Less stock, more profit:

Inventory optimization

IBS White Paper

IBS white paper

Less stock, more profit:

Inventory optimization
Inventory optimization is the area where most ERP software implementations
normally get the highest and fastest Return on Investment (ROI). However,
many companies that have implemented an ERP solution have not added a
dedicated inventory optimization module. It is a huge potential for companies
to maximize the value of their IT investment for a relatively small incremental
cost.

It is a fundamental requirement for almost every company to be able to meet

customers’ requested service levels with a minimum amount of inventory. This
means having the right products in stock and virtually nothing else. Excess
stock means excess capital outlay, which has a massive impact on
profitability. However, this has to be balanced against the potential damage of
inadequate stock leading to lost sales, lost customers and a negative impact
on the bottom line.

Achieving the right inventory levels

To ensure that customers are consistently served, some companies fill up the
warehouse. This results in overstock, which can have devastating effects on a
business. With excess stock, companies become more difficult to manage and
steer. They need more storage space, gain increased overheads, end up with
shelves full of obsolete or expired goods and, worst of all, own a large space
filled with what could otherwise be operating capital.

Unfortunately, understocking is potentially worse. This results in low service

levels, disappointed customers and greater expenses due to rush delivery
charges. Companies rarely get a second chance with new customers, and
understocking increases the risk of lost business opportunities with significant
long-term sales.

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Supply chain challenges

The inventory impact is even more influential for larger companies with
complex and global supply chains. Small changes in inventory levels can
make a huge impact on the profit and loss of an organization. Forecasting
becomes critical, but the more complex the supply chain, the more difficult it is
to achieve accurate forecasting.

Fifty years ago, companies focused on making distribution and manufacturing

more efficient because everything purchased or made could be sold. Today
the picture is different. In many cases, production is much greater than
demand and the customer has taken control of the supply chain. This is why
companies need a very agile supply chain that can react appropriately when
customers suddenly make new demands that they could just as easily fulfill
with a competitor.

This results in a new set of challenges in order to maintain a fluid and

profitable supply chain. Customers demand low prices, so manufacturing
moves to low-cost countries, which results in more complex transportation
requirements. Disparities between IT systems in some low-cost countries can
mean lower visibility into the manufacturing end of the supply chain.

Customers drive demand, but that demand is also unpredictable. It is

becoming increasingly difficult to be flexible enough to meet the needs of all
customers all the time. For many product lines, demand complexity has
increased so much that a configuration tool is necessary. To capture all these
various requirements, companies have to maintain more Stock Keeping Units
(SKUs) to keep in line with demand. On top of all that, the product life cycle
itself is getting shorter.

Considering all this, it is clearly becoming more and more complex to predict
what customers will buy tomorrow, let alone weeks or months down the line.

Industry requirements
Each industry has its own unique and diverse challenges that it is required to
meet. Detailed below are specific challenges facing three key industries.

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Paper suppliers and distributors

Paper suppliers and distributors have to handle very large and heavy goods.
This makes it more cost-effective to carry out direct deliveries from the
supplier to the customer. Deliveries have to be just in time, as a printing house
cannot store huge stockpiles of paper for the reasons given above.

In the paper industry supply chain, paper stocks are held at any number of
locations, including the mill, external warehouses owned by the mill or the
supplier, the supplier’s central or regional warehouses and even at the printer.
This stock holding and the subsequent distribution requirement incurs costs
for every member of the supply chain. In a market operating on razor-thin
margins, stock distribution must be carried out in the most cost-effective way
possible. Implementing best practices at this stage requires mills, suppliers
and printers to collaborate in establishing optimum distribution, which
eliminates warehouse cost and unnecessary journeys.

Pharmaceutical wholesaling
Pharmaceutical and healthcare distributors need to move and manage high
volumes of items with speed and accuracy. The receipt, storage and picking
of thousands of sales order lines has to be streamlined. Radio Frequency and
barcode support is needed to provide real-time inventory control and minimize
paperwork. The Pharmaceutical industry needs ERP solutions that support
large transaction volumes and automate purchasing and planning activities in
order to react and meet constantly changing market requirements.

Electrical component distribution

In terms of sheer volume of SKUs, the electrical component distribution
industry is among the highest. Some companies have more than 100,000
product lines. With this many SKUs, it is essential that the information on each
item is correct and easy to maintain. There is greater emphasis upon supplier
collaboration, which requires software that can easily import new prices and
handle extensive and complex agreements for purchasing products at the
right cost and at the right time.

