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25 Ways to Lower Supply Chain Inventory Costs

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Source: http://www.supplychain247.com/article/25_ways_to_lower_supply_chain_inventory_costs

The prime objective for all supply chains is to provide clients with what they want, when they want it. Inventory management plays a central role in every supply chain’s need to satisfy its clients. By Ralph Cox

July 28, 2013

Inventory policies drive two types of costs: period operating expenses and working capital requirements. The latest Logistics Cost and Service Report published by Establish Inc./Herbert W. Davis and Company, indicates that, while total logistics costs as a percent of sales are falling and most individual companies have succeeded in reducing inventory levels; total logistics costs per hundredweight are increasing, and inventory costs as a percent of total logistics cost are increasing.

In many organizations, however, the opportunities to reduce inventory costs are often not addressed at all or are not completely exploited. If your organization needs help taking money out of inventory there are strategies you can employ today that will provide payoff.

Some of these strategies address having less active inventory, others how you acquire active inventory, and still others require transferring inventory or relying on vendors for better inventory management. Regardless of which you choose to explore, proactive inventory management policies will make a difference in your operations. Here are some of the most common techniques for lowering inventory levels.

    1. Base Cycle Stock on Economics: For purchased products, getting a handle on your acquisition transaction costs will either reduce average inventory or allow for reducing purchasing and receiving labor. For manufactured products, if production equipment changeover costs are in a similar state, getting them in place will either reduce average inventory through shorter runs or allow for reducing changeover and receiving labor through longer runs.
    2. Reduce Order Transaction Costs: In the office, use the computer to generate purchase orders (POs), EDI for PO transmission, advance shipping notices (ASNs) to reduce expediting, and historical vendor performance to prioritize expediting to lower purchasing costs. In the manufacturing plant, pre-planning; pre-staging of needed parts or materials; use of special tools or equipment; changeover initiation prior to completion of the previous run; teamwork and work-division; maintaining equipment temperatures; and minimizing QA / QC work all reduce cycle stock inventory. In the distribution center (DC), pallet manifest-based receiving processes, counting scales, statistics-based inspection and checking, bar code scanners for data entry, certifying key vendors to eliminate receiving functions, and stocking forward storage locations first and reserve locations second can all reduce purchase transaction costs and cycle stock accordingly. Purchase transaction costs are not normally SKU-specific. However, reflecting any extraordinarily low receiving costs associated with specific SKUs will serve to reduce inventory for them. The opposite, of course, is also true.
    3. Lower Inventory Holding Costs: Improve space utilization in leased, contract, or public warehouses (or to minimize or delay expansion of owned facilities) through narrow aisle handling equipment, mezzanines, layout, or more appropriate storage modes.
    4. Base Safety Stock on Customer Service: Prioritizing SKUs consistent with corporate objectives, using the appropriate number of product classes, establishing class sizes that leverage the investment to maximize fill rates, updating safety stock levels dynamically and basing the service levels for each class on the financial goals of the business all serve to either reduce safety stock inventory, reduce out-of-stock situations or increase revenue.
    5. Forecast Routine Demand Forecasting: Using manually edited, naïve, arithmetic / stochastic forecasting models to reduce forecast error will reduce overstock, backorders, and the need for lateral or reverse logistics, holding inventory levels closest to only that required to support the desired customer service level. Editing history to eliminate non-recurring promotions and to compensate for out-of-stock situations is key.
    6. Forecast Future One-time Events Based on Past Events: Future promotions and other one-time events can be best forecast from extensive data on similar events from the past. Holding records in a centralized database avoids the issue of the data leaving with the last sales representative. Extending the data format to include not just SKU, retailer, date and lift, but also relative degree of advertizing, duration, price reduction, if any number of locations, or other factors, makes the information infinitely more useful for the future.
