Infrequent Updates to Inventory Planning Parameters Costs Time, Money, and Hurts Service

The Smart Forecaster

 Pursuing best practices in demand planning,

forecasting and inventory optimization

Inventory planning parameters, such as safety stock levels, reorder points, Min/Max settings, lead times, order quantities, and DDMRP buffers directly impact inventory spending and ability to meet customer demand. Based on these parameter settings, your ERP system makes daily purchase order suggestions.

Ensuring that these inputs are understood and optimized regularly will substantially reduce wasteful inventory spending and dramatically improve customer service levels.

Given the importance of getting these planning parameters right, we spend a lot of time during our consultations asking (1) how these parameter values are calculated and (2) how often they are updated. Most often the methods for calculating the parameter values are rule of thumb. You can read about why using rule of thumb approaches is so problematic here  – Beware of Simple Rules of Thumb for Managing Inventory.

This blog will focus on the frequency of updates. When we interview companies and ask them how often they update planning parameters, the answer we nearly always hear is “every day!” A follow up question or two most often reveals that this just isn’t true. What “every day” actually means in practice is this: Every day, the ERP system suggests dozens to hundreds of purchase orders and/or production jobs. The planner, let’s call him Peter, reviews these orders daily and decides whether to release, modify, or cancel them. If the order suggestion doesn’t “feel right”, Peter reviews the planning inputs and modifies the order if necessary. For example, Peter may feel there is already enough inventory on hand. To “fix” the issue, he will reduce the reorder point and cancel the order. Or if he feels that the order should have been placed weeks ago, Peter may expedite the order and increase the reorder point and order quantity to ensure there will be plenty of stock the next time.

The principal flaws with this approach are that it is reactive and incomplete. Here is why:

Reactive

It only assesses the handful of items marked for replenishment on any given day but not others. The trigger for reviewing an item is when the ERP suggests an order, and that will only happen when the reorder point or Min is breached. If the Min is too high and breaches earlier than it should have, an unneeded order will be placed unless caught by the planner. If the Min is too low, well, it is too late to fix the error. No matter how large the order suggestion is, you still have to wait to be resupplied and since the order was suggested late, a stockout during the replenishment period is highly probable. Where is the “planning” in such a process? As one customer put it, “Our former process was, in hindsight, spent managing the outputs and not the inputs.”

 

Incomplete

Graphics for inventory gets excess and shortage for all locations of a bill of distributionWhat about the thousands of other items that have a Min/Max, safety Stock, Reorder Point, or other parameters that isn’t being reassessed given the updated demand and supply data. The planner isn’t reviewing any of these items which means problems aren’t being identified in advance. Compounding the problem is that when Peter does make a change he doesn’t have any tools to assess the quality of his changes. If he modifies the min/max settings he doesn’t know the specific impact this will have on inventory value, ordering costs, holding costs, stock outs, and service levels. He only knows that an increase in inventory will likely improve service and increase costs. He doesn’t know for example whether his inventory has reached a point of diminishing returns. When inventory decisions are made with only a very rough understanding of the trade offs it creates more problems downstream. You wouldn’t want your carpenter making rough estimates of their measurements yet it’s commonplace for inventory planning professionals to do so with millions of dollars in inventory spend at stake.

How Often Do Most Companies Update Parameters?

So how often do most companies make system-wide updates to their planning parameters such as reorder points, safety stocks, Min/Max settings, lead times, and order quantities? Typically, mass updates occur quarterly, annually, and in some cases never – the only times changes are made are when an order is triggered by ERP. Not exactly agile.

The biggest reason given for not intervening more often is that it takes too much time. Most companies set these key parameters using very unwieldy Excel programs or ERP applications that simply aren’t designed to conduct systemic inventory planning. This is where inventory optimization software can help.

Using inventory optimization software and probability forecasting to update key planning parameters frequently, say every week or month instead of quarterly or annually, enables you quickly respond to changes in your business. You can seize on cost saving opportunities, as when demand turns down and you can reduce reorder points and/or order quantities and possibly cancel outstanding orders. Or you can respond to problems, as when demand increases threaten your service level commitments to customers, or supplier lead times increase and require re-computation of reorder points.

How to do it Right

The key is establishing an agreed upon set of performance and inventory value metrics and letting the software monitor the state of play in the background and alert you to exceptional situations. This is simply one more way of saying that, once systems have been established, you want to go forward using management by exception. You can set ranges within which things can bubble along as they normally do, but once a critical parameter like “stock out risk exceeds a pre-defined level” or “inventory value or costs exceeds a pre-defined level,” the software can provide a daily alert and can also recommend a response, such as raising a reorder point. With this level of automated assistance, it becomes possible to keep your finger on the pulse of the inventory without being overwhelmed by the sheer volume of data.