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Electrical distributors need solutions that support cross-referencing so that

they can define alternative and replacement products. They need inventory
segmentation so that product lines can be defined as high turnover, low-
margin, high-value or slow moving. The addition of dynamic demand
forecasting drives information for replenishment suggestions, cross-docking,
over-the-counter sales and seasonal fluctuations. Their warehouses require
real-time control to ensure timely deliveries without overstocking.

More and more industries are facing similar problems to the electronics
distribution industry. Companies continue to collaborate and consolidate,
forcing the supply chain to run at ever-faster rates and with ever-increasing
volumes. Information requirements and more complex and comprehensive
ways to connect systems and use information become more critical for
processes, reporting and analysis. Planning is becoming more and more
important along the supply chain.

How to optimize inventory

So far, we have discussed what companies ought to do and the rather
considerable barriers to doing it. How can you actually optimize inventory and
gain all these key benefits and rapid returns on investment?

Effective inventory optimization can be achieved by continually carrying out

the following five activities.

1. Analyze performance

5. Replenish 2. Classify your

products and
define strategy

Products

4. Optimize 3. Calculate
replenishment forecast

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Since this is a continuous process, it is important to go over this list again to

fine-tune inventory optimization and analyze performance. Always look for
item segments that can be improved to make forecasting more accurate.

Analyze performance
The purpose of analyzing performance is to see how the business is doing
and what can be done to improve it. It is imperative to measure service levels
and focus on delivery performance to customers, fill rates and order fulfillment
times.

Another key area to measure is the stock level. Establish stock turnover and
then measure the external elements that affect this turnover, such as safety
stock or seasonal demand. Then analyze the delivery performance of
suppliers, as well as their fill rates and order fulfillment times. The more
accurately this can be done, the less safety stock is required, resulting in
lower overall stock levels.

During these processes, companies must keep in mind the core objective of
decreasing stock while increasing customer service levels. This might sound
contradictory, but it can be achieved by ensuring that the right products are in
stock. The primary goal is to make the most effective use of inventory
investments by reducing overall stock without increasing the costs of total
inventory, all while achieving high customer service levels.

Measuring these values draws a picture of where a company is at any given

time. By comparing performance with competitors, they can also gain insight
into improvement. To do that requires a common reference model for KPIs
regarding inventory value and service levels. Such figures would give an idea
of the potential performance and indicate how much could be achieved in
terms of reducing stock and increasing customer service. With these figures, it
would also be easy to build Return on Investment (ROI) within the inventory
optimization area.

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Measuring performance with SCOR

The good news is that a standard KPI reference model exists in the form of
the Supply Chain Operation Reference Model, or SCOR. This model has been
developed by the Supply Chain Council, a global, not-for-profit trade
association open to all types of organizations, that is dedicated to improving
supply chain efficiency. The Supply Chain Council is supported by more than
1,000 corporate members worldwide who have worked together to develop
and fine-tune the SCOR model.

The Supply Chain Council's membership consists primarily of practitioners

representing a broad cross-section of industries, including manufacturers,
services, distributors and retailers. SCOR describes and provides a basis for
supply chain improvement for global projects as well as site-specific projects.

SCOR allows companies to examine and measure their supply chain

processes KPIs. Comparing these KPIs with those of competitors allows
companies to determine where weak links exist and identify how to make
improvements. This helps improve inventory optimization and can provide
dramatic ROI and savings.

Classify products
If companies have a large number of stock units, as in the electrical supplies
industry, it is a complex task to classify products. However, as stated in the
rules of how to optimize inventory, products need to be classified and different
strategies need to be adopted for different item segments.

Products are not the same, and they need to be treated differently. They can
be fast or slow movers, high or low value, long and short lead-time, bulky and
dangerous. Product segments need to be classified based on how they are
handled. Each product segment has to have a strategy defined for it based on
a range of parameters, such as what should be kept in stock, what items
should be focused on and what inventory policies should be used in order to
calculate the forecasts that ensure optimal service level and order quantities.

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Calculate forecast
Calculating a forecast is the most critical part of inventory optimization.
Inaccurate forecasts result in either overstock or understock, both of which
can be very damaging to the business.

Forecasting is the basis of warehouse stock levels and must be as accurate

as possible. ERP software is a proven asset to have for reacting immediately
to demand deviances in trends or seasonality. When it comes to forecasting,
there are two main policies, both of which are important for different reasons:

• Statistical forecasting is controlled by rules and methods and is more or

less calculated automatically.
• Demand planning is more controlled by market and capacity. It is more
manually oriented and reflects many more influences, such as
marketing activities, new demand from new products and new markets.

