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    Demand-Driven Inventory Optimization and Replenishment: Creating a More Efficient Supply Chain
    Demand-Driven Inventory Optimization and Replenishment: Creating a More Efficient Supply Chain
    Demand-Driven Inventory Optimization and Replenishment: Creating a More Efficient Supply Chain
    Ebook464 pages5 hours

    Demand-Driven Inventory Optimization and Replenishment: Creating a More Efficient Supply Chain

    By Robert A. Davis

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    About this ebook

    Remove built-in supply chain weak points to more effectively balance supply and demand

    Demand-Driven Inventory Optimization and Replenishment shows how companies can support supply chain metrics and business initiatives by removing the weak points built into their inventory systems. Beginning with a thorough examination of Just in Time, Efficient Consumer Response, and Collaborative Forecasting, Planning, and Replenishment, this book walks you through the mathematical shortcuts set up in your management system that prevent you from attaining supply chain excellence. This expanded second edition includes new coverage of inventory performance, business verticals, business initiatives, and metrics, alongside case studies that illustrate how optimized inventory and replenishment delivers results across retail, high-tech, men's clothing, and food sectors.

    Inventory optimization allows you to avoid out-of-stock situations without impacting the bottom line with excessive inventory maintenance. By keeping just the right amount of inventory on hand, your company is better able to meet demand without sacrificing the cost-effectiveness of other supply chain strategies. The trick, however, is determining "just the right amount"—and this book provides the background and practical guidance you need to do just that.

    • Examine the major supply chain strategies of the last 30 years
    • Remove the shortcuts that prohibit supply chain excellence
    • Optimize your supply/demand balance in any vertical
    • Overcome systemic weaknesses to strengthen the bottom line

    Inventory optimization is benefitting companies around the world, as exemplified here by case studies involving Matas, PWT, Wistron, and Amway. When inefficiencies are built into the system, it's only smart business to identify and remove them—and implement a new streamlined process that runs like a well-oiled machine. Demand-Driven Inventory Optimization and Replenishment is an essential resource for exceptional supply chain management.

    LanguageEnglish
    PublisherWiley
    Release dateDec 21, 2015
    ISBN9781119220411
    Demand-Driven Inventory Optimization and Replenishment: Creating a More Efficient Supply Chain

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      Book preview

      Demand-Driven Inventory Optimization and Replenishment - Robert A. Davis

      Copyright © 2016 by SAS Institute Inc. All rights reserved.

      Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

      Published simultaneously in Canada.

      No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.

      Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

      For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.

      Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.

      Library of Congress Cataloging-in-Publication Data:

      Names: Davis, Robert A., 1947–

      Title: Demand-driven inventory optimization and replenishment : creating a more efficient supply chain / Robert A. Davis.

      Description: Second edition. | Hoboken : Wiley, 2015. | Series: Wiley and SAS business series | Revised edition of the author's Demand-driven inventory optimization and replenishment, 2013. | Includes index.

      Identifiers: LCCN 2015036768 (print) | LCCN 2015041898 (ebook) |

      ISBN 9781119174028 (hardback) | ISBN 9781119220404 (ePDF) |

      ISBN 9781119220411 (ePub)

      Subjects: LCSH: Business logistics. | Inventory control. | Delivery of goods—Management. | Customer services—Management. | Supply and demand. | BISAC: BUSINESS & ECONOMICS / Decision-Making & Problem Solving. | BUSINESS & ECONOMICS / Decision-Making & Problem Solving.

      Classification: LCC HD38.5 .D38 2015 (print) | LCC HD38.5 (ebook) | DDC 658.7/87—dc23

      LC record available at http://lccn.loc.gov/2015036768

      Cover Design: Wiley

      Cover Images: Network © mattjeacock/Getty Images, Inc.;

      Shiny pattern © Ralf Hiemisch/Getty Images, Inc.

      Preface

      I grew up in a town called Bremerton, Washington. The town is situated on the Kitsap Peninsula right in the middle of Puget Sound. Given its location so close to the ocean, there are a lot of navel installations in the vicinity. The majority of the residents worked at the Trident Missile Base (nuclear missiles), the Keyport Underwater Warfare Base (torpedoes), or the Puget Sound Naval Shipyard (ship repair). This type of employment created a huge middle class. In addition to these blue-collar workers, Bremerton had a supporting cast of people there to help with every need. Doctors, lawyers, shopkeepers—you name it—they were there to support the town and the surrounding area.

