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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    Belmont, MA, June, 2021 – Smart Software, Inc., provider of industry-leading demand forecasting, planning, and inventory optimization solutions, today announced that it will present at Epicor Insights 2021.

    Greg Hartunian, CEO of Smart Software, will present “Creating Competitive Advantage with Smart Inventory Planning and Optimization.” Greg will explain how to empower planning teams to reduce inventory, improve service levels, and increase operational efficiency. Most inventory planning teams rely upon traditional forecasting approaches, rule of thumb methods, and sales feedback on demand. Our Breakout Session at Epicor Insights discusses these approaches, why they often fail, and how new probabilistic forecasting and optimization methods can make a big difference to your bottom line.

    • The presentation is scheduled for Wed July 14th 10:25 -11:15 AM  (PST) 

    1 Epicor Inventory Mangement Platinum Partner

    Epicor Insights 2021 will bring together more than 2,000 users of Epicor’s industry-specific ERP solutions for the manufacturing, distribution, and service industries.  To learn more, visit INSIGHTS 2021.

     Join us at Mandalay Bay in Las Vegas, at the Solution Pavilion,  Booth #1.

    3 Epicor Inventory Mangement Platinum Partner

     

    2 Epicor Inventory Mangement Platinum Partner

     

    Smart Software is an Epicor Platinum Partner and leading provider of demand planning, forecasting, inventory optimization, and analytics solutions. Our web platform, Smart IP&O, leverages probabilistic forecast modeling, machine learning, and collaborative demand planning to optimize inventory levels and increase forecast accuracy. You’ll use Smart IP&O to create accurate forecasts and optimal stocking policies that drive automated ordering in Epicor. The platform includes bi-directional integrations to both Epicor ERP and Prophet 21.

     

     

    About Smart Software, Inc.
    Founded in 1981, 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

     

     

    Redefine Exceptions and Fine Tune Planning to Address Uncertainty

    The Smart Forecaster

     Pursuing best practices in demand planning,

    forecasting and inventory optimization

    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.

    Leave a Comment

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      “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 1981, 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

       

       

       

      “Choosing and Achieving a Target Service Level” by Smart Software Co-Founder Profiled in Spring 2018 Issue of Foresight

      Belmont, Mass., May 17, 2018 – Smart Software, Inc., provider of industry-leading demand forecasting, planning, and inventory optimization solutions, today announced that the Spring 2018 issue of Foresight Magazine features Dr. Thomas Willemain’s article “Choosing and Achieving a Target Service Level.”  Len Tashman, Editor of Foresight states: “Tom Willemain describes the primary considerations for setting service-level targets, explaining how software can serve as a valuable aid in this endeavor and offering a case study to illustrate a relatively simple approach – what he calls “service level wins and losses” – by which a company can evaluate how well it is achieving its service level goals.  The case study also reveals how important it is to utilize appropriate probability models rather than rely on traditional defaults such as the Normal distribution of demands.”

      To read the entire article and to learn more about Foresight please visit https://foresight.forecasters.org/

      About Smart Software, Inc.
      Founded in 1981, 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