On September 5th at Berns in Stockholm, we opened the doors to the Optilon Supply Chain Conference 2024. It’s no secret that the world is changing rapidly. With the theme Navigating the New Era, we focused on understanding how these changes affect our businesses and how to stay competitive in this evolving market.
The day was filled with valuable insights from several outstanding speakers, along with a matchmaking segment where we had the opportunity to discuss both future challenges and opportunities in the industry.
Did you miss the conference? No worries—here’s a recap of the event!
NAVIGATING THE NEW ERA
The conference began with a breakfast where over 300 supply chain professionals gathered, energized for an insightful day ahead. Afterward, our moderator Sabinije von Gaffke welcomed everyone for the 10th time in a row.
Throughout the day, attendees were treated to a diverse range of perspectives and expertise from industry leaders:
First up was Alexandra Stråberg from Länsförsäkringar, who spoke about how the global perspective is business-critical and how it affects everyday life at national, regional, and local levels.
Vivienne Carney and Jim Thulin from AAK discussed how food safety and contaminant control are more critical than ever before. They explored ways to minimize the disruptive impact these issues could have on our operations and supply chains.
Maria Dahlén from Epiroc shared experiences and insights on the supply chain disruptions Epiroc has faced in recent years, beginning with the pandemic. She emphasized how we can effectively plan and prepare for future disruptions.
Hagen von Petersdorff from IKEA explored the transformative journey of integrating data science into supply chain operations. He highlighted the strategic shift that many companies, including IKEA, are making by bringing key analytics roles in-house.
Henrik Kniberg from Hups & Flitig.ai shed light on generative AI and how we can keep up with this rapidly evolving technology. He explained how both individuals and companies can stay relevant in the Age of AI.
Kim Gaba Jensen from Tesla talked about how Tesla is innovating the industry, manufacturing, and modern car ownership. He also shared the secrets behind Tesla’s staggering 55.4% compounded annual growth rate.
The final keynote speaker was Micael Dahlen, Professor of Wellbeing. He demonstrated how we can get more out of life, our relationships, and our careers. He shared findings from his own research, as well as others, and provided us with tips and tricks that are scientifically proven to help us enjoy our lives just a little bit more.
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MATCHMAKING
This year we introduced a special feature at the conference: supply chain matchmaking. Throughout the day, attendees had the opportunity to network with various professionals in the industry. Those interested in learning more about S&OP, Planning, Supply Chain Design, or AI & New Technology were able to discuss these topics with Optilon experts in the field.
These interactions did not only foster valuable connections but also inspired new ideas and collaborations within the supply chain community.
MINGEL & NETWORKING
In addition to the matchmaking segment, attendees had the opportunity to connect with like-minded professionals while enjoying delicious food and special supply chain-themed drinks. We also had an Optilon reporter mingling with the crowd, who asked the participants questions about future trends—stay tuned for those insights!
KEEP AN EYE OUT
If you missed the conference or want to share it with a colleague, we have gathered all the inspiring keynote presentations and mingling photos, which will be launched soon! Follow us on LinkedIn to be the first to know when they go live.
ABC inventory classification has been around for so long that most planners just assume it is the only way to segment inventory. Spoiler alert: it is not. And it is far from the best way. This method hails from the 1960s, a time when computers were room-sized giants. Today’s tech can do so much more. Let us dive into how inventory management has evolved into multi-echelon inventory optimization (MEIO), helping companies minimize inventory investment while hitting service-level targets and improving profitability.
How does ABC classification work? (And what’s wrong with it?)
To understand why ABC inventory classification falls short, let us unpack how it works. Traditional inventory management applications calculate safety stock for each individual Item-Location (warehouse) combination in isolation. For such an application to work, the planner needs to assign a service level target (%) for every combination.
With companies often managing tens or hundreds of thousands, or even millions, of Item-Locationcombinations, it is impractical to set service levels individually. A simplification is necessary, and ABC classification is one way of doing it.
A common approach is to use a 3×3 matrix with volume value on the Y-axis and order lines on the X-axis, creating a “double” ABC classification. Typically, 80% of the volume value is assigned to A items, 15% to B items, and 5% to C items. The same 80/15/5 breakdown applies to the number of order lines. A few high-volume value items usually hit the 80% threshold of the AA category quickly, leaving most items in the CC category.
Example of ABC classification.
Service levels are then assigned to each ABC class through a “trial-and-error” process. The AA class typically gets the highest service level targets, and the CC class gets the lowest.
If the aggregated service level doesn’t meet the company’s overall target, say, 95.o%, adjustments are made to the service level targets per class. Once the settings are in line with, or slightly above, the company’s overall target, 95.5% in this example, the process stops.