      One of the residents, a lawyer, had a huge house built on property overlooking one of the great views of Puget Sound and Mt. Rainier. It was a beautiful home fit for the very successful family. In addition to the home, the property sported landscaped gardens, elegant trees, and garages designed for 6 to 10 cars. People from Bremerton would take visitors on drives around the town and, invariably, swing by the lawyer's house to have everyone gawk at the fancy house on the hill.

      Oddly, over the years, very few, if any, people ever saw the inside of the house. If anyone was allowed on the property, it was to tend to the gardens or clean the various fixtures. If there was a gathering of friends, the entertaining was done on the grounds, not in the house. This type of behavior got everyone to wonder what wonderful treasures were inside. It led to a mystique about how fancy it must have to be to keep others out. How else would such privileged people live? Everyone could see how successful the family was. Who could hold it against them to be so private? They lived in luxury, as everyone could see, and everyone aspired to have the trappings of success just like the lawyer's family.

      Now why, you must be wondering, would I bring up a story about a house in Bremerton, Washington, in a book about demand-driven distribution? Something happened to that house that I will explain at the end of the book. The house has become a metaphor for when I examine highly regarded and not so highly regarded companies and their supply chains.

      Let's face it, companies like to dress themselves up. Just like the people of Bremerton, Washington, executives see other highly regarded organizations from the outside and wish their companies could be just like the lawyer's house in my story—the envy of all who see it.

      While the outside might be awe-inspiring, it is the guts of the organization that make the products. Many C-level executives look at supply chain as the underbelly of their company. The black hole, if you will, of activities where products are pushed out and revenue comes back in the form of a balance sheet and/or income statement. In my 35-plus years of working in and around supply chains I find executives treating supply chains like our lawyer friend in my story—as something inside the organization that is not to be seen by the outside world.

      With that said, please enjoy the book and wait until the end to find out what happened to our Bremerton, Washington, lawyer and how it relates to demand-driven distribution.

      Acknowledgments

      I have had the great fortune of being in contact with many people much smarter than myself. I guess one of my strengths is to be able to understand that when smart people speak it is best for me to stop talking and learn. People wax on about having a mentor in order to be successful. I'm lucky enough to have many mentors over the years who have taken time out to teach me. I am eternally grateful that they took time for me even though I was not always receptive!

      If JoAnne McBride had not told me to put up or shut up about ordering, I never would have had the opportunity to become a buyer.

      Bob Larson and Pat Smith spent many hours going over what made good buying decisions while supporting turn volume and promotional volumes.

      Nick Gazzard took the time to teach me about supply chain cost analysis and the ability to see beyond the numbers when researching problems.

      Radhika Kulkarni, Jinxin Yi, Tugrul Sanli, and Xinmin Wu practiced supreme patience as they helped me understand the technical side of Operations Research and Inventory Optimization.

      Anders Richter showed me and just about every other inventory optimization practitioner how to successfully deliver a solution on time and under budget.

      Vinay Chaturvedi has been my close confidant, friend, and sounding board for many, many years. I can't imagine dealing with complex supply chain issues without having Vinay working with me to better understand customer needs.

      Scott Nalick gave me countless hours of time to show how time-phased business analysis reports could be provided to wary C-level decision makers in a manner that is both professional and personal. Indeed, Scott's I've got one more question queries could rival any episode of Colombo, and I am forever grateful for his thoroughness.

      Ed Katz could provide many sanity checks during my research when I was ready to jump out of my skin. Over the last 15 years, Ed has acted like a big brother. He was always ready to smack me upside the head when I did wrong, but help me up and dust me off when he made his point.

      Charlie Chase always believed I could be a writer and had something to say about the subject of inventory optimization. Charlie was the one who told me not all books about optimization have to be written by PhDs and have algorithms plastered all over the page. Yes, Charlie, executives want to learn too!

      Lora Cecere has been there for me for the last 7–8 years as I have pushed my learning envelop. I remember when I first met Lora after dealing with her on the phone. I told her, I'm 6'4 tall and weight 250 lbs., but you scare me!" Lora doesn't suffer fools so she taught me to always be prepared!