    7. Think Postponement: For parent products from which multiple SKUs can be manufactured, only partially completing manufacturing, placing semi-finished product in inventory, and then completing manufacturing of the final SKUs to order reduces total inventory. In a similar manner, component products from which final SKUs may be assembled can be purchased to inventory and then the final SKUs assembled to order, providing that the time for assembly doesn’t exceed the customer lead time.
    8. Rationalize SKUs: Removal of inappropriate product from the product line can be a controversy-ridden process, but may reduce inventory significantly if handled in a constructive manner, as follows:
        • Develop consensus on the objective of maximizing profit
        • Develop activity-based costs for each SKU and separate them into three groups:
          1. Those with selling prices that create positive gross margin
          2. Those with selling prices that cover their variable cost but do not completely cover their fixed cost
          3. Those with selling prices that do not cover their variable cost
        • Quantify the sales volume correlations between SKUs, based on the analysis of both individual orders and aggregate order patterns by customer
        • Identify the combination of SKUs which maximizes profit on a fully-absorbed basis
  1. Reduce Acquisition Lead Times: For either manufactured or purchased product, any reduction in lead time, whether supplier lead time, transportation time or receiving cycle time, provides a one-time, permanent reduction in cycle stock inventory proportional to the throughput level of the SKU and the degree of lead time reduction. In a similar manner, reducing lead time variability and increasing inbound unit-, SKU-, or order-fill rates both increase supply reliability and reduce safety stock inventory for a given customer service level.
  2. Implement Joint Procurement for Purchased Products: Joint procurement of multiple SKUs from a common supplier serves to effectively reduce unit purchase transaction costs and thereby reduces both cycle stock inventory and annual purchase transaction expenses. In a similar manner, joint procurement of multiple SKUs from different suppliers located in close physical proximity and consolidation of inbound (LTL) volume to form full TLs serves to reduce the incremental transportation cost portion of purchase transaction costs and reduce cycle stock inventory.
  3. Minimize Purchase Minimums: Comparing the total cost of ownership, including inventory holding costs (i.e., not just landed costs) for purchased products’ quoted prices with no order quantity limitations with reduced prices requiring minimum order quantities (MOQs) will help determine if the reduced prices really provide savings. An uninformed purchaser’s interaction:Purchaser: Can I buy _____ at the same volume but at a lower unit cost?
    Sales Representative: Sure, we can reduce your cost by __% if you purchase in minimum order quantities of _______ .
    Purchaser: Sure, no problem!(When the annual holding cost for the increased inventory due to the minimum order quantity more than offsets the annual purchase cost reduction, the higher unit cost with no minimum order requirements has a lower cost.)
  4. Get Downstream Forecasts and Send Forecast Upstream: Hard information on upcoming needs from customers reduces demand variability and forecast error, thus reducing the safety stock required for a given customer service level. Sharing demand forecasts with suppliers is more indirect; however, in the long run it will serve to reduce the supplier’s finished goods inventory and associated costs and, with effective negotiation, yield lower unit purchase prices.
  5. Don’t Stock It, or If Some Stocking is Required, At Least Not Everywhere: For a single storage location, manufacturing or purchasing product to order when the acquisition and customer lead time relationships and order quantity relationships allow it is a very direct way to reduce inventory, providing that the acquisition capacity exceeds the potential short-term demand rate. Likewise, in a network of storage locations, not stocking every SKU in every location can reduce both inventory and transportation costs.