For example, you may choose an initial set of inventory parameters as the policy because you could see from the software that it meets your service level goals within your inventory budget. You may let the system prescribe service level targets for you and be comfortable with the settings because inventory value is within the budget. However, if demand gets less predictable than historically, you won’t be able to achieve the same level of service without an increase in inventory. An exception report will identify this and enable you to make an informed decision on what to do. You can decide to modify the policy or keep it the same. If you keep it the same, you now know the additional risks and change in inventory costs. This can be communicated to all stake holders so that there aren’t any surprises.

Plan Don’t React

Rather than being constantly in reactive mode, you can handle what really needs to be handled and still have some time to do forward thinking. For instance, you can do “what if” analyses on such issues as which supplier lead times would yield the biggest payoff if reduced, or whether service level targets should be adjusted to account for shifts in customer criticality, or similar policy issues. After all, it’s not as if you are not going to end up with a full daily agenda, it’s just a question of whether you can elevate that agenda to a more strategic level. So if you are spending all of your “planning” time managing the outputs of your ERP instead of constructively reviewing and optimizing the inputs, it is time to reassess your inventory planning process.

 

 

Leave a Comment

Related Posts

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

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

The supply chain has become the blame game for almost any industrial or retail problem. Shortages on lead time variability, bad forecasts, and problems with bad data are facts of life, yet inventory-carrying organizations are often caught by surprise when any of these difficulties arise. So, again, who is to blame for the supply chain chaos? Keep reading this blog and we will try to show you how to prevent product shortages and overstocking.

Recent Posts

  • Epicor Prophet 21 with Forecasting Inventory PlanningExtend Epicor Prophet 21 with Smart IP&O’s Forecasting & Dynamic Reorder Point Planning
    Smart Inventory Planning & Optimization (Smart IP&O) can help with inventory ordering functionality in Epicor P21, reduce inventory, minimize stockouts and restore your organization’s trust by providing robust predictive analytics, consensus-based forecasting, and what-if scenario planning. […]
  • Supply Chain Math large-scale decision-making analyticsSupply Chain Math: Don’t Bring a Knife to a Gunfight
    Math and the supply chain go hand and hand. As supply chains grow, increasing complexity will drive companies to look for ways to manage large-scale decision-making. Math is a fact of life for anyone in inventory management and demand forecasting who is hoping to remain competitive in the modern world. Read our article to learn more. […]
  • Mature bearded mechanic in uniform examining the machine and repairing it in factoryService Parts Planning: Planning for consumable parts vs. Repairable Parts
    When deciding on the right stocking parameters for spare and replacement parts, it is important to distinguish between consumable and repairable servoce parts. These differences are often overlooked by inventory planning software and can result in incorrect estimates of what to stock. Different approaches are required when planning for consumables vs. repairable service parts. […]
  • Four Common Mistakes when Planning Replenishment TargetsFour Common Mistakes when Planning Replenishment Targets
    How often do you recalibrate your stocking policies? Why? Learn how to avoid key mistakes when planning replenishment targets by automating the process, recalibrating parts, using targeting forecasting methods, and reviewing exceptions. […]
  • Smart Software is pleased to introduce our series of webinars, offered exclusively for Epicor Users.Extend Epicor Kinetic’s Forecasting & Min/Max Planning with Smart IP&O
    Epicor Kinetic can manage replenishment by suggesting what to order and when via reorder point-based inventory policies. The problem is that the ERP system requires that the user either manually specify these reorder points, or use a rudimentary “rule of thumb” approach based on daily averages. In this article, we will review the inventory ordering functionality in Epicor Kinetic, explain its limitations, and summarize how to reduce inventory, and minimize stockouts by providing the robust predictive functionality that is missing in Epicor. […]

    Inventory Optimization for Manufacturers, Distributors, and MRO

    • Blanket Orders Smart Software Demand and Inventory Planning HDBlanket Orders
      Our customers are great teachers who have always helped us bridge the gap between textbook theory and practical application. A prime example happened over twenty years ago, when we were introduced to the phenomenon of intermittent demand, which is common among spare parts but rare among the finished goods managed by our original customers working in sales and marketing. This revelation soon led to our preeminent position as vendors of software for managing inventories of spare parts. Our latest bit of schooling concerns “blanket orders.” […]
    • Hand placing pieces to build an arrowProbabilistic Forecasting for Intermittent Demand
      The New Forecasting Technology derives from Probabilistic Forecasting, a statistical method that accurately forecasts both average product demand per period and customer service level inventory requirements. […]
    • Engineering to Order at Kratos Space – Making Parts Availability a Strategic Advantage
      The Kratos Space group within National Security technology innovator Kratos Defense & Security Solutions, Inc., produces COTS s software and component products for space communications - Making Parts Availability a Strategic Advantage […]
    • wooden-figures-of-people-and-a-magnet-team-management-warehouse inventoryManaging the Inventory of Promoted Items
      In a previous post, I discussed one of the thornier problems demand planners sometimes face: working with product demand data characterized by what statisticians call skewness—a situation that can necessitate costly inventory investments. This sort of problematic data is found in several different scenarios. In at least one, the combination of intermittent demand and very effective sales promotions, the problem lends itself to an effective solution. […]