Interest in inventory optimization continues to increase as companies seek a more efficient way to reduce excess inventory while maintaining or improving customer service levels. Multi-echelon inventory optimization (MEIO) is also playing a larger role in the sales and operations planning process (S&OP). Recently I sat down with Sean Willems, Ph.D., associate professor of Operations Management at Boston University's School of Management and Chief Scientist at Logility, to get his thoughts on inventory optimization misperceptions, S&OP, and centralized vs. decentralized initiatives.
What’s the most common misperception C-Level execs have regarding inventory optimization?
That they are already optimizing their inventory investment. Most major companies can show sustained inventory reductions over the past five years. However, much of that reduction was done by brute force or by mining all the "low hanging fruit" in their supply chain.
To continue reducing inventory—and more importantly, to realize a step-change in inventory performance—C-level management must do three important things: give the supply chain team a seat at the decision-making table, ensure the company has a robust S&OP process, and base the determination of inventory targets on proven science.
How does a S&OP team learn to treat inventory targets as a planning input, not an output?
Most people outside of supply chain think of inventory targets only as an output. By contrast, the S&OP team knows inventory targets are both inputs and outputs. It’s incumbent upon the S&OP team to educate the rest of the company about creating a closed loop for inventory target setting. The closed loop has two parts: first, calculate proper inventory targets through the S&OP process. Second, modify the plan as demand is realized and the actual inventory level deviates from the target.
An everyday analogy for the input/output duality is ordering take-out food. When they quote you a delivery time on the phone--that is a calculated input to the system. The actual delivery time is an output. Both matter and are part of the customer experience. Similarly, calculated and achieved inventory targets both matter – was your order correct and ready for consumption?
Once the broader company understands why inventory targets are important, they can start managing to them.
Should inventory optimization capabilities be centralized or decentralized?
One very successful approach is to establish a supply chain center of excellence (COE). A COE allows the company to create a wealth of supply chain knowledge efficiently and cost-effectively that is specific to the company.
A successful COE marries its technical mastery with the accumulated wisdom of the business units. Depending on the company's scale, the business unit may just maintain a point of contact or it may require its own subject matter expert to interface with the COE.
Like any initiative worth pursuing, optimizing supply chain performance over time requires investment in people, process and technology. For many organizations, the COE is the right place to start because it invests in the people necessary to solve problems. Those people can then develop processes and incorporate technology as required.
Sean’s key take-aways:
- Give the supply chain team a “seat at the S&OP table,”
- Treat inventory as an input to the process, not just an output, and
- Consider establishing a center of excellence to ensure that inventory optimization efforts receive the people, process, and technology needed for success.