  6. Cross-dock Customer Shipments: With effective use of joint replenishment, the potential increases in inbound transportation costs associated with purchasing to order can be mitigated. Cross-docking customer shipments can facilitate purchasing to order even when the order quantity relationship would have otherwise dictated purchasing to inventory. In a similar manner, aggregating purchase requirements for multiple DCs into a single order and cross-docking to multiple DCs effectively reduces purchase transaction costs and reduces cycle stock inventory.
  7. Extend Payment Terms: When negotiating long- term purchase agreements, getting the best payment terms at a given unit price is the most direct way to increase the portion of inventory funded by the vendor. If improving payment terms can be coupled with increased turnover, then the improvement in working capital effectiveness is significant.
  8. Take Advantage of Price/Quantity Breaks: Taking price/quantity breaks into account when purchasing for replenishment seems an obvious way to reduce the inventory investment, but seems to be frequently overlooked. Often this is a result of either not quantifying breaks at the time of sourcing or negotiation, not having an effortless way to take them into account, or through lack of understanding of the impact of purchasing larger quantities at reduced unit cost.
  9. Transfer Instead of Purchase: When an overstock SKU in one location needs to be purchased to replenish inventory in another location, transfers are a smart way to reduce inventory, provided that the additional warehousing and transportation expenses are not so high that the reduction in holding cost does not exceed the cost to transfer.
  10. Liquidate: Although there will always be a short-term price to pay on the profit and loss (P&L) and the balance sheet, when it is absolutely clear that the value to be gained through liquidation –whether through sale at reduced price, sale as distressed product, salvage, or charitable donation – is greater than the most optimistic estimate of future gross margin from conventional product sales, then liquidation is the best decision.
  11. Merge-In-Transit: The concept of in-transit product merging-where, for example, two things are shipped from different locations and then married in transit so that they reach the customer as a single shipment-can be seen as a technique for reducing inventory if the need for the customer to simultaneously receive multiple SKUs is taken as a requirement. If the need for simultaneous receipt is a given, then the concept eliminates the need for inventorying the individual SKUs together. To some extent, merge-in-transit represents an extension of postponement beyond the distribution center walls.
  12. Get Help From Friends: Collaborative Planning and Replenishment (CPFR) is an open set of pre-defined business processes and IT/communications standards created to facilitate collaboration between supply chain partners. CPFR can reduce inventories through inventory balance, forecast, demand and other data visibility and associated collaboration in the planning area.
  13. Use Vendor-Managed Inventory (VMI) and Vendor Stocking Programs (VSP):With the appropriate incentives, allowing VMI suppliers to assume the responsibility for replenishment of your inventory, because of their visibility into both their own inventory and production schedule and your demand data, can almost always reduce your inventory. Used primarily for maintenance inventories but applicable to all, VSPs require a supplier to commit to an extremely high service level for delivery of specific SKUs within a fixed time at a pre-defined mark-up over cost. VSPs can reduce or eliminate inventories for slow-moving products.
  14. Estimate Reserves Accurately: Accurate estimating of reserves avoids year-end surprises. Estimates should be based on a realistic view of both inventory accuracy and the viability of product sale.
  15. Maintain Accurate Inventory Balances:  Inaccurate inventory balances undermine the very best forecasting and safety stock management processes. They can always be addressed with effective cycle counting and issue root cause identification efforts.
  16. Exploit Sales and Operations Planning (S&OP): At their very best, effective S&OP programs facilitate good decision-making to compensate for the real life issues, which will always occur above and beyond the best planning efforts. At the least, they begin to get everyone on the same page regarding the capacity, timing and other issues between actual demand and available supply.
  17. Measure Performance: Reporting, posting in public locations internally, and reviewing performance results with natural work teams lay the groundwork for continuous improvement. In highly seasonal businesses, providing last year’s results along with this year’s facilitates same time last year comparisons, which may be much more meaningful than this month versus last month.

