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.