      Mark Demers, my boss! You believed in me and supported me as I dug deep into the subject of inventory optimization. You are one of those great managers who take joy in the success of those who work for you.

      Finally, over the years I have had the great fortune to have been welcomed into many companies who have been looking for ways to improve their supply chains. In virtually every occasion I am floored by the intelligence, professionalism, and grit these supply chain practitioners have in doing their jobs. I thank these wonderful people for sharing with me their successes and their not so successful endeavors. If these people are any indication, the supply chains of now and the future are in good hands.

      About the Author

      Over the past 35 years I have had a unique practitioner's view into inventory and replenishment optimization. This pathway has led me from humble purchasing, to an eye-opening supply chain cost analysis career, to, finally, helping some of the largest companies in the world drive huge inefficiencies out of their supply chains.

      Starting in the mid-1980s, while working as a key account manager for a large grocery manufacturer, a harried, overworked co-op wholesale buyer asked me take over the purchasing of my own products as a way of lightening her load. That's right. I was a practicing vendor-managed inventory (VMI) manager 20 years before it was in vogue. Over the next three years, I was able to learn all of the tricks of the replenishment trade and balanced my selfish vendor goals with some of the highest inventory turns in the company. Three times, I was asked to join the staff as a full-fledged buyer, but felt my skills were better served in sales and business management. However, that grounding in replenishment and the fascination with supply chain relationships continued to tug at me until 2000.

      Efficient consumer response (ECR) and its stepchild, collaborative planning, forecasting, and replenishment (CPFR), were sweeping through forward-thinking supply chain companies in the late 1990s, and I was able to immerse myself in those movements with my efforts as product manager for an award winning solution called value chain analytics (VCA). ECR Europe had just promoted VCA as the cost analysis tool to use in collaborative engagements. This allowed me entry to study some of the most famed supply chains in the world, like Kimberly Clark, 3M, and Kroger and Rona of Canada. It also thrust me onto the stage as a supply chain cost expert with featured speaking opportunities with CGIT, VICS, IBF, ABC User Group, SASs User Group, and Rochester Institute of Technology Operations Conference.

      At SAS the natural progression would be to move from performance/cost analysis into inventory optimization product management. Over the past eight years I have had the privilege of leading the development of SAS inventory optimization solution from a single install to engagements listing some of the largest companies in their respective industry verticals. I have literally helped save millions and increase revenues by tens of millions. However, in the process I have gotten to experience, first hand, how unknown shortcomings in enterprise resource planning (ERP) systems and reliance on ancient replenishment methodologies have pushed some of the best buyers and inventory control managers to the breaking point.

      I have found, through my experiences, that when you understand the shortcomings of the present inventory systems you embrace the benefits of inventory and replenishment optimization. It can be a leap of faith, but it does not have to be a black-box leap of faith. You can have a tremendously positive effect on an organization and personnel. Inventories come under control, buyers have more time to spend on value-added activities, and the top-line revenues and bottom-line costs of the company dramatically improve. Anyone can ratchet down days of supply over the short run to meet a number, but when an organization right-sizes an inventory for best results you might even get a buyer to smile.

      Chapter 1

      Creating Demand-Driven Supply

      When people talk about inventory optimization I am always surprised at the number of definitions that are rolling around out there. Most C-level executives know it has something to do with reducing or right-sizing inventories and that it really helps control supply chain costs. The career path of that C-level executive can morph her viewpoint about where that optimization resides. Indeed, the closer you get to the customer, the more optimization means replenishment. This means a retail executive has a far different view of optimization compared to that of a manufacturing executive.

      For many, the focal point of supply chain efficiency projects is to uncover and exploit cost discrepancies positioned by supply chain partners in the name of optimization. For instance, in the article Optimizing Replenishment Policies Using Genetic Algorithms for Single Warehouse/Multi-retailer System, W. Yang, T. Felix, S. Chan, and V. Kumar cite how huge savings can be achieved by adhering to a methodology of quantity discounts in transportation cost models.¹ This technique of uncovering supply chain inefficiencies to fill the void with cost savings shifts costs onto another portion in the supply chain. It is rampant inside companies and between external trading partners in almost all industries. Obviously, the whole point of optimization is to take advantage of every opportunity of cost savings, not just taking advantage of trading partner inefficiencies. Optimization is not simply shifting the costs from one location to another. Optimization is all about the actual elimination of costs and the savings enjoyed by either the network as a whole or the end customer satisfaction.