There are numerous ways to take better control of inventory and decrease its associated costs. Many of these strategies may seem challenging to implement; however, they have all been used successfully for years. The key to managing inventory successfully is to continuously measure your performance and look for new ways to improve.

These 25 strategies should get your organization thinking about what it can do to lower inventory costs.


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10 Rules for Supply Chain & Logistics Optimization

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Source: http://www.supplychain247.com/article/10_rules_for_supply_chain_logistics_optimization

Few companies today know how well their supply chain and logistics optimization is actually performing and how to determine their most significant opportunities for improvement. By H. Donald Ratliff, Ph.D.

July 28, 2013

Companies have made tremendous strides in automating transaction processing and data capture related to supply chain and logistics operations.

While these innovations have reduced cost by reducing manual effort, their greatest impact is yet to come. They are the essential enablers for optimizing supply chain and logistics decisions.

Supply chain and logistics optimization is neither easy nor cheap but it is the biggest opportunity for most companies to significantly reduce their cost and improve their performance. For most supply chain and logistics operations there is an opportunity to reduce cost by 10% to 40% by making better decisions.

Over more than 30 years of developing and implementing supply chain and logistics technology, I have found the following 10 rules to be essential requirements for success:

1. Objectives – must be quantified and measurable
Objectives are the way that we specify what we want to accomplish with logistics optimization. This in turn is how the computer determines whether one solution is better than another and management determines if the optimization process is providing acceptable ROI.

For example a delivery operation might define the objective to be – minimize the sum of the daily fixed cost of assets, the per mile cost of fuel and maintenance, and the per hour cost of labor. These costs are both quantified and reasonably easy to measure.

2. Models – must faithfully represent required logistics processes
Models are the way we translate operational requirements and constraints into something the computer can understand and use in algorithms. For example, we need models to represent how shipments can be combined into loads for a truck. A very simple model such as the total weight/volume of the shipments will faithfully represent some loading requirements (e.g., bulk liquids).

However, if we use a total weight/volume model for loading new cars on a car hauling truck, many of the loads that the computer thinks will fit cannot actually be loaded while loads that the computer discards because it thinks that they will not fit may actually fit and be better than the ones selected. Hence, in the latter case the model does not faithfully represent the loading process and the loads developed by an optimization algorithm are likely to be either infeasible or suboptimum.

3. Variability – must be explicitly considered
Variability occurs in almost all supply chain and logistics processes (e.g., travel time varies from trip to trip, the number of items to be picked at a DC differs from day to day, the time to load a truck varies from truck to truck). Many of the models associated with supply chain and logistics optimization either assume that there is no variability or assume that using average values are adequate.

This often leads to errors in model results and poor supply chain and logistics decisions. Ignoring variability is generally a receipt for failure. Variability must either be explicitly considered in the models or the supply chain and logistics practitioners must have the expertise to explicitly consider variability in interpreting model results.

4. Data – must be accurate, timely, and comprehensive
Data is what drives supply chain and logistics optimization. If the data is not accurate and/or it is not received in time to include it in the optimization, the resulting solutions will obviously be suspect. For optimization that focuses on execution, the data must also be comprehensive. For example, having the weight of each shipment is not sufficient if some loads are limited by volume of the truck.

5. Integration – must support fully automated data transfer
Integration is important because of the large amount of data that must be considered by logistics optimization. For example optimizing deliveries from a warehouse to stores each day requires data regarding the orders, customers, trucks, drivers, and roads. Manually entering anything other than very minor amounts of data is both too time consuming and too error prone to support optimization.

6. Delivery – must provide results in a form that facilitates execution, management and control
Solutions provided by supply chain and logistics optimization models are not successful unless people in the field can execute the optimized plan and management can be assured that the expected ROI is being achieved.

The field requirements are for simple, unambiguous directions that are easily understood and executed. Management requires more aggregate information regarding the plans and their performance against key performance benchmarks over time and across facilities and assets. Web based interfaces are becoming the medium of choice for both management and execution.

7. Algorithms – must intelligently exploit individual problem structure
One of the biggest differentiators among supply chain and logistics optimization technologies is the algorithms. An irrefutable fact regarding supply chain and logistics problems is that each has some special characteristics than must be exploited by the optimization algorithms in order to provide optimum solutions in reasonable time.

Therefore, it is critical that (1) this special structure be recognized and understood by the analyst setting up an optimization system; and (2) the optimization algorithms being used have the flexibility to allow them to be “tuned” to take advantage of this special structure.

Since logistics optimization problems have a huge number of possible solutions (e.g., for 40 LTL shipments there are 1,000,000,000,000 possible load combinations), failure to take advantage of special problem structure means either that the algorithm will pick a solution based on some rule-of-thumb or that the computational time will be extremely long.

