytics

    In this figure you can see the demand history of an intermittently demanded part and two distributions based on this demand history. The first distribution was generated using the same “normal distribution: logic employed by P21. The second is a simulated distribution based on Smart Software’s probabilistic forecasting. The “normal” P21 distribution recommends that 46 units is needed to achieve the 99% service level but when compared to actuals far more inventory was needed. Smart accurately predicted that 63 units was required to achieve the service level.

    This blog explains how you can test your system’s service level accuracy.

    Reliance on Spreadsheets & Reactive Planning
    P21 customers tell us that they rely heavily on the use of spreadsheets to manage stocking policies and forecasting.  Spreadsheets aren’t purpose-built for forecasting and inventory optimization. Users will often bake in user-defined rule of thumb methods that often do more harm than good.  Once calculated, users must input the information back into P21 via manual file imports or even manual entry.  The time consuming nature of the process leads companies to infrequently compute their inventory policies – Many months and on occasion years go by in between mass updates leading to a “set it and forget it” reactive approach, where the only time a buyer/planner reviews inventory policy is at the time of order.  When policies are reviewed after the order point is already breached, it is too late.  When the order point is deemed too high, manual interrogation is required to review history, calculate forecasts, assess buffer positions, and to recalibrate.  The sheer volume of orders means that buyers will just release orders rather than take the painstaking time to review everything, leading to significant excess stock.  If the reorder point is too low, it’s already too late.  An expedite is now required driving up costs and even then, you’ll still lose sales if the customer goes elsewhere.

    Limited What If Planning
    Since features for modifying reorder points and order quantities are baked into P21 it is not possible to make wholesale changes across groups of items and assess predicted outcomes before deciding to commit.  This forces users to adopt a “wait and see” process when it comes to modifying parameters. Planners will make a change and then monitor actuals until they are confident the change improved things.  Managing this at scale—many planners are dealing with tens of thousands of items—is extremely time consuming and the end result is infrequent recalibration of inventory policy. This also contributes to reactive planning whereby planners will only review settings after a problem has occurred.

    Epicor is Smarter
    Epicor has partnered with Smart Software and offers Smart IP&O as a cross platform add-on to Prophet 21 complete with a bidirectional API-based integration.  This enables Epicor customers to leverage built-for-purpose best of breed forecasting and inventory optimization applications.  With Epicor Smart IP&O you can generate forecasts that capture trend and seasonality without having to first apply manual configurations.  You will be able to automatically recalibrate policies every planning cycle using field proven, cutting-edge statistical and probabilistic models that were engineered to accurately plan for intermittent demand.   Safety stocks will accurately account for demand and supply variability, business conditions, and priorities.  You can leverage service level driven planning so you have just enough stock or turn on optimization methods that prescribe the most profitable stocking policies and service levels that consider the real cost of carrying inventory. You can build consensus demand forecasts that blend business knowledge with statistics, better assess customer and sales forecasts, and confidently upload forecasts and stocking policies to Epicor with a few mouse-clicks.

    Smart IP&O customers routinely realize 7 figure annual returns from reduced expedites, increased sales, and less excess stock, all the while gaining a competitive edge by differentiating themselves on improved customer service. To see a recorded webinar hosted by the Epicor Users Group that profiles Smart’s Demand Planning and Inventory Optimization platform, please register here: https://smartcorp.com/epicor-smart-inventory-planning-optimization/

     

     

     

    The Supply Chain Blame Game: Top 3 Excuses for Inventory Shortage and Excess

    1. Blaming Shortages on Lead Time Variability
    Suppliers will often be late, sometimes by a lot. Lead time delays and supply variability are supply chain facts of life, yet inventory carrying organizations are often caught by surprise when a supplier is late.  An effective inventory planning process embraces these facts of life and develops policies that effectively account for this uncertainty.  Sure, there will be times when lead time delays come out of nowhere.  But most often the stocking policies like reorder points, safety stocks, and Min/Max levels aren’t recalibrated often enough to catch changes in the lead time over time.  Many companies only review the reorder point after it has been breached, instead of recalibrating after each new lead time receipt.  We’ve observed situations where the Min/Max settings are only recalibrated annually or are even entirely manual.  If you have a mountain of parts using old Min/Max levels and associated lead times that were relevant a year ago, it should be no surprise that you don’t have enough inventory to hold you until the next order arrives.