      This is why we oftentimes find supply chain executives perplexed about where to start in developing a fact-based pathway to better supply chain dynamics. There seem to be a million different definitions of what inventory optimization is, depending on what flavor of optimization is in vogue. At one time the flavor might be network design to drive best positioning at the moment of a warehouse. Another time it might be a theory of constraints project to uncover bottlenecks in the company supply chain that can be smoothed out. Conversely, it might even be a project about SKU (stock keeping unit) rationalization for overall portfolio profitability. I have heard them all batched under the banner of inventory optimization. However, nothing has created more confusion than a definition driven out of the just-in-time wave of supply chain efficiencies—the idea that a company that practices pull supply chain methodologies will suddenly enjoy massive inventory savings and replenishment nirvana. Nothing could be further from the truth.

      There is nothing wrong with the assumption that replenishment is what drives supply. In fact, given my background I would almost wholeheartedly agree. Over the past 30 years supply chains are shifting from being supply-driven (push) to being demand-driven (pull). While the theory is easy to imagine, the devil is in the details. There are decades of supply-side or push-style supply chain practices in place throughout organizations. You can't simply flip a switch and make your supply chain work in a new way.

      Originally, the thought of most companies was to make a complete shift from push to pull as a way to have a nimble and/or agile supply chain. In an article written back in 2003,² Erik Kruse talks about some of the disastrous results companies incurred when they took perfectly good operating systems that insured efficiencies when producing large quantities of standardized products and attempted to make smaller batches of products to quickly react to customer demand. He points out an AMR Research study that supports his claim of inefficiencies. In that study, it was shown that companies tend to reconfigure their physical networks without introducing new processes that would help in the transition. Kruse points out that if customers don't buy what the efficient operations are producing, then the efficiency metric isn't really measuring true efficiency.

      This brings up an interesting paradox. If you only use supply-side/push methodology, your operations can be extremely efficient. Large amounts of standardized product can be positioned, but if the customer is not buying the product at the same rate, the real efficiency is lost. In turn, if you shift to a demand-side/pull methodology, you reduce the production cycle and produce just enough to satisfy customer demand. When this occurs, you lose your manufacturing efficiencies, and you run the risk of not fulfilling unexpected customer demand.

      Various large-scale supply chain movements like just-in-time, efficient consumer response, and collaborative planning, forecasting, and replenishment have all been rolled out in the name of creating a more responsive organization. The introduction of enterprise resource planning (ERP) and supply chain management (SCM) solutions in the late 1990s helped these movements gain traction, as technology interacted with methodology. Oddly, as technology and methodology interconnected, it seemed as though the supply chain industry was simply creating a bigger, better, and faster replenishment engine as a way of having an optimized supply chain. What is becoming more and more apparent, though, is that replenishment can only do so much in an effort to become demand driven. In the end, replenishment can only attempt to compensate for out-of-balance inventories.

      The Path to Demand-driven Supply

      This book is designed to take business practitioners through the fundamentals of inventory optimization so that they can attain a demand-driven supply. If you are looking for a book that will spell out stochastic algorithms, you're in the wrong place. Virtually every book written on the subject of inventory optimization (IO) seems to be done by academics with complete focus on proving that the stochastic algorithms they used during their studies are sound and repeatable. The rest of the inventory optimization publications could be categorized as snake oil whitepapers. Why snake oil? From the early 2000s through 2010, various inventory optimization vendors tried to differentiate themselves by claiming their math was superior or they had proprietary algorithms no one else could provide. There was little wonder the industry had confused the market.

      The business world has heard about the subject of inventory optimization, but has trouble linking the solution to the many supply chain problems they might have in their organization. My goal is to provide a business perspective on why current inventory systems suboptimize the supply chain and why faulty replenishment processes lead to wasted time and effort. In the end, I hope the reader would come away with a good understanding of why optimized inventory and replenishment helps overcome in-system weaknesses and deliver results. We've come a long, long way, and it seems as though we only have a few more hurdles to go before we become part of the end game known as demand-driven supply.