8. People – must have the domain and technology expertise required to support the models, data, and optimization engines
Optimization technology is “rocket science” and it is unreasonable to expect it to function well over time without at least a few “rocket scientist” to insure that the data and models are correct and that the technology is working as designed. You cannot expect a complex set of data, models and software to be operated and supported without considerable effort from people with the appropriate technical and domain knowledge and experience.

9. Process – must support optimization and have the ability to continuously improve
Supply chain and logistics optimization requires a significant ongoing effort. There is invariably going to be change in logistics problems. This change requires systematic monitoring of data, models and algorithm performance not only to react to change but to initiate change when opportunities arise. Failure to put into place processes to support and continuously improve logistics optimization invariably results in optimization technology being either poorly utilized or becoming “shelf-ware.”

10. ROI – must be provable considering the total cost of technology, people and operations
Supply chain and logistics optimization is not free. It requires significant expenditures for technology and people.

Proving ROI requires two things:
(1) an honest assessment of the total cost of optimization and (2) an apples-to-apples comparison of the solutions being produced by optimization versus benchmarked alternatives.

There is a strong tendency to underestimate the ongoing cost of using logistics optimization technology. If the total cost of logistics technology decreases after the first year, it is likely that the solution quality is decreases proportionally. It is seldom the case that the ongoing annual cost of effectively utilizing logistics optimization technology is less than the initial cost of the technology.

Determining the impact of optimization technology requires (1) benchmarking with regard to key performance indicators before implementing the technology, (2) comparing the results from optimization to the benchmarks, and (3) performing regular audits of optimization performance.

Few companies today know how well their supply chain and logistics optimization is actually performing and how to determine their most significant opportunities for improvement.

This is both the greatest challenge and the biggest opportunity for the next generation of supply chain and logistics optimization technology.

Editors Note: H. Donald Ratliff, Ph.D. is Executive Director – Supply Chain and Logistics Institute, UPS Chair and Regents’ Professor School of Industrial & Systems EngineeringGeorgia Institute of Technology.


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Global Supply Chain Institute Identifies 10 Game Changing Supply Chain Trends

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The study highlights some of the latest trends that companies must consider as they look to the future. By Global Supply Chain Institute

Source: http://www.supplychain247.com/article/ut_identifies_ten_game_changing_supply_chain_trends

 

A recent report from The University of Tennessee has pinpointed ten game-changing supply chain trends that can help companies improve their operations.

The university’s Global Supply Chain Institute researched the topic and identified and tracked the trends. UT supply chain management faculty surveyed 163 supply chain professionals from 132 global companies to develop the list.

As defined by the survey, a game-changing trend is one that greatly impacts a firm’s shareholder value and can be extremely difficult to implement successfully.

“This research confirmed that world-class companies need to revisit these trends on a regular basis to stay abreast in today’s dynamic and rapidly changing environment,” said Paul Dittmann, executive director of UT’s Global Supply Chain Institute. “Companies also must be open to considering new challenges, such as the application of business analytics to big data and cloud-based applications.”

The first annual “Game-Changing Trends in Supply Chain” survey was sponsored by Ernst & Young LLP, a leader in assurance, tax, transaction, and advisory services, and Terra Technology, the leader in demand sensing.

Companies surveyed ranged in size of revenue from $75 million to $500 million. Twenty-seven percent of the participants were retailers, 59 percent were manufacturers, and 14 percent were service providers.

“The study highlights some of the latest trends that companies must consider as they look to the future,” said Brad Newman, principal at Ernst & Young LLP. “While there have been strides made to address such issues as cross-functional integration and collaboration, companies need to be even more diligent about how they leverage new sources of data to address the unique needs and economics of different customer and product segments.”

Download the White Paper: Game-Changing Trends in Supply Chain

The ten trends addressed in the survey are:

1. Customer relationship managementLeading companies are successfully segmenting their products and customers and developing tailored supply chain solutions for each segment. This approach allowed one firm to eliminate nearly half (48 percent) of its inventory while still improving on-shelf availability from 96 percent to nearly 100 percent.