Now every item in each ABC class shares the same service level target. For example, if there are 10,000 stocked items in a location, all 5,400 items (54% from the ABC classification example above) in the CC class will have the same target. Safety stock levels can then be calculated.
The drawbacks of ABC classification
Now, let us pause and think for a moment.
The stock investment depends on the service levels set for each ABC class. Could other service level combinations achieve the same 95.5% result? Absolutely. There are countless combinations that could give the same 95.5% overall service level, all with different stock investments.
So, how do we know if our chosen assignment of service level per ABC class is optimal? We don’t. That is why this method is referred to as inventory management – not inventory optimization.
The example above describes one level, but supply chains are often more complex, with multiple levels/tiers (central, regional, and local warehouses). Some traditional inventory management software uses an 8×8 ABC matrix per location, with many locations, this becomes a very labor-intensive task to set up, not to mention maintain over time. And we still can’t be sure if we have the optimal set-up.
Why inventory optimization beats traditional inventory management
So, is there a better way to segment items, assign service level targets, and optimize safety stock levels today? Yes, there is.
While traditional ABC classification focuses on operational logistics, often ignoring sales, marketing, and customer needs, inventory optimization looks at the product range and the business.
This modern approach uses “Service Classes”, for example, “Accessories”, “High-margin products”, “own-brands”, and “Critical spare parts”. This categorization is more relevant to sales and marketing, who might not even understand ABC classification.
Stock-to-service for better inventory management
In inventory optimization, you set service level targets per service class, not ABC class. The software optimizes each Item-Location’s service level and safety stock level using a “stock-to-service” curve. This ensures that you meet the aggregated service class target but with minimal stock investment. Let’s think about this. Using the ABC approach, all items in a class are assigned the same service level as an input. In inventory optimization, the software optimizes the individual Item-Location service level, this is an output.
This automated differentiation of service levels (known as mix optimization) within each service class, considering lower bounds, is an outstanding way to reduce stock investment and increase service level at the same time. For example, “Accessories” might have an overall target of 93%, with a lower bound of 90%. The software then assigns service levels between 90% and 99.99% in such a way that the service class still reaches 93% as a group but with minimum stock investment, i.e. optimization. Similarly, “Critical spare parts” may target 99.5%, with a lower bound of 99.0%, still giving the system some level of freedom in the mix optimization step.
Multi-Echelon Inventory Optimization
The result? Each item in each location is optimized individually but in relation to all other items in the same service class and in relation to upstream and downstream locations (known as Multi-Echelon Inventory Optimization, MEIO). Actually, they compete about the stock investment among each other you could say. In inventory management, items are treated as isolated entities. Inventory optimization software models tens of variables such as demand variability, standard cost, order quantity, lead time, lead time variability and more – unmanageable with the traditional approach.
Modern inventory optimization automates the planning of complex supply chains with hundreds of thousands of Item-Location combinations, guaranteeing service levels with minimum stock investment. This is all done with a very limited number of planners.
Ready to upgrade your inventory management?
Are you still relying on old inventory management methods? Transform your inventory strategy today with cutting-edge inventory optimization tools. Say goodbye to outdated ABC classification and hello to smart, efficient, and cost-effective inventory optimization.
Are you struggling with balancing inventory? Today, many Nordic businesses face major challenges in matching their inflated stock levels and assortment of products with changing customer demands. The quest to maintain a high service level while minimizing costs remains a top priority, although now it seems more difficult than ever. Fortunately, smart supply chain planning can unleash the potential of your inventory and pave the way for supply chain success.
Why do businesses struggle to balance inventory?
In the midst of a global pandemic that profoundly disrupted the global supply chain, our current macroeconomic landscape has taken shape. With significantly reduced shipping capacity and prolonged lead times from Asia, businesses faced the challenge of meeting customer demands by placing substantial orders to stock up on inventory.
Fast forward a few years, and we now find ourselves grappling with high-interest rates and inflation. These economic forces have propelled a significant change in consumer behavior. Consumers are now favoring more affordable products over their pricier counterparts. Consequently, businesses have also adapted their supply chain strategies, stocking more inexpensive items to cater to these changing customer needs.
High inventory levels and the wrong product mix
This shift, however, has unwittingly given rise to a particular problem – the overstocking of higher-priced items. The current product mix is simply mismatched and does not align with the new customer needs. This is now causing large financial strains on businesses.
Previously, when interest rates remained low, companies focused on providing a high service level, and they could maintain extensive product inventory without incurring significant costs. Now the scenario is vastly different. Obtaining desired stock has become increasingly expensive, and the bottom line is directly impacted by percentages.