      When I am in front of executives who think replenishment cures their supply chain, I often ask the question: If replenishment takes care of inventory ills, what caused your inventory to be sick in the first place?

      Although it is not the only place of supply inefficiency, let's take a look at the grocery supply chain in the United States. Because of the normal interactions people have with their grocery stores, they can recognize some of these push-style methods that companies use to entice you to buy products you wouldn't otherwise have purchased in the name of pushing products through the supply chain.

      Shifting from Supply-driven to Demand-driven Methodologies

      Thirty-five years ago, just before the demise of the so-called push supply chain in grocery products, I made a personal transition from being a supply-driven buyer to being demand-driven buyer. First of all, at the time I didn't know what any of this supply–demand mumbo-jumbo meant, and, second of all, I never set out to be a buyer in the first place.

      So You Think You Can Do Better?

      I was working as a key account manager in Portland, Oregon. My job was to manage grocery headquarter accounts for best results in sales. It was getting close to the end of the fiscal year, and we were slightly below the numbers I needed to bring in. One of my accounts was a co-op wholesaler who supplied almost all of the large, independent grocery stores in the northwest region. My buyer, Joanne McBride, did not have any direct responsibility for the advertising, but purchased for both turn and promotional merchandise. I was good friends with her. I was also really needling her to order a little more so I could make my year-end numbers. What she did next changed my life forever.

      She looked at me and said in a very tired and very sarcastic voice, Bob, you think you're so hot stuff. Why don't you do it?

      I was stunned. Now what am I going to do? However, never being the one to back down, I said, Okay, and picked up the two orders so that I could get the heck out of there. I went downstairs to the lunchroom with a calculator and a very sharp pencil. The only instructions I got from her that day were the following:

      There are four numbers that show the running as-is demand by week with the most recent on the left.

      If there are any ads planned for the product, they will show up above the order line with the price and the placement—feature or subfeature.

      The order suggestions are forecasted only for turn volume. You must figure out what needs to be ordered for the advertising.

      Once you have the total amount, make sure the goods can fit in a truck ranging from 38,000 to 44,000 pounds.

      For the next two-and-a-half hours, I was sweating bullets. After using up the calculator batteries, most of the pencil, and the entire eraser, I was able to put together two trucks for the Portland warehouse and one truck for the Medford warehouse. I took the orders up to Joanne and handed them over for the judgment. She looked at them and said, Not bad, but anybody can buy once. Let's see what you can do over the long haul.

      Yep, you guessed it—I was suddenly doing vendor-managed inventory (VMI) 20 years before it was cool.

      Let's not get ahead of ourselves here. I wasn't shifting the product ownership points or taking on an official role of a VMI person. I was just a key account manager who got handed the keys to a treasure chest. My job at that point was to go into the wholesaler, pick up the computer-generated ordering output for the two wholesaler warehouses in Oregon, and develop orders to cover general turn volume and major advertising.

      At the time—remember, this was the mid-1980s—there were two completely different inventory management philosophies between a grocery vendor and a grocery wholesaler. Grocery vendors were graded on sheer volume. Total shipments was the key performance indicator (KPI), with little focus on the actual consumer consumption until after the fact with POS data from IRI or Nielsen. On the flipside, the grocery wholesaler focus was on efficient inventory turns out to the stores.

      In the middle of this conflict was an old adage uttered by just about every grocer vendor in the business: A happy buyer is a loaded buyer. The crux of this statement was that in order for the grocery wholesalers to be efficient, you should keep them in an overstock situation so that they would have to do something to get rid of the stock. Moreover, if they were overstocked with your products, they couldn't do anything with a competitive product. Therefore, if you had an overstock on a product that was so far out of whack that a wholesaler had to run a feature ad, you ended up moving a lot of stock, and the ad was a bonus to get customers to buy your product. Interesting paradox—in order to drive volume through the wholesaler warehouse, the more inefficient you made them, the better the overall volume would be.

      So, guess what happened?

      I did what every red-blooded vendor rep would have done. I put in over three months of unneeded, redundant inventory in the blink of an eye to make my year-end numbers. Heck, my management thought I was the greatest buyer of all time. I had made my numbers, and now all I needed to do was set up a whole bunch of ads, and the

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