2. Collaborative relationshipsA win-win collaboration between supplier and customer may be rare, but it can produce amazing results. These collaborations should be built on a foundation of common metrics, shared benefits, and trust. OfficeMax collaborated with its supplier Avery Dennison to dramatically increase revenue by more than 22 percent, achieve product availability to more than 99 percent, significantly decrease inventory by 34 percent, and save more than $11 million in logistics costs.

3. Transformational strategyOnly 16 percent of firms have a documented multiyear supply chain strategy, yet developing these strategies can produce spectacular results. Whirlpool used a transformational strategy to deliver record-high service levels while decreasing inventory levels by over $100 million and logistics costs by $20 million.

4. Process integrationOf great concern to supply chain organizations is the functional silos that still exist and disrupt supply chain performance.

“When processes are integrated and silo walls are eliminated, the results can be staggering,” Dittmann said.

One opportunity that can have tremendous impact is integrating purchasing and logistics. Although both functions are traditional supply chain functions, the research confirmed significant payback when these two areas align their objectives and operating plans.

5. Driver-based metricsSimply changing the performance measurement and goal-setting system inside a firm can greatly enhance the overall performance of the supply chain. Procter & Gamble applied this concept and dramatically increased customer service levels, market share, and sales.

6. Information sharing and visibilityFirms are changing the game by sharing and linking together masses of information from multiple sources (also referred to as big data) and interpreting the data using business analytics expertise.

7. Demand managementNo one buys a company’s stock because of the company’s ability to forecast. Yet increasing forecasting accuracy along with integrating the demand and supply functions across the supply chain can drive higher revenue, lower working capital, and decrease costs. Leading companies are leveraging big data and new approaches to better forecast demand.

8. Talent managementTalent management is the number one requirement for transforming a supply chain. Critical competencies in hiring top supply chain talent include global orientation, leadership and business skills, and technical savvy.

9. Virtual integrationOne of the fundamentals of a great supply chain is for a company to stick to what it does well—its core competencies—and leave the rest to world-class service providers. When outsourcing, firms should create a win-win vested outsourcing framework with its service providers.

10. Value-based managementSupply chain excellence is the key to creating shareholder value. On average, the supply chain controls 100 percent of the inventory, manages 60 to 70 percent of cost of goods sold, and provides the foundation to generate revenue by delivering outstanding availability.

Download the White Paper: Game-Changing Trends in Supply Chain

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Global Supply Chain Institute Identifies 10 Game Changing Supply Chain Trends

 

Supply Chain 24/7: New Report Explores Top Supply Chain Technologies

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Companies need to utilize latest technologies for demand-driven operations & meet expectations of today’s omnichannel customer. (By Tompkins Supply Chain Consortium)

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Source: http://www.supplychain247.com/article/new_report_explores_top_supply_chain_technologies/Tompkins_International

June 05, 2013

A new report by Tompkins Supply Chain Consortium examines the latest technologies and features for supply chain success.

Investing in the right technologies helps retailers meet the challenge of today’s omnichannel customer, whose shopping expectations call for demand-driven supply chains.

The report, Supply Chain Technology: Applying the Latest Products and Features to Your Supply Chain, reveals today’s technology solutions in enterprise resource planning, transportation management systems, and warehouse management systems, among others.

“The most successful retailers recognize supply chains as key enablers of the transformational customer experience and use it to distinguish themselves from the competition,” says Chris Ferrell, author of the report and Director of Tompkins Supply Chain Consortium.

The greatest technological advancements are being made in tactical components of the supply chain, such as MOVE (transportation) and STORE (facilities), as companies look for high return on investment (ROI) and quick payback.

The best supply chain technologies will create value for customers through visibility, flexibility, and speed.

“The world’s leading supply chain organizations will judge their technology spend almost exclusively through the prism of exceeding customer expectations as a means of maximizing profitability,” Ferrell notes.

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