4. Inventory Allocation
Objective:
Optimal allocation of inventories improves customer service, reduces inventory investment, and improves profitability. The allocation process balances inventory among distribution centers, factories, and channel partners to achieve optimal service while minimizing inventory investment.
Background:
Unexpected demand can cause an imbalance of inventory among multiple distribution centers or plants. This happens for a number of reasons, including:
- An unexpected large order from a customer or channel partner.
- A large return due to defective merchandise, requiring prompt replacement.
- A competitive promotion resulting in one’s own urgent, unplanned promotion.
- Orders transferred in because an emergency renders another plant unable to produce.
- A capacity or production problem creates shortages. Channel partners or customers order large amounts attempting to corner supplies thus exacerbating the situation.
Manufacturers are at the mercy of large, unpredictable channel replenishment orders. Automated order processing systems normally release large orders to be filled in chronological sequence, creating an imbalance between channel partners’ inventories (first large order gets it all) with a very negative effect on end customers. This situation can be unintentional or intentional, as when one distributor or wholesaler tries to corner the market.
In large global companies, plants and distribution centers are often using different operational systems, so inventory allocation processes are not feasible.
New Process:
With integrated visibility via an EDW, unbalanced inventory versus demand situations can be monitored and corrected. Allocation algorithms can equalize service and inventory levels, create appropriate move orders or replenishment orders, and interface to transactional systems.
Enterprise-wide visibility of inventories, forecasts (demand plans), customer orders, internal replenishment orders, and supply plans in the EDW enables complex analysis of availability in all locations and offers the ability to allocate inventory to best meet requirements. Service or inventory levels can be equalized across all locations. The impact on your ability to fill current orders and forecasts in all locations, while responding to an exceptional situation, can be evaluated. Such optimal use of enterprise inventory has a substantial positive effect on sales and customer satisfaction.
With visibility of inventories, customer orders, replenishment orders, demand plans and supply plans for all distribution centers and their associated distribution regions, an allocation algorithm
can actively equalize service in each region on a daily basis. Such an algorithm can be used to move existing inventories in response to changing demand or to proactively allocate prior to generating replenishment orders for the DC. Before generating a replenishment order for one DC, all DC available inventories and forecasts are analyzed and available inventory is allocated to equalize service throughout the distribution system.
With visibility of end customer orders from channel partners, it is possible to manage channel partner replenishment using the same principle – adjusting your replenishment shipments to their end customer demand. The best practice is to replenish channel partners automatically based on their customer demand (POS transactions).
Related analyses:
- Report impact of major stock-outs on sales (based on backorder value).
- Identify lost orders due to lack of inventory (cancelled backorders).
- Exception reporting of excess inventory over maximum and X week supply.
- Exception reporting of replenishment, production, or purchase orders that will result in inventory over maximum level.
- Identify most serious product and raw material shortages (negative available balances).
- For items out of stock, identify replenishment or production orders overdue.
- Report value of open, overdue orders for custom-made products.
- Rank products and materials with highest and lowest inventory turns.
- Measure inventory investment optimization (higher inventory level for fast moving, less expensive items) to
- optimize service to investment ratio.
- Exception reporting of promotional items needing replenishment expedited to meet planned promotional demand.
- Identify products not meeting target service levels (too many out-of-stocks).
Leadership:
Supply chain management uses EDW integration of inventory, order, and supply chain planning information globally to allocate and optimize inventory and production. They also use the extensive analytic capability of the EDW to monitor supply chain performance and the impact on the enterprise.
Results:
If finished goods inventory is 10% of revenue, and its carrying cost is 20%, a conservative 10% reduction in inventory will result in a profit increase of .2% of revenue. Significantly greater inventory reductions have been achieved. Additional benefit will come from reducing stock-outs and improving customer service and satisfaction.
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