Inventory optimization (IO) software is one of the most powerful technology tools available today for companies to "right size" inventory levels across multiple tiers of the supply chain.

But IO is still relatively little understood by many companies and supply chain managers, leaving it as still something of a niche software category - which is too bad, as IO is delivering substantial benefits to the many companies that have embraced the tools. That said, implementing inventory optimization in a smart way is critical to delivering the value that IO is capable of creating.

SCDigest Says:

One key early insight was that while inventory optimization tools are generally thought of as being used to reduce inventory levels, it can also show companies areas where they need to boost inventories to avoid stockouts and lost sales. What Do You Say? Click Here to Send Us Your Comments Click Here to See Reader Feedback

That assessment is supported by a recent case study presentation by Tim Boos, Sr. Program Director for medical equipment giant Medtronic, on a recent Videocast on our Supply Chain Television Channel. An on-demand version of the broadcast, plus other resources such as the Videocast slides and a podcast of the Q&A portion of the broadcast, can be found here: Achieving Powerful Results at Medtronic with SAP Enterprise Inventory Optimization.

The presentation not only summarized the approach and results Medtronic has achieved in its multi-year inventory optimization effort, it also detailed the partnership that ERP software leader SAP has in delivering IO solutions with SmartOps, whose Enterprise Inventory Optimization (EIO) software was deployed at Medtronic.

Before Boos' portion of the broadcast, Dave Strothmann, a principle in SAP's supply chain planning group, gave a concise summary of what inventory optimization is and how it works.

The key difference between IO software and traditional advanced planning systems (APS), Strothmann said, is that it considers the relationships between different tiers of the supply chain, whereas APS systems in general only consider one level at a time.

IO software "looks holistically across the supply chain to really balance inventory in all stages and in all locations, based on inventory that's at one stage that might be feeding an inventory level downstream," Strothmann said. "All those inventory locations have a relationship with each other that can be balanced to create the lowest possible inventory for the desired service level."

IO really complements traditional supply chain planning, he added, by better optimizing inventory policies and safety stock levels throughout the supply chain that then feed APS systems, such as SAP's APO.

"Companies are starting to recognize that there is a better way to plan inventories across the full supply chain," Strothmann said. "What we see moving forward now is that companies are realizing that there is a much better way to plan inventories because we are going to look across every stage and node in our supply chain, and figure out what the impact will be of moving inventory up or down."

Medtronic Finds IO Success

Medtronic's Boos said those benefits from an inventory planning perspective were exactly what the $16 billion manufacturer, spread across seven major divisions, was looking for several years ago.

In just its finished goods supply chain, Medtronic's' inventory storage locations and product flows are very complex and create real inventory management challenges, Boos said.

Medtronic, for example, has 44 manufacturing facilities worldwide, feeding six tier 1 distribution centers and more than 50 regional and local DCs.

"Inventory optimization was the next logical step," Boos said, after Medtronic undertook a major overall supply chain network optimization project. The potential of IO also was entirely consistent with the Lean culture that permeates Medtronic's supply chain, he said.

Boos later added that from his view, inventory optimization starts with respecting end customer service levels while answering two questions simultaneously:

• What is the optimal mix of SKUs at each location?
• What is the optimal staging of SKUs throughout the network?
  

Boos said that when Medtronic started a search for inventory optimization software, it had several high level criteria for potential solutions. Those included:

• Scalable, exception-based workflow tools
• Strong capabilities in "what-if" scenario analysis
• Strong integration to its SAP ERP system
• Ability to handle complex BOMs

In the end, EIO solution from SmartOps was selected, in part of course due to the tight partnership between SmartOps and SAP. SAP has adopted EIO as its inventory optimization solution of choice, Strothmann said, and sells and supports EIO as if it were its own product.

Before it moved forward, Medtronic did quite a bit of modeling to better understand the results IO software could bring to the company, Boos said, using about 100 SKUs for the effort.

One key early insight was that while inventory optimization tools are generally thought of as being used to reduce inventory levels, it can also show companies areas where they need to boost inventories to avoid stockouts and lost sales.

(Supply Chain Trends and Issues Article - Continued Below)