Turbulent times call for a different approach to inventory management

In unpredictable times, traditional methods of inventory management leave a lot to be desired. The huge number of empty supermarket shelves at the start of the COVID-19 pandemic made that all too clear. Companies like Kraft have significantly improved their performance thanks to multi-echelon inventory management, as software supplier Logility demonstrated earlier this week during the third edition of Webinar Wednesday.

By Marcel te Lindert

According to research by Supply Chain Media, almost half (45%) of companies are planning to invest in software for sales & operations planning (S&OP) and 40% in software for end-to-end supply chain visibility. Such high numbers come as no surprise to Jonathan Jackman, Vice President EMEA at Logility. “We understand the reasoning behind that. Companies are keen to get a better grip on their supply chain and integrate more intelligence into their decision-making,” he said.

Multi-echelon inventory management is a seamless fit with this. Traditional inventory management software is focused on optimizing inventory at a single location in the supply chain. Ideally, however, the optimal inventory level at that location should be linked to the inventory present elsewhere in the supply chain. Multi-echelon inventory management considers the end-to-end supply chain and calculates the optimal inventory levels for all locations.

Misalignment

Taking the first step towards better inventory management immediately presents a sizeable challenge: how to explain why multi-echelon inventory management is necessary and to win board-level support. The traditional approach no longer works, according to Jackman, who even quoted Darwin: “It is not the strongest of the species that survives, nor the most intelligent. It is the one that is most adaptable to change”. “Poor service levels are not just caused by forecasting errors, but are often also due to misalignment between the production and distribution strategies. As a result, companies struggle to respond adequately to change. If there is a change in market demand, supplier delivery times or supply chain dynamics, the inventory strategy must be adapted accordingly,” he continued.

Many companies are struggling to maintain their service levels in these volatile and uncertain times. The traditional response is to increase safety stocks, but this is less and less likely to produce the desired result. “In addition, we’re seeing that it can be difficult to clear excess stock quickly. Halting production is often not an option. Today’s ERP solutions don’t offer a solution for this because they can’t handle the changes in the supply chain. But multi-echelon inventory management makes it possible to achieve clear improvements.”

Chance of survival

Logility showed how production and distribution processes are interlinked; adjusting the stock replenishment frequency in warehouses has an impact on downstream availability and upstream demand patterns. “Many companies look at their finished goods inventory, but not at the processes leading up to it,” stated Gokhan Usanmaz, Product Owner at Logility.

Usanmaz explained the approach of companies with complex distribution networks: “First they conduct a network study to determine where to base their warehouses, then they calculate how much stock should be in each warehouse. Companies with a broader view, who regard their factories as inventory points too, often hold a bit of stock everywhere; that’s a costly solution. The optimal situation might mean that you don’t need to hold stock at every location. Other considerations come into play, such as: Where should I differentiate my stock? How do I safeguard the supply? How can I minimize the recovery time after a disruption? And how can I increase my chances of survival in circumstances like we’re witnessing now? Answering these questions requires a different approach to inventory and closer collaboration between procurement, production and distribution.”

Mac & Cheese

Introducing multi-echelon inventory management successfully calls for more than just a strong business case. It also requires the participation of various disciplines within the company, but it’s not always easy to get them on board because the principles of multi-echelon inventory management can be counterintuitive. Logility illustrated this with a real-life example from Kraft, manufacturer of the popular US product Mac & Cheese. “It’s a long shelf-life product with a high and stable demand pattern and decades of historical data. Yet it was one of the products that planners paid the most attention to – a typical case of overplanning. The planners were likely to strongly resist any proposals for a different approach,” Usanmaz said.

By focusing on multi-echelon inventory management, Kraft has managed to weather the storm caused by the COVID-19 outbreak relatively well. Whereas the company focus used to be on efficiency, that shifted to restoring service levels as soon as the pandemic started. “While many other consumer goods manufacturers saw their service levels drop below 90%, Kraft scored around 95% despite all the disruptions. The company is now focusing on reducing the risks due to fluctuations in supply and demand. The planners have remained confident in the system throughout because it adapts to changing circumstances.”