Statistical forecasting
Carrying out statistical forecasting requires at least a 24-month demand
history to detect trends and seasonal profiles. It is important to focus on
demand history and not shipping history, because demand history can reveal
what customers want, rather than what you actually delivered to them. It is
critical to focus on the end goal of improving customer service and
satisfaction. A statistical forecasting system detects repeatable demand
patterns from the same time each year and can determine trends.

The calculations are carried out more or less automatically, but they can be
less accurate if, there is no accessible demand history or if the demand
history is highly irregular. In addition, statistical forecasting does not take
consideration of sales and marketing activities, which are key drivers in the
demand planning numbers.

Demand planning
Demand arises when customers buy products because of sales and
marketing activities. To ensure accurate forecasting, sales budgets,
promotions and campaigns must be considered when demand planning is
performed. This method also takes into account eventual capacity constraints,

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meaning that certain items can be purchased or produced and placed in stock
in advance, to be able to deliver the final product during a high peak season.

Optimize replenishment
When forecast is calculated, it is time to plan for replenishment. Money can
be saved if the system automatically optimizes the replenishment suggestion.
In order to minimize the manual effort it is important that a system can
automatically use different replenishment policies on different product
segments to determine proper safety stock levels and Economical Order
Quantity (EOQ). This will ensure low stock levels combine with low
replenishment cost. To minimize the purchase price the system should also
determine best discount quantities by automatically getting the right products
to maximize line-buy minimums.

With large numbers of stock units, it is important to have a system that can
produce exception reports for review, auto-adjust for variances and provide
complete visibility of changes throughout the supply chain to allow quick
reaction to changes.

Replenish
Efficient collaboration with suppliers is a natural part of the whole process to
optimize inventory. The more information that is shared with suppliers, the
more likely it is that they will be able to deliver on time and maybe even
reduce lead-time. This will have a positive impact on inventory levels.

Supplier Relationship Management (SRM) is a comprehensive approach to

managing an enterprise's interactions with the organizations that supply the
goods and services it uses. The goal of supplier relationship management is
to streamline and make more effective the processes between an enterprise
and its suppliers. SRM is a key piece of the information flow within supply
chain management. It enables and manages effective communication
between enterprises and suppliers who may use different business solutions,
practices and terminology. SRM is geared toward improving the efficiency of
goods and services procurement, inventory management, and materials
processing.

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Order management accuracy and profitability can be maximized by integrated

SRM functionality in the order fulfillment process. To capitalize on the benefits
provided by these solutions, software companies like IBS offer a solution
where these functionalities are fully connected and collaborate in a
homogenous business environment.

Implementing an inventory optimization solution that covers all this

functionality will result in reduced working capital and increased customer
service. It can also result in reduced transaction costs through automating
processes. Automation decreases transaction costs while giving your
company more time to spend on the transaction and items that are most
important for business. Inventory optimization is a win-win implementation for
any company that has not adopted it.

How can IBS help?

So how can IBS help companies optimize inventory with as little effort as
possible?

IBS works with customers to increase customer service, cut the working
capital and reduce transaction costs with a solution that is cost-effective to
implement, deploy and run. IBS Enterprise is a user-friendly solution that
helps companies reach key business goals with less effort and lower costs.

Tackling the challenges

As supply chains become more complex and global, IBS Enterprise has been
proven repeatedly to successfully support companies with multiple
warehouses and multi-company, cross-border environments. It has the
functionality to target certain goals that will reduce costs throughout the supply
chain. For example, IBS Enterprise can ensure that a whole container is filled
before it is shipped with manufactured products that have been outsourced
from low-cost countries. This is especially important in reducing transport
costs and ensuring stock availability, as well as meeting requirements for
environmental and Green IT processes.

System integration and visibility is crucial to understanding and optimizing the

supply chain. IBS Enterprise is an open solution with many predefined

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integration points. For example, IBS Enterprise can automatically replace last
year’s sales statistics for a particular customer with more accurate figures
from the customer’s own actual forecast.
IBS Enterprise’s manufacturing module is built as a true demand-driven
manufacturing solution and this is reflected in the solution’s planning and
forecasting functionality. With just a few keystrokes, users can focus attention
on the most important elements to solve, such as stock priority and shortages.
IBS Enterprise makes it easier and faster to respond when demand is
changing. The graphical planning tool makes it easy to compare the true
demand to the forecast and make instant changes when needed.

For more complex products, IBS Enterprise enables several versions of the
same product and the solution can be set up to capture demand on basic
levels. A product configurator tool helps set up final configuration at the order
entry stage, meaning final products do not have to be stored in the
warehouse, only the individual components. This makes it possible for
forecasting to be much easier and more accurate, as well as cutting lead-
times.

