The current US political environment is turbulent, but there is rare bi-partisan alignment concerning China’s role in global geopolitics. International policies from both major US parties encourage businesses to relocate operations from China or risk higher tariffs and restrictions. This has left companies across industries wondering where to look for low-cost manufacturing.

In a recent Journal of Business Forecasting article, we discussed key considerations for shifting operations to Mexico; however, many operating models, especially those that have a global customer base, will require a footprint outside of North America as well.

For those sectors whose operations would be supported by maintaining an APAC footprint, India is a compelling option. The world’s fastest growing major economy has enacted business-friendly reforms, is developing supporting ecosystems through investments in areas like infrastructure and transportation and offers access to a growing and highly educated labor pool.

Risk matrix of outsourcing to low-cost manufacturing countries

Favorable Regulatory Environment Encourages Growth 

India has made a clear goal to grow its GDP, and the current policy approach is to develop into a regional manufacturing powerhouse. In recent years, India has made progress through several initiatives to become a more appealing operating environment, climbing the World Bank’s ease of doing business index rankings to 63^rd in its most recent iteration.

While this is an improvement, India still trails other low-cost economies such as Poland, Thailand, and Mexico. One flagship program to continue climbing the ranks is the Production Linked Incentive (PLI). This program targets growth in key sectors, offering incentives totaling INR 1.97 trillion (USD ~23 bn) from 2020 to 2025 linked to incremental increases in sales of goods manufactured in India by approved applicants.

“Subsidies and lowering barriers to entry signal India’s aspiration to be a prominent player in the global economy.”

To this end, foreign direct investment (FDI) approvals for organizations without ties to China or the Chinese government have been fast-tracked through channels where approvals are largely automated. This program has been successful with reports showing Investments of USD ~13 bn generating production and sales of USD ~103 bn and creating 678,000 jobs. Introducing subsidies and lowering barriers to entry signal India’s continued aspiration to walk back protectionist policies and become a more prominent player in the global economy.

While these are new programs, India’s increasing economic openness is part of a larger trend, stemming from India’s economic liberalization movement in the early 1990s. Prime Minister Modi’s “Make in India” and Atmanirbhar Bharat (“Self-reliant India”) initiatives revitalized this movement since the 2010s by encouraging organic domestic development of manufacturing supported by FDI across several key industries such as pharmaceuticals.

Policies in 2023 tied to these initiatives refocused national agencies to defend India’s position in pharmaceutical markets from low-cost Chinese alternatives. The National Policy on Research and Development in Pharma-Med Tech in 2023 responded to increasing price pressures by creating a foundation for domestic and international players to innovate in the pharma-med tech space, building on PLI schemes already in place for the sector. The policy codified structures in the national education system to ensure sufficient domestic expertise in pharmaceuticals though university programs, and it centralized drug approval processes across several agencies to reduce process time by 50%.

“India is now the 3^rd largest nation in pharmaceutical manufacturing.”

India’s efforts have catapulted it to becoming the 3^rd largest nation in pharmaceutical manufacturing. This policy specifically targets the pharmaceutical industry, but similar mechanisms exist across several industries and set the stage for broad transformation of India into an ideal operating partner for globalized players in the coming decades.

Investment in Transportation is Allowing India to Compete with Regional Powerhouses 

Several manufacturers have taken advantage of open economic policies and invested in manufacturing infrastructure. Major brands based in APAC (e.g., Samsung, Foxconn, Toyota, Hyundai) have shifted manufacturing to India and continue investing to realize scale benefits. In parallel, India launched several infrastructure projects through the late 2000s, and most recently its National Logistics Plan, to continue developing the major arteries required to transport finished goods and raw materials throughout the country and major ports.

In 2009, the central government launched Bharatmala Pariyojana, a USD 140 bn program to build 50 major transportation corridors and connect 550 districts with 4+ lane highways to support freight connectivity across the country. Since 2009, 75% of the program’s projects have been awarded and 25% of the planned roadways have been completed.

