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2016

Here is another letter to a typical client (with some redactions). See if you find yourself in the same case as they find themselves.

 

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Gentlemen:

 

Thank you for today’s tele-conference. We trust you found it helpful. It was certainly our pleasure to speak with you on the matters with which you are concerned.

 

We believe that there are really five essential steps to effective inventory and supply chain management in today’s highly volatile and competitive business environment. Those steps are these:

 

  1. Strategic Inventory Positioning – Failure to determine where in your supply chain inventory should be positioned is a huge source of waste in most supply chains. Any investment in stock for a given SKU-location is strategic if—and only if—it satisfies the following three requirements: 1) it absorbs variability in supply and demand, 2) it decouples lead times, and 3) it provides real ROI—that is, ROI that can be computed!
  2. Buffer (stock) Profiles and Levels – The establishment of stock profiles and initial buffer (stock) levels.
  3. Dynamic Buffer Management – The creation of tools and methods to automate the dynamic management of stock buffers. In my opinion, dynamic management should be done daily, and therefore, must be automated. Contrary to what one might initially think, making daily dynamic changes to the factors governing buffer levels actually reduces system nervousness. The reason this is true is that the daily adjustments are small and incremental—most often a fraction of unit in ADU (Average Daily Usage)—which leads to small incremental changes in replenishment orders. Large-scale monthly changes lead to large-scale changes in replenishment orders, as well. This simply aggravates the bullwhip effect up and down the supply chain.
  4. Demand-Drive Planning – Planning must be based on the maintenance of FLOW. All of the benefits in a supply chain accrue from the FLOW of relevant information and relevant materials. Too many supply chain managers are drowning in data while lacking the ability to sort out the relevant information from the background noise.
  5. Visible and Collaborative Execution – The creation of a high-visibility and collaborative environment for management of the supply chain is essential for ongoing improvement. This should include 1) the creation and training of a cross-functional management team; 2) the development of new and effective KPIs for measuring inventory and supply chain performance in terms of FLOW; and 3) the creation of an effective POOGI (process of on-going improvement) to prevent stagnation at any level.

 

When we start working with most of our clients, their inventory looks like this:

DDMRP Bimodal Inventory Distribution.jpg

They typically have very few SKU-locations (SKULs) in their “ideal” or “target” inventory range. Instead, they have a large number of SKULs with too much inventory (the right-hand part of the figure above), and a large number of SKULs with too little inventory (the left-hand portion of the figure).

 

What they want—and need—is inventory that looks like the figure at the right. All of the ROI to be found in carrying inventory is found in having a supply chain that supports FLOW. Inventory that is missing (out-of-stocks) and inventory that is sitting still (excesses) only diminish ROI.

DDMRP Inventory AssetValueCurve.png

The reason most companies’ inventory is in a bi-modal distribution is because none of the five essential steps are in place.

  1. Inventory has never been strategically positioned
  2. Buffer (stock) levels have never been calculated by rules based on the maintenance of FLOW
  3. Buffer (stock) management is not dynamic
  4. They do not have demand-driven planning tactics; nor the ability to sort out relevant from irrelevant information from their systems
  5. The do not have—or know how to create and train—a collaborative cross-functional team for supply chain management either within their organization, or in their extended supply chain

 

Here Is the Good News!

 

[Product name] essentially does steps 1, 2 and 3 for you—automatically.

 

While [Product name] does not take the demand-driven approach to calculating ROI for each SKUL, it does apply statistical methods that are well beyond the capabilities of most small to mid-sized business enterprises in order to begin reshaping your present bi-modal inventory.

 

[Product name] automatically determines buffer (stock) profiles (step 2) beginning day-one, and hones each buffer profile day-by-day as new relevant information becomes available to it.

 

Therefore, [Product name] is also—day-by-day—undertaking the process of dynamic buffer management, making incremental adjustments to your buffers. This leads, over time, to the reshaping of your inventory from bi-modal toward increasing ROI and an inventory that looks more like the second figure above.

 

Other Alternatives

 

In our telephone conversation, we talked about other alternatives. Here are some comments on these alternatives:

  • [Product name] with Demand Smoothing – Traditional MRP is a powerful tool. However, one must remember that traditional MRP—whether found in [Product name] or [Product name]; whether purchased for $10,000 or $10,000,000—is all predicated on logic that emerged in the 1940’s and 1950’s; was developed into software in the 60’s, 70’s and 80’s for the most part; and has not changed significantly since. It was designed and built for a world and competitive environment that is much different from today’s world.