As companies create more SKUs, it becomes more complicated to ensure

accurate information on all of them. To ease the heavy maintenance of
thousands of different products, IBS Enterprise offers dedicated functionality,
such as mass update. Item files in IBS Enterprise have open interfaces, which
include validation to ensure accurate data. This is automated as much as
possible with item segmentation, which makes it possible to set up common
rules just one time for groups of similar items. This lets you concentrate on the
most important items and let the system handle the rest of the items
automatically.

Agile solution meets specific industry requirements

Different industries and businesses have different requirements. They need
an agile solution that meets specific functionality requirements for varying
business needs.

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Paper suppliers and distributors

IBS has an on-going relationship with our largest paper supplier customer that
has decided to implement IBS Enterprise in eighteen different countries.
Together with the customer, IBS is working on projects that ensure bulky and
heavy goods are stored in as optimized a way as possible. Functionality has
been developed to ensure transportation to customers from several
warehouses can be planned and optimized. The solution can also separate
owning from storing so that it is possible to store stock in any location, no
matter who owns it.

Pharmaceutical distributors
One of IBS’ oldest IBS Pharmaceutical customers, Galexis has more than
60,000 products and, in peak hours, is capable of distributing more than
70,000 order lines per hour. The transaction volumes are so enormous that as
much automation as possible is vitally important. After installation of IBS
Enterprise, Galexis succeeded in decreasing their stock value by 25 percent.
They also automated more than 50 percent of their purchases. This means
that the solution creates purchase orders and as much as 50 percent of those
are fully automatic, i.e. the purchaser does not look at them. This can be done
because there is a signal system, which uses review flags to capture orders
that a purchaser should review before sending it to the supplier. This makes
their daily work a lot easier.

Electrical supplies distribution

Electrical distributors face similar challenges as the pharmaceutical industry in
terms of sheer numbers of SKUs. Italian distributor Fogliani has around
70,000 stock units and, with the help of IBS Enterprise, has been able to
reduce inventory by 13 percent while maintaining the same service levels. In
addition, improved processes have ensured that Fogliani always delivers the
right product. Fogliani has decreased the number of returns by 25 percent,
which is an enormous cost saving. This has also helped to increase customer
satisfaction, loyalty and retention.

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How you can optimize inventory with

IBS Enterprise
Analyze performance
In 2006, IBS was the first software vendor to be accredited by the Supply
Chain Council as complying with the SCOR model. IBS Enterprise has level 1
performance metrics predefined in the IBS Business Intelligence module.
When this module is installed, it can start measuring performance according
to standardized KPIs from day one without a lot of effort creating and
configuring relevant reports.

Classify products
Analyzing performance helps companies identify what they are doing and how
they can improve. However, when handling large numbers of SKUs, like in the
Electronics Industry, products cannot be treated in the same way.

IBS Enterprise helps you classify products into different segments. The whole
purpose is to focus on the items that are most important, and let the solution
handle the less important ones more or less automatically.

This allows the system to impose the same simple rules for all items. It can
then simulate and adopt more advanced calculation rules on strategic item
segments, thereby constantly improving performance over time while ensuring
focus is maintained on strategic items.

Calculate forecasts
Forecast calculation is the most critical part of Inventory Optimization. IBS
Enterprise lets you combine two forecasting principles, statistical forecasting
and demand planning, according to your business needs. An ERP solution
that supports automated forecasting can benefit your business with accurate
forecasts that help cut down inventory volume and costs.

Statistical forecasting should be used for all items with a base volume where
there are limited promotions, no new markets and predictable seasonal
variances and trends, because the system can do all the work.

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New markets, new products and other more complex variances require the
use of demand planning for calculating forecasts. This method assures that
stock is available for sales at the right time for selling new products to new
customers and markets.

IBS Demand Planning is a tool that allows preloaded forecasts from many
sources, such as sales history. Users can easily collaborate to adjust those
figures to reflect planned campaigns and promotions or other key influences.
This means that salespersons can work on their own figures for sales in their
region and the system aggregates the information. The whole tool is very
user-friendly, allowing work on either aggregate level or detailed level and
enabling changes that are automatically transferred bottom-up or top-down.

It allows the sales and marketing departments to collaborate and come up

with relevant sales budgets that can be used to calculate the forecast. With a
few keystrokes, demand figures from customers can be also be incorporated.
If a large customer sends his or her own forecast, it automatically replaces the
old sales statistic forecast for this customer in the calculation. This is another
example of how IBS inventory optimization can save time and money for an
organization.

