Academic journal article The Journal of Business Forecasting

From the S&OP Trenches: Quick-Hit Tips to Reduce Inventory

Academic journal article The Journal of Business Forecasting

From the S&OP Trenches: Quick-Hit Tips to Reduce Inventory

Article excerpt

EXECUTIVE SUMMARY |

Here the author offers various tips to reduce inventory over a short horizon with very little effort. These tips are simple and easy to implement. Not only that, they can provide a jump-start for some longer-horizon inventory reduction efforts.

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Why is it necessary to talk about inventory "tips?" There are two reasons: First, by the nature of the process, S&OP leaders have some degree of ownership over inventory. Second, many companies implement S&OP with the intention of using the process to better manage the working capital (i.e., reduce inventory and the cash-to-cash cycle). Our goal here is to offer some helpful, quick-hit tricks to reduce inventory during an early- to mid-stage S&OP implementation.

Every consultant or project leader has a desire to start off an engagement or new initiative with a bang - a quick win. It doesn't have to be a home run - a well-hit double off the center field wall will suffice. So, what is the S&OP equivalent of a lead-off double? Inventory reduction.

INVENTORY REDUCTION SOLUTIONS

There is tremendous value in early implementation wins for any process initiative. One can only imagine the positive buzz an S&OP project would receive if inventory began to tick downward in the first couple of months. Certainly, many books have been written about inventory management, so it would besilly to try to reinventthe wheel. Most supply chain consultants who specialize in inventory optimization will drive discussions regarding inventory reduction toward some combination of six or seven typical solutions:

* Reduction of Demand Variability/ Improved Forecast Accuracy: Since all planning starts with a demand signal - such as a forecast - the more accurate thesignal, the more accurate will be the plan.

* Examination of the Components and Parameters that Drive Inventory: Planning parameters, such as production batch sizes, lead times, changeover durations, waste/yields and losses along with fill and customer-service-level requirements, ultimately lead to an ideal safety stock determination. All too often these parameters are wrong because they are set to arbitrary rules of thumb, haven't been reviewed for quite some time, are not statistical in nature, or no longer fit the current business of analysis focuses on lowering raw components and pack inventory. All too often people buy too much, too soon, and in quantities that are out of sync with production sizing.

* Management of Capacity Relative to Inventory: This includes effon to add agility to the production process and reduce the cost/impact of changeovers. These efforts remove the implied cost of smaller batch sizes, and allow inventory to be reduced accordingly.

* Structural Changes in the Distribution and Production Network:Jh\s involves changing not only where the product is made and stored but also from where it is shipped.

* Finished-Good SKU Rationalization/ Component and Raw Ingrethent Reduction: Reducing product complexity, eliminating products that are clearly at the end of their useful life cycle, and examining the use of joint raw and packaging materials to reduce inventory.

* Lean/Just in Time (JIT)ZTheory of Constraints (TOC): These and other higher-level supply chain disciplines lead to inventory reduction by eliminating waste time and inventory, and driving production closer to a demand-pull process.

Depending on the organization's production process, distribution network, types of products, etc., these inventory opportunities vary in terms of their potential value and their return relative to the amount of time invested. In addition, most of these solutions take time to gestate before they begin to generate benefits. Some of these approaches require a fair amount of organizational training; others require significant production and distribution network analysis; and some require setting up very elegant and sophisticated analytical tools to help planners target ideal inventory settings after considering all of the supply chain parameters. …

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