Inventory Management and Demand Planning: Overview
Efficient inventory management and demand planning is key to gaining a competitive advantage. The cost of holding stock can eat into profits very quickly. In addition, increases and the need to provide exceptional service levels is now the norm.
At Bisham, our Logistics Consultants have vast experience of purchasing, demand management and inventory level optimisation. This has been gained the hard way through years of experience in senior management positions in industry. We have a a broad range of experience across retail and manufacturing combined with in house models. Consequently, Bisham Consulting are able to use proven methodologies to optimise inventory levels for the entire supply chain.
Why do we need inventory management and demand planning?
Demand planning encourages businesses to look at the factors that are ‘pulling’ actual sales: consumer demand, specific promotions and trends; then production and supply chain resources can be adjusted accordingly. Adjusting the focus to an analysis of demand can bring numerous benefits:-
- Increased Customer Service
- Reduced Inventory
- Improved Supply Chain Capacity & Cost Control
- Increased Supply Chain
- Responsiveness and flexibility
Sounds counter-intuitive? It has been proved not to be. It is a fact that companies often do not have the stock they need to sell today but they do have plenty of stock that is not selling. Demand planning allows the business to review an integrated plan on a regular basis, to bring together sales, production and financial plans, add up-to-date demand information and produce a single, more accurate forecast that can satisfy the requirements of all departments and customers.
Inventory Management and Demand Planning: Maximising the Company Profit Potential.
All businesses make plans, but how accurate are they? Some people say that it's difficult to quantify the benefits of inventory management and demand planning. It is quite easy to see how much would have been lost when forecasting is not accurate. Forecasting demand is key to the process of demand and supply chain management.
Okay, so forecasting is never perfect. Errors can result both from either under-forecasting or over-forecasting. Shortfalls from under forecasting can be made good through increases in production and shipment costs, although there can be lost sales. In the case of over-forecasting, losses to the business come from discounts that must be offered to dispose of excess or obsolete inventory and the costs of holding excess stock or transhipping excess products from one distribution centre to another. To be effective, efficient Supply Chains must maintain the lowest possible inventory consistent with the highest possible service levels that match the company’s objectives. All the time it is critical to keep costs down. In summary, the short-term benefits of integrated business planning will include improvements to:-
- Transport planning
- Inventory requirements planning
- Production scheduling
- Capacity planning
- Manpower planning
- Sales and marketing planning
- Purchasing planning
- Financial planning/budgeting
In the longer-term the infrastructure provided by the inventory management and demand planning process is extremely potent. It can be used as both a platform for business modelling and "what-if" analyses.
Forecasting and demand planning tools are widely available and many ERP systems have demand planning features. However, forecasting software alone is unlikely to provide the hoped-for improvements. To be really successful it must be linked into a recognised company-wide process of sharing information and joint decision making. So, in order to implement demand planning into a business there are a number of prerequisites:
- Defined processes
- Defined responsibilities tied to performance incentives
- Forecasting tool (and training) and appropriate links/interfaces
Inventory Management Case Study: "Dentsply"
This project managed the implementation of a new demand management system throughout Europe. Dentsply International is the largest supplier of professional dental products in the world. Following an in-depth review of the savings to be made from planning inventory a system selection exercise was commissioned. Dentsply needed to implement this new system to support new Demand Planning, Inventory Optimisation & Purchase Planning processes for the Chairside business in Europe.
Inventory Management and Demand Planning: Client Benefits
A demand forecast will be based on a statistical analysis of historical information combined with future assumptions based on a number of drivers. At Bisham Consultants we look at all of the key indicators. These include market development, promotions, new product launchers, competitive activity, Bank Holidays and start of the school year. It's long list.The business needs to identify the departments that are responsible for deciding or monitoring these specific drivers. Individual roles and responsibilities also need to be updated to reflect driver-related objectives. We also consider compensation and incentives programs where they need to be aligned across the company. As a starting point, the top drivers in each area should be identified. This allows the business to concentrate on the most important focus areas right away.
Over time, additional drivers will also be identified and included in the demand management process. It's particularly important that all departments co-operate in driver identification and subsequent assumption management. So, in summary, Demand Forecasting is not simply a sales function and nor can it be used successfully without input from many sources.
On a periodic basis, the demand forecasting and management process should be completed as part of the month-end closing schedule. There are three phases:-
- Produce a statistical demand forecast based on known history and existing assumptions. Commercially available tools exist to calculate the best forecast available based on past history, combined with the known effect of forthcoming events e.g. new product launches, production issues, holiday periods, etc.
- Demand Forecast Review & Demand Management Analysis. A Forecast Analyst will review the forecast and add any other factors based on Market Intelligence that may cause a variance to demand (e.g. competitor activity, regional events, etc.). In a many-SKU business this manual review can be quite time-consuming and short-cuts will need to be found to minimise the turnaround time, focusing on Fast-moving items or known problem areas.
- Consolidation, Forecast Adoption, Upload. Once approved, the forecast data will be combined with company strategy (e.g. customer service levels to be achieved, levels of inventory of raw materials and finished goods), and turned into Purchase Orders, Production plans, manpower and resource plans, transport plans, etc. Once this process is adopted: the Sales and Operations Planning Meeting (S&OP), it has to be accompanied by the willingness and the ability to react flexibly to short-term changes in forecast demand. Forecast accuracy can be monitored by comparing actuals with original forecasts. Targets can be set to improve this accuracy and every effort made to determine what causes variations in demand, so that these fluctuations can be recorded and used in future planning cycles.