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Closed-loop inventory management helps manufacturers build demand planning strategies

To improve inventory control, manufacturers are making methodologies such as closed-loop inventory management and sales and operations planning part of their demand planning strategies.

To get the most out of demand planning software and build successful demand planning strategies, users and industry...

analysts recommend a four-step process.

  1. Institute a collaborative planning process across the organization.
  2. Find easy-to-use software that supports that process, buying only those tools that address your company's particular demand and inventory profiles.
  3. Thoroughly train everyone on the new software and the underlying business process.
  4. Create a consensus forecast and revise it frequently with the latest information.

In the meantime, you'll probably have to get the supply and demand sides of your organization talking to each other, perhaps through a formal sales and operations planning (S&OP) strategy and such supporting infrastructure as executive dashboards and portals.

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Demand planning starts with organizational changes

Many manufacturers have succeeded at demand planning in large part by changing their organizational charts, said Nari Viswanathan, vice president/principal analyst at research firm Aberdeen Group. These companies have built a demand and supply planning organization overseen by a chief supply chain officer who reports to a chief operating officer, thus putting S&OP on the executive suite's radar.

Without that type of comprehensive buy-in strategy, companies are likely to face cultural resistance. "People would rather live with a problem they understand than a solution that they don't understand," said Adeel Najmi, vice president of product strategy and planning at i2 Technologies, a vendor of demand planning software and other supply chain tools.

Closed-loop inventory management solves problems

Aberdeen Group promotes the concept of closed-loop inventory management, a system of planning and execution steps designed to address the root causes of such problems as rising inventory costs and falling customer satisfaction.

Najmi, who describes himself as an advocate of closed-loop inventory management, defines it as applying analytics and business processes to determine whether the original plan succeeded, then taking corrective action. Closed-loop inventory management is a variation on a well-known problem-solving method used in Six Sigma, he said.

"The 'one-number plan' is obsolete," Najmi said. "Now, demand planning needs to be one common playbook. It's not planning for execution; it's planning for discovery and learning."

Inventory management needs data from throughout supply chain

In a May 2009 report entitled Inventory Management: 3 Keys to Freeing Working Capital, Viswanathan rated 170 companies in terms of their use of inventory management. "Best-in-class companies are not focused on one particular area," he said. "They are focused on multiple levels."

Leading companies tend to target inventory levels at various points along the supply chain -- a technique called multi-echelon optimization -- and use demand data to replenish inventory into distribution "buffers." Most of them also have a statistical method for computing inventory targets as well as the ability to segment inventory according to customer-service goals. Their inventory analysts typically "own" the data and update it daily or weekly.

In the report, Viswanathan recommends segmenting finished-goods inventory by financial performance, moving away from inventory rules of thumb, applying demand planning at the SKU level, and tying inventory and financial metrics together.

SKU-level planning helped Quality Bicycle Products, a distributor of bikes, parts and accessories in the Minneapolis area, attain its quickest return on investment from using Infor SCM Demand Planning software, said Jason Bates, supply chain manager for the distributor. "If you've got a good SKU-level forecast, the Replenishment Planner will tell you which purchase orders to expedite or put later," he said, adding that the method helped avoid stockouts.

Integrating inventory management with ERP yields savings

Inventory management experts cite integration as both a challenge and an opportunity. Integrating specialized demand and inventory planning tools with ERP can speed cash flows on the accounting side and improve execution with real-time data from manufacturing and transportation management systems.

This practice also helps companies fine-tune their strategies -- for example, by emphasizing collaborative forecasts over statistical analysis, or vice versa -- then buy specialized software for just those components, tying them into existing systems instead of having to use them in independent silos. Some vendors said they bill significant time helping customers integrate their software into existing SCM systems.

It is also important to invest in the quality of the sales and inventory data coming into the system. The task might be as fundamental as data cleansing that reformats information from a legacy system or as complicated as writing a custom application that collects information previously unavailable to the system.

How to optimize the use of demand planning software
  • Make sure users have learned the fundamentals of planning before giving them the software.
  • Don't take on too much, too fast; start with basic functions and prove their value before adding sophisticated analytical tools.
  • Use a blend of collaborative and statistical approaches to generate a variety of data points. Don't just rely on the forecast calculated by software.
  • Manage demand based on alerts and exceptions that tell you, for example, that your forecast error or late order rates are too high, or inventory has gone below safety levels.
  • Generate weekly, rather than monthly, forecasts so you can update them more regularly.

The unique nature of demand for a specific manufacturer's products will determine which components in the demand and inventory suite get the most use, according to John Bermudez, senior director of supply chain planning and product strategy at Oracle Corp.

Bermudez cites the case of Oracle customer VTech, a manufacturer of cordless phones that depends on its Oracle demand-planning tool to match demand to inventory, which is expensive to ship from Chinese factories. High transportation costs and 14-week lead times for the low-margin phones make improved forecasts extremely valuable to VTech, which has used demand planning to cut inventories by 65%, Bermudez said.

In contrast, another Oracle customer that manufactures high-volume fiber optic components gets more value from applying inventory optimization because the demand for its components is based mostly on large deals with telecom companies. "For them, using a regular demand-planning product is a bit of a challenge," Bermudez said. "They know what deals sales is bidding on."

Once companies have used S&OP and supporting tools to improve demand visibility, they can seek further gains by figuring out how their manufacturing and inventory processes limit needed supply, perhaps with the aid of materials resource planning (MRP) tools. "Systematically figure out why you have so many constraints," Bermudez advised.

About the author: Freelancer David Essex has covered information technology for BYTE, Computerworld, PC World, and numerous other publications and websites.

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