    Traditional MRP is designed to manage all inventory to zero plus safety stock. If you do not recognize its limitations, you are likely to get burned. This is why worldwide companies of all sizes, running hugely expensive MRP implementations, are much more likely than not to supplement their MRP data—and make final replenishment planning decisions—based on Microsoft Excel™ spreadsheets and in-house developed applications, rather than on the raw data coming out of MRP.
  • Third-party demand planning, forecasting and smoothing products – There are many third-party demand planning, forecasting and forecast smoothing products that could be considered. Remember, however, that in the absence of sound underlying data (e.g., lead times, demand variability, supply variability, average daily usage) you are likely to get numbers, believe the numbers, and discover that the numbers are wrong in the end.

    All forecasts are wrong! The only thing we don’t know when we reduce a forecast to a single value is how much it is wrong, and in which direction. Therefore, as a Certified Demand Driven Planner, I am a strong advocate of using forecasts for large-scale decisions (e.g., capacity planning) only. Short-term decisions about inventory buffer sizing and replenishment actions should be determined by actual demand in the system (i.e., FLOW), relying upon the buffer to do its job (absorbing supply and demand variability).
  • [Product Name] – [Product name] is a capable tool that can be used in a number of ways, including the creation of dashboards, alerts and notifications. This is really a function of steps 4 and 5 above. Needless to say, if steps 1, 2 and 3 are not carried out (or poorly executed), whatever tools you choose to use in steps 4 and 5 will merely supply you with bad data and, perhaps, irrelevant data.

    Therefore, before deciding what tools you might use in steps 4 and 5, one must lay a sound foundation in steps 1, 2 and 3.
  • Other Options – If you were to look for a truly demand-driven solution, one could hardly go wrong by taking a serious look at [Product name]®, a product from [Software vendor name].

    It is also quite possible to implement many demand-driven principles within the context of [Product name], but this would require some adaptation, along with some Customizer work, and the development of some SQL components and (possibly) a handful of source code changes. We have already done some prototyping in this area.

 

Next Steps

 

We are happy to coordinate your review of a demonstration of any of the products we have identified above, and supply you with further information, as well.

 

Additionally, we are prepared to supply you with training and consulting to fulfill the requirements of steps 4 and 5 listed above. Remember, when we say 5 essential steps, the word “essential” means just what you think it means. Companies may skip any of these steps, but when they do, they give up ROI and improvement opportunities.

 

Generally, the result of skipping any of these 5 essential steps is precisely what you have already been experiencing: bi-modal inventories and costly fire-fighting and expediting. All of these other actions are non-value-add and tend only to increase operating expenses and reduce profits.

 

We are here as your partner in success. Let us know how we can help.

 

Please do not hesitate to contact us with your further questions or concerns.

 

Very truly yours,

 

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Does your case match theirs? What steps are you taking to end the ongoing battles of fire-fighting and expediting?

 

We would like to hear from you. Leave your comments below.

Recently I read an article published by a smart guy. I know he must be, because he holds a Master of Science and a Bachelor of Arts degree. He is also an “international master trainer and award-winning author” writing on supply chain and other management topics. [He shall go unnamed in this article, however, for reasons that may become apparent below.]SupplyChain Flow-Centric View.png

 

Therefore, you can imagine my shock when I read that, in his opinion, what it takes to optimize inventory, at a minimum, are: “fixed, known, certain, [and] reliable lead times; and accurate demand forecasting.”

 

This, I believe, will mean that a very small number of businesses will ever optimize their inventories.

 

While there are a few industries and locales that might fit the bill for the creation of “fixed, known, certain [and] reliable supply lead times,” there are very, very few that can lay claim to “accurate demand forecasting.”

 

If there is one thing that supply chain executives and managers can agree upon, it is the fact that forecasts are always wrong. The only variables are by how much they are wrong and in which direction.

 

Do Not Wait

If you are waiting for the next round of new and improved demand forecasting solutions to bring you what you need to finally “optimize your inventory,” you are going to be sadly disappointed.

 

Brand and product proliferation, new ways of marketing and shipping to customer both near and far, ever-growing international competition, and the Internet-empowered consumer are changes that are increasing market volatility and unpredictability faster than new forecasting algorithms can bring improvement. There is no way to catch up.

 

Don’t Be One of Those

If your approach to supply chain and inventory management is not dynamic, I will guaranty you that your inventory is not optimized.

 

If you are like many of our clients when we first engage with them and your lead-times, safety stock, minimums, maximums and ROPs (reorder points) were set six years ago by some guy who “doesn’t work here anymore;” or even if they were set three months ago, or last month, or last week; I will still guaranty that your inventory is not optimized.

 

In most businesses today, if your system is not daily recalculating values that directly drive the inventory you have on-hand and in your supply chain, it is virtually impossible for your inventory to be optimized.

 

Subtle changes in the market, as measured by small shifts in ADU (average daily usage), should drive dynamic and incremental shifts in reorder points, min and max stock levels, replenishment cycles and more. And, if you manage more than about 500 SKU-locations, you simply will not be able to do this effectively in Excel workbooks—no matter how sophisticated your macros are.