To cope with this, many businesses find themselves resorting to significant discounts to reduce their inventories, or they simply hit the brakes in an attempt to handle the situation. However, this scenario may eventually lead companies to face a “bullwhip effect”, resulting in empty shelves and disorganization throughout the supply chain.
Discover the potential of your inventory
Instead, this situation calls for careful consideration of inventories to ensure a balanced mix of products. The more complex the supply chain, the more critical the inventory management. And as the complexity grows, so does the need for digitization, robust system support, and control.
For today’s companies, it is important to understand where the forecast lies. Keeping tabs on demand has always been valid, but it has now reached a new level of importance. The large expenses of maintaining product inventory heighten the need to align stock levels precisely with customer preferences.
Despite this, a vast majority of supply chain data correction is still today handled manually in Excel or via rigid and rule-based processes in ERP systems. These traditional systems are primarily designed for data input rather than supply chain optimization. This often leads to an accumulation of slow-moving items with irregular and sporadic demand patterns. As a result, businesses face increased costs and inefficiencies.
To maximize the true potential of your inventory, a System of Differentiation (applications dedicated to handling specific business needs to reach a competitive edge) – rather than a System of Record (applications and ERP systems dedicated to handling the most basic and critical data need and processes) – is required.
Use a smart supply chain planning platform
A smart supply chain planning platform can be tailored to optimize a company’s specific supply chain operations. It leverages advanced algorithms and intelligent automation to provide the insights needed to make informed decisions and take proactive actions.
A modern supply chain planning system will provide a high service level for the end customers by securing the right product mix, while still keeping inventory levels low.
Companies can maintain a high service level not only during peak periods or with high-volume items but also with products sold sporadically. It ensures an efficient operation while keeping inventory levels low or at their optimal point.
By implementing the right system support, businesses can experience remarkable cost savings. On average, stock levels can be reduced by as much as 30%. Imagine the impact that saving such a significant amount of money can have on your bottom line.
Moreover, a smart supply chain planning platform eliminates the need for manual work. Automating time-consuming tasks liberates planners to focus on more rewarding activities, such as proactive risk assessments. This allows them to contribute strategically to the company’s success and drive growth.
To sum it up, your company will benefit from a higher level of service, ensuring customer satisfaction and loyalty. Simultaneously, inventory levels will be optimized, enabling you to strike the delicate balance between meeting demand and minimizing excess stock. Furthermore, the automation provided reduces operational inefficiencies and streamlines your processes, paving the way for increased productivity and profitability.
A large network of supply chain experts at your service
At Optilon, our expertise stems from a rich 30-year integration heritage, empowering us to seamlessly integrate solutions for production planning, demand forecasting, inventory optimization, and replenishment. With a vast network of 50 supply chain experts in the Nordics, we offer unparalleled support to our clients.
Don’t settle for outdated methods. Contact us today and discover how we can help you transform your business. It is time to step into the future of supply chain planning.
That supply chains are not only the backbone of any business, but fundamental for success, has become evident in the past few years. Staying up to date with trends is imperative for any Nordic business to plan for the future and stay competitive in the global market. In this article, I share 7 global supply chain trends in 2023 to help you out.
1. Shifting focus from only cost to also risk
Looking back at the past decade, the majority of companies in Scandinavia and Northern Europe have been characterized by outsourcing their production to low-cost countries such as China. The same goes for sourcing raw materials and components. But in the past few years, the world as we know it was turned upside down. The dramatic events of the COVID-19 pandemic, the Suez Canal blockage, and the invasion of Ukraine all caused significant disruption to global supply chains.
As a result, Scandinavia and Northern European companies have started to realize that although cost-efficient, single sourcing from Asia is not very resilient to changes – regardless of size – may they be massive, like a pandemic, or small, such as fluctuation in market demand. This has now led to more companies shifting focus from only cost to also risk. And minimizing those risks has rapidly risen to the top of their agendas.
2. Reshoring – bringing production home
As part of this shift, Scandinavian and Northern European companies that are outsourcing from Asia are considering buying a return ticket. In fact, we are already starting to see examples of reshoring in Scandinavia and the Nordic countries where businesses are bringing their entire or parts of their production home.
By moving their entire production home or sourcing from both Asia and Europe, they are looking to increase their chances of withstanding failure in the primary supply chain and reduce their overall supply chain vulnerability. However, to do that, it is important to have the right tools in place for efficient supply chain planning and smart use of resources.