IBS Demand Planning works in an adaptable, graphical and operational

workbench that gives excellent visibility and efficiency. It is very easy to work
with and can quickly allow users to update, delegate and review the figures.
IBS has built-in authority handling so that the same figures are shown in
different hierarchies. For example, the sales manager might want to see the
demand/forecast figure sorted per region, salesperson and then item group,
while the purchasing people would like to see the same demand sorted per
supplier and then item number.

IBS Enterprise uses order history, not delivered history

As mentioned before, calculating the forecast is the most critical part of
inventory optimization, and therefore the data must be as accurate as
possible.

Quality of data is one of the greatest benefits of having an inventory

optimization system that is built on the same base as the rest of the ERP

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solution. The same level of accuracy can never be achieved with an

integrated third party ‘best-of-breed’ solution, which usually looks at only
delivery history. A true demand planning solution, such as IBS Enterprise,
considers customer order history instead of what was delivered. Calculating
forecasts based on past demand patterns gives a truer picture of what a
customer will order in the future: what has the customer ordered in the past?
IBS Enterprise can even be set up to capture orders that were lost because of
stock-outs.

Management by exception
IBS Enterprise produces exception reports for review when the calculated
forecast or actual demand differs by more than an accepted, user-set
tolerance. The solution can auto-adjust for variances and provide complete
visibility of changes throughout the supply chain to allow quicker reaction and
response to changes.

Optimize replenishment
For large numbers of products, IBS Enterprise helps to accurately and quickly
create forecasts, calculate proper safety stock levels, determine EOQ,
determine best discount quantities, and automatically get the right products to
maximize line-buy minimums. With a few keystrokes, the solution can tell what
methods to use for different item segments, automating much of the
replenishment work.

IBS Enterprise handles several different methods for safety stock: calculations
based on variance in demand, using lead-times, and factoring in desired
service levels for those products. The calculations are constantly and
automatically adjusted for changes and produce exception reporting when
amounts are outside the normal variance.

Service levels can be set by product profitability, total revenue, number of

sales and quantity of sales, and can be varied by territory or region and set on
key products for key customers. These parameters are automatically updated,
constantly checked for changes and adjusted for thousands of products. IBS
Enterprise allows for differences throughout the supply chain based on

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strategic decision-making. It also allows for EOQ calculations, which

automatically maximizes line-buy discounts with the right products.

Automatic deviation tracking

Companies with large numbers of items or large numbers of transactions
simply can do manual error tracking. However, ensuing optimal stock requires
finding errors in time and IBS Enterprise can help deliver this on an automated
basis. Embedded in the solution is error tracking, which tracks and finds
probable deviations for:
• Forecast
• Economical order quantity
• Re-order points
• Safety stock.
IBS Enterprise also highlights those deviations when working with the
purchase suggestions. The solution can directly react on these deviations by
use of automatic calculation of the Alpha factor (smoothing factor), which is
used in the forecast calculation. In this way, the deviations will have a direct
impact on the forecast.

IBS Alert Management

The IBS Alert Management module is a monitoring and notification application
that consists of several predefined triggers that control different processes.
New triggers can easily be added for processes that are of most importance. If
something unexpected is happening the solution can be set up to
automatically send an e-mail, an SMS message or an alert within IBS
Enterprise to all people that should be notified. For example, a purchaser
automatically gets an alert if any part of their purchase order is delayed.

Simulation
Another key application from IBS that helps companies operate more
efficiently with large numbers of items or transactions is the simulation tool.
The solution simulates different scenarios so that the user can identify what
will happen based on accurate and relevant data. For example, a simulation

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can help determine what would happen to safety stock and service levels if a
particular safety stock calculation was carried out on a specific item segment.

Replenish
If several warehouses are involved, replenishment becomes more complex. It
is therefore very important to be able to plan and forecast on a multi-company
level. Aggregated forecasting can help you negotiate more favorable, volume-
based agreements with suppliers.

Supplier relationship management (SRM) is a comprehensive approach to

managing an enterprise's interactions with the organizations that supply the
goods and services it uses. The goal of SRM is to streamline and make the
processes between an enterprise and its suppliers more effective.

Order management accuracy and profitability are maximized within IBS

Enterprise, as SRM functionality is embedded in the order fulfillment process.
IBS offers a solution where functionalities are connected and are able to
collaborate in a consistent business environment.

Conclusion
IBS Enterprise can help reduce operational costs, increase efficiency and
customer service and reduce the overall cost of stock holding and
warehousing. The solution delivers inventory optimization that is easy to
implement, use and manage.

To find out more about IBS please visit us online at:

www.ibsus.com

Contact IBS:
800-886-3900 or [email protected]

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