The question from many Supply Chain leaders: How can you reduce waste with Supply Chain planning in order to progress on the company’s Sustainable Supply Chain matureness? This blog post reveals ways you can harness demand and inventory planning to take out waste. At the same time you can take out unnecessary expenses and maintain or improve service to customers.
Start with a better demand forecast for optimal inventory levels
If you plan well from the start, you can avoid all sorts of costly, time-consuming activities down the road–or down the chain, so to speak.The place to start for a more efficient inventory stocking strategy is better understanding your demand so you can precisely predict how much goods you need, where and when. Your demand planning should understand and automatically adapt to the full spectrum of demand behavior in a SKU portfolio by factoring in order volume and frequency. This method is known as probability forecasting.
Combine this probability forecast with demand modeling for a fuller, more precise view of the various factors that influence demand, such as promotions, seasonality and product lifecycle behavior. This approach allows you to consistently place better inventory bets than your competitors for those harder-to-forecast items. And when you reduce overstocking and stockouts, you free up working capital and improve service levels at the same time. This tried and tested approach can provide a sustainable competitive advantage–and it can restore trust in your forecasting.
Having the right inventory in the right location brings with it a host of other waste-reduction benefits
When you better anticipate customer demand, you reduce the need to expedite with air freight along with expensive costs from warehouse to warehouse. Rush orders and transfers erode profit margins, and often companies fail to see that poor demand forecasting and inventory stocking are the origin of the problem. Solve the root cause to eliminate costly reactionary activities. Eliminating wasteful expediting and warehouse transfers means fewer carbon emissions from inefficient and unnecessary truck and rail transport. Read more about improving transportation efficiency in section #2.
It’s estimated that up to 22% of inventory is unnecessary. When you remove it with a smarter stock mix, you minimize the amount of space required for inventory and reduce overhead costs such as power, heat and real estate–and still meet or exceed service commitments.
Improve efficiency and timing of orders
Often companies focus singularly on inventory turns, and as a result may have inefficient order cycles. For example, it may be that placing orders every week may not be as efficient as every two weeks, even if inventory isn’t turning as frequently. This results in too many costly LTL shipments and requires extra labor to receive, cut purchase orders, store and pick the items. A better solution is to identify the optimum order cycle which is aligned with potential customer demand and tied to a service objective. This helps you maximize both space and profit. Ask yourself, how can you best satisfy customers with your available space?
Rethink your one-size-fits-all service strategy
Today consumers want more flexibility to reduce packaging and emissions or to choose alternate delivery options. As a result, fulfillment is changing, including direct to consumer, dark stores and city hubs. In-store fulfillment isn’t just grocery anymore. The key is having the analytical capability to position inventory across the network to fulfill changing demand. You need a richer, more credible demand signal to make it happen. It all comes back to understanding your customer demand, and delighting them by providing the items they want with the right level of service.
Improve transportation efficiency
There are plenty of ways you can improve transportation efficiency through better inventory optimization. A vehicle or container running empty or partially full is wasting space and fuel and generating excess carbon emissions. Larger companies with their own fleet can minimize empty return trips (deadheads) with backhauls. Instead of returning empty after drop-offs, your planning solution can help you group vendors for return pick-ups to make the most of available freight capacity, improve efficiency and balance inventories. Most companies will even provide an allowance when you provide the transportation. Planning technology can also help you take better advantage of economies of scale with international shipments. For example, your system can recommend how best to work with vendors and contractors to fill ocean containers and create balanced loads for optimized freight investments.
Work with your production efficiency
Better inventory planning has a beneficial effect on manufacturing efficiency too. It works as a “helper” to enable you to execute manufacturing better: more efficient production planning reduces the need for plant overtime to produce out-of-stock items, and also has a smoothing effect on production, minimizing peaks and troughs. Here are some specific ways to reduce waste in the manufacturing process.
Capacity planning is much more than simply calculating resource load based on production requirements and throughput rates. Your planning system must help you manage both constrained and excess capacity, effectively balancing the competing objectives of customer service and manufacturing. It works this way: when you consider the probabilities associated with demand, there is less of a “cost” to rescheduling some planned orders than others. When you have excess capacity, your planning system must pull forward the planned orders that can best contribute to service performance. When you have capacity constraints, you must manage the trade-offs across items to reduce the overall risk of a stockout or a shorted customer order. By managing over a longer horizon, you can better leverage available capacity to reduce the possibility of future shortfalls. This helps reduce the need for additional shifts or overtime.
Take shelf life into consideration
Inventory planning is complex in general, but even more so when products have a potential risk of obsolescence. In process manufacturing, grocery and other industries with shelf-life requirements, this typically results in high inventory write-offs as lots age out. In discrete industries, in which products are frequently updated with new models, the problem manifests in heavy discounting to liquidate stock of the original components when the new model is launched.
You can finally get ahead of lots that are at risk and avoiding overplanning stock by understanding the inventory you have and when it will expire. A more accurate forecast results in producing the right amount of goods to avoid sell-off. Next-gen inventory optimization defines an inventory mix that takes into account shelf life to maximize freshness and minimize risk of obsolescence. It does this by generating a stock to service curve that helps you understand how best to achieve service levels without risking obsolescence. You satisfy customers while minimizing the risk of having to throw out materials.
Use less human resources
You’re probably beginning to see a pattern: better planning = greater efficiency. This is also true with your human resources–the planners who orchestrate the plan that keeps your products stocked and your customers happy. Traditional supply chain solutions were not designed for today’s high variability demand. Inventory mixes and service levels get out of balance across the network—and out of line with business objectives. Trust in the planning process erodes. Planners are forced into reactive “firefighting” mode which all leads to a cycle of excessive costs, waste and obsolescence.
Elements of Supply Chain planning are ideal tasks to “outsource” to machines, which can execute analytical tasks and repetitive calculations faster and more accurately than humans. In other words, this isn’t a case of machines replacing people’s jobs: automation plugs a skills gap that humans can’t practically fulfill. Planning automation eliminates inefficient, reactionary activities and gives planners and buyers AI-generated insights about promotions, seasonality, and other external demand influencers. It is regenerative leadership.
This post is written with inspiration from our partner Toolsgroup.