3. Moving towards differentiation
In the aftermath of the pandemic and invasion of Ukraine, we are also seeing an increased focus on differentiation, where companies are looking to set themselves apart from the competition through new price points and inventory strategies.
With inflation pressures, consumer behaviors and customer demands are shifting from high-end products to more affordable ones. At the same time, businesses are focusing on cost efficiency to prevent their capital from going through the roof.
To meet the demands for availability and service level – while at the same time keeping inventory costs under control – companies realize they need to become more granular and specific in how they control and optimize their inventories.
As a result, we are now seeing more businesses moving away from manual and semi-manual processes and using “one size fits all” types of rules toward differentiation, digitalization, and automation.
4. Prioritising supply chain design
Another strong trend that has emerged as a result of the increased supply chain awareness is the need for companies to improve their supply chain design. This is particularly noticeable in companies with high supply chain complexity.
Supply chain complexity can arise from several sources – network nodes and links, internal and external processes, product and service range, product design and development, supplier integration, and information and organizational complexity.
While companies are adding the cost and risk dimensions into their supply chain design, two more dimensions need to be considered to secure resiliency. The first is service level, which includes the ability to offer short lead time to customers. The second is sustainability, which includes the ability to map the current CO2 footprint and find new supply chain set-ups that will reduce CO2 emissions without a large negative impact – or even reduction – on cost or other dimensions. As the global market for emissions credits matures, this will also be part of the equation.
Companies must review their supply chain based on all four dimensions to create a shared view of the supply chain and find their trade-off. If companies can do that, their chances of securing continued competitiveness and obtaining sales will increase.
5. Creating a digital twin of the supply chain
More companies are embracing digital technologies to help them design their supply chains and outsmart disruption. One critical component of this shift is using a digital twin. A digital twin is a digital representation of a company’s end-to-end supply chain network.
You can look at it as a sandbox extension of your supply chain: By recreating your real supply chain in a virtual world, you can apply what-if scenarios and create versions of the future to model alternative scenarios for uncertain areas within your business. This enables you to efficiently make trade-offs between risks and potential gains and conclude under which pre-conditions to use which supply chain setup or strategy.
Instead of assessing your supply chain every third year, you can use your digital twin to review your setup annually, semi-annually, or even quarterly, as well as ad-hoc. Slowly but surely, the digital twin is becoming a key component of future supply chains. It will be the common playground for sales, sourcing, supply chain, and sustainability to gather around. It will also help companies break silos and adopt a more holistic approach.
6. Supply chain automation, robotics, and AI
Tapping into digitalization and technology, the use of automation, robotics, and AI in supply chains continues to be a strong trend. Automated solutions for supply chain tracking, inventory and warehouse management, and back-office tasks have allowed for leaps forward in labor productivity performance. The shortage of truck drivers has catapulted the transport industry into the forefront of AI and autonomous vehicles.
Although these new technologies have the potential to reshape the entire supply chain, many of them, especially AI, haven’t fully matured and reached their full potential yet. Inserting AI into a data system (ERP or similar) will not automatically generate a ready-made business strategy. As with any other data analysis, it still takes a lot of work to collect the data, transform it, and ensure it is high-quality and connected. Once that is done, you can start accessing all the business value AI can bring.
While there are efficient AI solutions today for forecasting, promotion planning, and data correction, for example, we will see more and better applications of AI, machine learning, and reinforcement learning for various supply chain problems in the future.
7. Sustainability and transparency in focus
The future consumer market will be shaped by millennials and Gen Z. If a business wants to survive in the next century, its strategies must align with the priorities and values of these consumers. Millennials and Gen Z expect companies to be more visible, active, and transparent. They don’t settle for less than proof and demand sustainable supply chain practices addressing climate change, human rights, and corruption.
As a result, the tracking trend is intensifying. More companies are using RFID tags, QR codes, and blockchain technology to identify and track the entire chain of movement on the way to the end consumer. Tracking also provides companies with better data for improving supply chain operations, reducing costs, and proving a product’s origin.
With the increasing demand from millennials and Gen Z, we are also seeing companies shifting from linear supply chains to circular supply chains to minimize waste and environmental impact. This shift is a no-brainer for some companies, while others struggle to find a suitable circular supply chain model.
How efficiently do you use your resources?
Supply chains are no longer a marginal concern for businesses. Today, supply chain knowledge and experience should have a given place in the boardroom as more companies realize supply chain is about much more than merely cost reduction. It is a possibility to differentiate, create strong offers, and stand out from the competition. At Optilon, we believe Nordic companies have the potential to be the most competitive in the world. They just need to use their recourses more efficiently than their competitors to get there.