Similar programs for air and ocean shipping were also launched. India announced USD 16 billion of investments in its national ocean ports across 150 initiatives. In addition, the country is planning to invest USD 35 bn to operationalize 220 regional airports across the country by 2025 (almost triple the 74 regional airports in 2014), including enhancements to its major international airports.

Programs like these across all modes of transportation eliminated systematic transportation inefficiencies across India, bringing logistics costs from ~14% of GDP to ~8% of GDP which is now in line with global averages. The National Logistics Plan (NLP) seeks to build on these legacy programs’ success with further reductions in transportation costs to ~5% of India’s GDP. These reductions will be driven by cross-ministerial collaboration and a digitization of India’s transportation infrastructure (e.g., eWaybills and a digital toll system). Following the 2023 G20 summit, this plan would cement India’s role in the announced India-Middle East-Europe Corridor (IMEEC), directly competing with China’s Belt and Road Initiative (BRI).

India is Investing Heavily in Logistics Channels 

These logistics efforts support initiatives across sectors and the automotive industry, amongst others, has benefited from connections developed between key manufacturing hubs. Tata motors, Mahindra, Volkswagen and other international players have operated in India for the last two decades and doubled their overall CAPEX investment in R&D and Manufacturing from 2014–2024.

Milestones in India’s automotive industry

The country’s various transportation sector developments have supported automotive players to transition from independent manufacturing locations into an automotive manufacturing ecosystem, enabling each region to develop specialties and more easily ship components to the next link in the supply chain. These knowledge clusters build on each other’s capabilities and are merging to become an innovation ecosystem. Smart investments in key knowledge clusters within India can ensure these communities continue to expand to meet the future needs of manufacturers in the region.

Where key Indian and international manufacturers base their Indian operations

Outsourcing to India Overcomes Labor Force Scarcity

Globally, manufacturers will face an ongoing challenge of labor force scarcity as most major manufacturing countries will have declining workforce populations over the next 25 years. Understanding the workforce population and demographic dynamics (e.g., age bubbles) is critical to ensuring long term success. Transitioning to India for manufacturing operations can reduce the risk of declining labor availability in the short and long term.

India’s working age population is anticipated to grow by 16% from 2022 to 2050, developing a large, highly educated workforce. In the same period workforces in China and other Eastern bloc countries popular for manufacturing will decline double digit percentages by 2050. Investment in manufacturing expansion where there is strong labor force growth reduces competitive pressure for skilled labor and ensures labor availability in the long run.

Working-age population forecast for 2050 & working-age pop. growth compared to 2022

India workforces are growing but additional labor regulations must be considered. Indian workers are subject to multiple jurisdictions of labor regulations at the state and national level, and, because these regulations supersede any contract agreements, contracts require more scrutiny to ensure compliance.

India’s labor regulation environment is reminiscent of other major economies with its strong discrimination protections and leave requirements, but it has tighter regulations surrounding termination. When terminating employees, 30-90 days’ notice is typically required and large-scale terminations of more than 100 people require government approval in key sectors like manufacturing and agriculture. Furthermore, non-compete agreements cannot be enforced once an employee is terminated, limiting the IP protections that are typical in other regions.

A Footprint in India Unlocks Sales Channels to the Fastest Growing Major Economy 

India is on track to be the 3^rd largest economy in the world by 2030, but it has historically been a difficult market to enter. As the population and GDP continue to grow there is a unique opportunity to unlock a growing middle class. As seen following the manufacturing booms in China and Brazil, growth in manufacturing ripples across the economy, fostering a new middle class of consumers and invigorating the broader economy.

As businesses grow with this new customer base, supply chains will need to adjust to meet rising end market demand. Serving this customer base domestically reduces transportation and tariff costs, making products more accessible. This business model shifts operations out of China but retains access to other key markets within APAC, unlocking a new Indian market without impacting existing sales channels.

Beyond operational benefits, leveraging India for manufacturing unlocks the market by increasing local production content to be certified as a local supplier. