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Inventory Planning & Optimization: Extending Your ERP System Part Three: Business Case for Inventory Optimization Solutions

Written By: D Hooiman
Published On: April 7 2003

The Case for an Inventory Optimization Solution

Inventory Optimization solutions allow an organization to achieve a balance between the most efficient investment in inventory and highest customer service levels.

"One such misconception is that existing enterprise resource planning (ERP) systems can handle inventory management adequately. For small distributors not working in complex environments, this may be true. Most ERP systems do count and track inventory very well, and possibly even provide a basis for replenishment. However, such systems can lack the sophistication required to take inventory management to the next level, as well as the responsiveness necessary to handle rapidly changing market conditions. Nor do they have the depth or strength to evaluate and forecast inventory down to individual products and locations, which is essential if you're going to squeeze out additional costs and increase profits." (Source: S.Kilgore, Balancing Supply and Demand, Forrester Research, March 2002)

ERP vendors themselves have recognized this fact, and have recently started adding advanced planning functionality as separate extensible modules to their core product offerings. Inventory Optimization software recognizes that different industries have different inventory profiles and requirements. That fast moving retail items have different characteristics to slow moving items in automotive spare parts. Inventory Optimization software have this functionality.

Type >
Slow Moving
Recurring
Multi-tier
Example Gearboxes Household Detergents Packaging
Inventory Characteristics High Service Criticality, Sporadic Demand, Lead time exceeds service levels Continuous demand, reliable lead times and high volumes Seasonal demand, variable lead times, and moderate volumes
Inventory Model Based upon Causals and service levels Historical demand Historical and causal demand
Application Requirements Item criticality and product substitution Model must be linked to demand forecasts Optimization across multiple tiers
Example of Applications JustEnough, i2, Servigistics Manugistics, Non-Stop, JustEnough, i2, SAP APO, JD Edwards /E3 i2, JustEnough, Optiant, SAP APO, Manugistics

Figure 5 shows how different inventory profiles have different requirements.

This is Part Three of a three-part note.

Part One contained and Executive Summary and presented ERP Systems Today.

Part Two discussed the Inventory Planning & Optimization Solution.

The Bottom Line

The following quadrant outlines the relevant differences in cost and implementation times across the main Inventory Planning and Optimization software Vendors.

Note: MS-Excel is a traditional way to analyze small numbers of SKU's and forecasts, and Demand Solutions manages only the demand forecasting and some inventory modeling of inventory.

Considerations for any organization looking at implementing Inventory Optimization software also include the following:

  • How long will it take to implement the new modules?
    Firms have a right to be cautious after some lengthy ERP implementation experiences. Inventory Optimization solutions that use data from the existing ERP or Transaction systems can be implemented in under 90 days. Not all projects turn out successfully as borne out by the recent Nucleus research report which stated that "Fifty-five percent of the i2 customers interviewed did not believe they achieved a positive ROI from their i2 investment, after an average of 2.2 years of use" and that "Most of these customers attributed their negative ROI to the length of time necessary to deploy the i2 solution. Nearly 70 percent of i2 deployments lasted longer than planned, an average of nearly three times more than the project team had expected." (Source: BusinessWire, 13 January, 2003)

  • How costly will the new software be?
    One needs to do homework. Research has indicated that solutions are priced in a large range from tens of thousands of Dollars to millions of Dollars. In this niche market sector, price is definitely not an indicator of the quality of solution. ROI is paramount.

  • Vendor Lifecycle One needs to be aware of the challenging times that are affecting the Industry. E3, i2 and Manugistics have all made layoffs. Optiant is a relatively new market entrant. SAP has slowly been growing its own consultancy due to poor software license sales. Non-Stop has had a volatile liquidity past. JustEnough though an older player, but is new to the the United States (two years), having grown primarily in the European and African continents.


About the Author

Dirk Hooiman is a respected and successful consultant with over 28 years of industry experience in the areas of business process consulting, quality and strategic planning. He is currently a Senior Consultant with the Solutions Group, a business process consulting company. Mr. Hooiman is accomplished in Kaizen, PS 9000, Lean Manufacturing, and Six Sigma as well as working to install ISO 9000 and develop strategic plans in both manufacturing and technology companies.

 
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