     

    2. Blaming Excess on Bad Sales/Customer Forecasts
    Forecasts from your customers or your sales team are often intentionally over-estimated to ensure supply, in response to past inventory shortages where they were left out to dry. Or, the demand forecasts are inaccurate simply because the sales team doesn’t really know what their customer demand is going to be but are forced to give a number. Demand Variability is another supply chain fact of life, so planning processes need to do a better job account for it.  Why should rely on sales teams to forecast when they best serve the company by selling? Why bother playing the game of feigning acceptance of customer forecasts when both sides know it is often nothing more than a WAG?  A better way is to accept the uncertainty and agree on a degree of stockout risk that is acceptable across groups of items.  Once the stockout risk is agreed to, you can generate an accurate estimate of the safety stock needed to counter the demand variability.  The catch is getting buy-in, since you may not be able to afford super high service levels across all items.  Customers must be willing to pay a higher price per unit for you to deliver extremely high service levels.  Sales people must accept that certain items are more likely to have backorders if they prioritize inventory investment on other items.  Using a consensus safety stock process ensures you are properly buffering and setting the right expectations.  When you do this, you free all parties from having to play the prediction game they were not equipped to play in the first place.

     

    3. Blaming Problems on Bad Data
    “Garbage In/Garbage Out” is a common excuse for why now is not the right time to invest in planning software. Of course, it is true that if you feed bad data into a model, you won’t get good results, but here’s the thing:  someone, somewhere in the organization is planning inventory, building a forecast, and making decisions on what to purchase. Are they doing this blindly, or are they using data they have curated in a spreadsheet to help them make inventory planning decisions? Hopefully, the latter.  Combine that internal knowledge with software, automating data import from the ERP, and data cleansing.  Once harmonized, your planning software will provide continually updated, well-structured demand and lead time signals that now make effective demand forecasting and inventory optimization possible.  Smart Software cofounder Tom Willemain wrote in an IBF newsletter that “many data problems derive from data having been neglected until a forecasting project made them important.” So, start that forecasting project, because step one is making sure that “what goes in” is a pristine, documented, and accurate demand signal.

     

     

    Inventory Planning Becomes More Interesting

    The Smart Forecaster

     Pursuing best practices in demand planning,

    forecasting and inventory optimization

    Taiichi Ohno of Toyota is credited with inventing Just-In-Time (JIT) manufacturing in the 1950s. JIT ensures that a manufacturer produces only what is needed, only when required, and only in the necessary amount. That innovation has since had major impacts, some good, some less so.

    A recent New York Times article “How the World Ran out of Everything” describes some of the “less so” impacts.  For example, JIT has kept inventory costs very low improving return on assets.  This in turn is rewarded by Wall Street, so many companies have spent the last few decades reducing their inventories dramatically. Focused as they were on financials, many companies ignored the risks inherent in reducing inventories to the point that “lean” began to border on “emaciated.” Combined with increased globalization and new risks of supply interruption, stock-outs have abounded.

    Some industries have gone too far, leaving them exposed to disruption. In a competition to get to the lowest cost, companies have inadvertently concentrated their risk, been interrupted by shortages of raw materials or components, and sometimes forced to halt assembly lines. Wall Street does not look kindly on production halts.

    We all know that random events have added to the problem. First among them has been the Covid pandemic. As the pandemic has hindered factory operations and spread disarray in global shipping, many economies worldwide have been tormented by shortages of an immense range of goods — from computer chips to lumber to clothing.

    The damage is compounded when more unexpected things go wrong. The Suez Canal Blockage is a prime example, obstructing the main trade route between Europe and Asia. Recently, cyberattacks have added another layer of disruption.

    The reaction creates its own problems, just as the cyberattack on the Colonial Pipeline created gas shortages through panic buying. Suppliers start filling orders more slowly than usual. Manufacturers and distributors reverse course and increase inventories and diversify their suppliers to avoid future stockouts. Simply expanding warehouses may not deliver the solution, and the need to determine how much inventory to keep is more urgent every day.Manager In Warehouse With Inventory Management Software

    So how can you execute a real-world plan for JIT inventory amidst all this risk and uncertainty? The foundation of your response is your corporate data. Uncertainty has two sources: supply and demand. You need the facts for both.

    On the supply side, exploit the data you have on recent supplier lead times, which reflect the current turbulence. Don’t use average values when you can use probability distributions that reflect the full range of contingencies. Consider this comparison. Supplier A is now reliably filling orders in exactly 10 days. Supplier B also averages 10 days but does with a 78%/22% mix of 7 and 21 days. Both A and B have an average replenishment delay of 10 days, but the operational results they provide will be very different. You can only recognize this if you use probability models of inventory performance.

