Supply Chain Trends and Issues: Our Weekly Feature Article on Important Trends and Developments in Supply Chain Strategy, Research, Best Practices, Technology and Other Supply Chain and Logistics Issues  
 
 
  - September 23, 2008 -  

Supply Chain News: Inventory Optimization is Different than Traditional Supply Chain Planning


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Taking into Account All the Various Dependencies and Sources of Variability of the Network

  
 

 

SCDigest Editorial Staff

SCDigest Says:
Though most companies thought they were doing Inventory Optimization with traditional supply chain planning or APS tools, there really are some important differences, though in fairness recent advances on both sides are causing the solutions to blur.

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The following article is taken from our recent Supply Chain Digest Letter on Inventory Optimization. A downloadable copy of that Letter, along with an array of other resources, is available at our Inventory Optimization Resources page.

Inventory Optimization is one of the hottest areas of supply chain software right now.

What is it?

Gartner analyst Andrew White explains it this way: “For complex distribution networks where source and recipient locations can be dynamically determined, the inventory level in one location can affect the ability to achieve goals in another — to the point that you get into a circular argument: "If I set inventory levels at location 'A' to 'X,' what do I need to set inventory levels at 'B' to achieve 'Y' when 'B' is a source of inventory for 'A'?” The only way to correctly answer this question is to determine the total inventory level for all locations simultaneously, taking into account all the various dependencies and sources of variability of the network.”

That’s what Inventory Optimization software does.

Though most companies thought they were doing Inventory Optimization with traditional supply chain planning or APS tools, there really are some important differences, though in fairness recent advances on both sides are causing the solutions to blur.

The table below provides a summary of key differences between traditional approaches to inventory optimization and the techniques used with most multi-echelon tools.

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Comparison of Inventory Optimization versus traditional Supply Chain Planning Software:

 

 

Process

 

Traditional Inventory Management Approach

 

Multi-Echelon Inventory Optimization Approach

Optimization Objective/Function

Not true optimization; objective is to provide net requirements upstream to determine replenishment needs

Meet end-customer service goals at minimum inventory

Optimization Approach

Some heuristics combined with traditional optimization, sometimes using constraint-based models

Can also use heuristics and traditional optimization, but many solutions also use the more recent tools around stochastic/probabilistic optimization

Demand Forecasting

Forecasted demand per period with little processing of demand variability

Forecasts based on lowest echelon’s primary demand signals and other information; demand variations also are forecasted and used in optimization run

Lead Times

Static lead times that often look only one level back

Uses all lead times and lead time variations of upstream suppliers

Internal Bullwhip Effects

Generally not considered

Effects measured and accounted for in overall replenishment strategy

Network Intelligence

Little visibility or consideration of inventory levels and demand beyond immediately connected supply chain levels

All echelons have complete visibility into other echelons; inventory/demand data is used in the replenishment logic across all tiers

Differentiated Customer Service

Generally not supported/manual

Often supported, as orders out of a higher echelon location to a lower echelon are fully controllable; allocation schemes using set-aside inventories per customer can be configured

Cost Implications Across Echelons

Generally not well considered

Fully modeled so true network optimization can be achieved

While a growing number of companies offer Inventory Optimization solutions, the field is still confined to a relatively small number of players.

Do you agree with our assessment of the differences between traditional SCP and Inventory Optimization? What would you add or subtract? Do you have experience with Inventory Optimization software? Let us know your thoughts at the Feedback button below.

  
     
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