 

We help our clients find, select, plan and implement supply chain management tools that provide full-time dynamic management of your inventory and supply chain flows.

 

We would like to hear from you. Please leave your comments below, or feel free to contact us directly, if you prefer.

 

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Sun Tzu wrote in The Art of War, more than 2,500 years ago, “War is a matter of vital importance to the state; the province of life or death; the road to survival or ruin. It is mandatory that it be thoroughly studied.”

 

Today, many of the firms with which we work could write:SunTzu Opportunities.png

 

“Our supply chain is a matter of vital importance to our enterprise; in it lies the life or death of our business; it holds the road to our survival or ruin.”

 

Nevertheless, while the owners, executives and managers of these firms are frequently filled with great angst over the performance of their supply chains—and while they hold huge investments in inventories and expend large amounts monthly in salaries and wages on the people to whom they entrust the management of their supply chains—we find that they seldom have invested much (if, any) time in really studying the theories, strategies and tactics that might help them improve how their supply chains are managed.

 

Why?

 

We believe the culprit is the simple statement: “We know….”

 

These executives and managers believe that they already know all that they really need to know about supply chain management. They believe that they already know about all of the possible strategies and tactics that can be employed to make their supply chains more effective and profitable.

 

They hold these beliefs because they see that most of their competitors—and golfing buddies who are not competitors—are all trying to achieve success by employing the same tired, worn-out strategies and tactics that they are trying—and re-trying, and trying again.

 

“If everybody’s doing it the same way, I can’t be far wrong, even if I’m not perfectly right,” they seem to opine to themselves.

 

Meanwhile, there are the exceptions to this rule out there.

 

These exceptions are a group of small to mid-sized business enterprises whose executives and managers have decided to study thoroughly—to discover if there is a better, less traveled, way that can lead to a sustainable competitive advantage.

 

Among this fringe group of re-thinkers are found the firms achieving average outcomes like these:*

  • Lead Times – 70% mean reduction
  • Cycle Times – 65% mean reduction
  • Inventory Levels – 49% mean reduction
  • Due Date Performance – 44% improvement
  • Combined Financial Variable – 63% improvement
  • Revenues (Throughput) – 73% mean increase

 

Software may be important—even necessary—but it is not sufficient for gaining and sustaining such improvements.

 

On the other hand, new thoughtware is absolutely essential.

 

That’s where we can help. We would be delighted to hear from you. Contact us at your earliest opportunity to talk about it.

 

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* Mabin, Vicky, and Steven Balderstone. The World of the Theory of Constraints. Boca Raton, FL: St. Lucie Press, 1999.

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Most of the small to mid-sized enterprises with which we engage on supply chain matters have been taking a predictable path in addressing the challenges they face. They frequently find themselves expending tremendous manual efforts—adding man-hours and people—accompanied by costly just in case actions.DDMRP House.jpg

 

These actions generally result in excess inventories and high operating expenses. As a result, even though they are able to grow their top-line by reaching additional markets and adding customers, their bottom-line stagnates—or even declines.

 

Many of these firms have struggled to make their investment in expensive ERP (enterprise resource planning) and MRP (material requirements planning) system provide the return on investment (ROI) for which they had hoped. Nevertheless, despite their best efforts, ROI on these expensive systems are elusive.

 

In fact, studies show that regardless of the price paid for traditional ERP and MRP systems, the teams assigned to supply chain and manufacturing management and planning still tend to rely heavily on spreadsheets, in-house developed applications (in Microsoft Access or other), and even whiteboards as planning tools of last resort. They are keenly aware that if they relied solely upon the recommendations coming from their complex and costly ERP / MRP systems, their situations would be made worse, not better.

 

Finally breaking through

Within the last decade, a new and effective approach to supply chain and manufacturing management has been introduced. This new simple, yet extremely effective, method is called demand-driven material requirements planning (DDMRP) and its newest evolution, demand-driven sales and operations planning (DDS&OP).

 

These methods have been shown to be effective at eliminating the corporate sinkhole of throwing people (and operating expenses) at the supply chain problems that appear to be never-ending.

 

This new approach has been demonstrated to support dramatic increases in top-line growth while effectively holding the line on the growth of operating expenses. At the same time, in significantly improves on-time delivery, while slashing away at excess inventories and lost sales due to out-of-stocks.

 

DDMRP and DDS&OP harmonize the actions of the whole organization—from the C-suite to the shop floor. Supply chains can be effectively synchronized—especially when the DDMRP / DDS&OP is propagated up and down the supply chain amongst trading partners.

 

If you would like to learn more about this new and highly-effective approach to supply chain and manufacturing management, please contact us. We look forward to hearing from you.

 

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