    On the demand side, similar considerations apply. First, recognize that there may have been a major shift in the character of item demand (statisticians call this a “regime change”), so purge from your analysis any data that represent the “good old days.” Then, again, stop thinking in terms of averages. While the average demand is important, it is not a sufficient descriptor of the problem you face. Equally important is the volatility of demand. Volatility is the reason you keep inventory in the first place. If demand were completely predictable, you would have neither stockouts nor excess inventory. Just as you need to estimate the full probability distribution of replenishment lead times, you need the full distribution of demand values.

    Once you understand the range of variability in both supply and demand, probabilistic forecasting will allow you to account for disruptions and unusual events. Software will convert your data on demand and lead times into huge numbers of scenarios representing how your next planning period might play out. Given those scenarios, the software can determine how best to meet your goals for such metrics as inventory costs and stockout rates. Using solutions such as Smart Inventory Optimization , you will confidently plan based on your targeted stockout risk with minimal inventory carrying cost. You may also consider letting the solution prescribe optimal service level targets by assessing the costs of additional inventory vs. stockout cost.

    In inventory planning, as in science, we cannot escape the reality of uncertainty and the impact of unusual events. We must plan accordingly: using inventory optimization software helps you identify the least-cost service level. This creates a coherent, company-wide effort that combines visibility into current operations with mathematically correct assessments of future risks and conditions.

    Inventory planning has become more “interesting” and requires a greater degree of risk awareness and agility. The right software can help.

     

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        Redefine Exceptions and Fine Tune Planning to Address Uncertainty

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        Inventory Planning from the Perspective of a Physicist

        In a perfect world, Just in Time (JIT) would be the appropriate solution for inventory management. If you can exactly predict what you need and where you need it and your suppliers can get what you need without delay, then you do not need to maintain much inventory locally.  But as the saying goes from famous pugilist Mike Tyson, “everyone has a plan until they get punched in the mouth.” And the latest punch in the mouth for the global supply chain was last week’s Suez Canal Blockage that held up $9.6B in trade costing an estimated $6.7M per minute[1].  Disruptions from these and similar events should be modeled and accounted for in your planning.

        The assumption that you can exactly predict the future was apparent in Isaac Newton’s laws. Since the 1920’s with the introduction of quantum physics, uncertainty became fundamental to our understanding of nature. Uncertainty is built into fundamental reality.  So too should it be built into Supply and Demand Planning processes.  Yet too often, black swan events such as the Suez Canal blockage are often thought of as anomalies and as a result, discounted when planning. It is not enough to look back in hindsight and proclaim that it should have been expected. Something needs to be done about addressing the occurrence of other such events in the future and planning stocking levels accordingly.

        We must move beyond the “thin tailed distribution” thinking where extreme outcomes are discounted and plan for “fat tails.”  So how do we execute a real-world JIT plan when it comes to planning inventory? To do this, the first step is to estimate the realistic lead time to obtain an item. However, estimation is difficult due to lead time uncertainty.  Using actual supplier lead times in your company database and external data, you can develop a distribution of possible future lead times and demands within those lead times. Probabilistic forecasting will allow you to account for disruptions and unusual events by not limiting your estimates to what has been observed solely on your own short-term demand and lead time data.  You’ll be able to generate possible outcomes with associated probabilities for each occurrence.

        Once you have an estimate of the lead time and demand distribution, you can then specify the service level you need to have for that part. Using solutions such as Smart Inventory Optimization (SIO), you will be able confidently stock based on the targeted stock-out risk with minimal inventory carrying cost. You may also consider letting the solution prescribe optimal service level targets by assessing the costs of additional inventory vs. cost of stockout.

        Finally, as I have already noted, we need to accept that we can never eliminate all uncertainty. As a physicist, I have always been intrigued by the fact that, even at the most basic levels of reality as we understand it today, there is still uncertainty. Albert Einstein believed in certainty (determinism) in physical law.  If he were an inventory manager, he might have argued for JIT because he believed physical laws should allow perfect predictability. He famously said, “God does not play with dice.”  Or could it be possible that the universe we exist in was a “black swan” event in a prior “multi-verse” that produced a particular kind of universe that allowed us to exist.

        In inventory planning, as in science, we cannot escape the reality of uncertainty and the impact of unusual events.  We must plan accordingly.

         

        [1] https://www.bbc.com/news/business-56559073#:~:text=Looking%20at%20the%20bigger%20picture,0.2%20to%200.4%20percentage%20points.

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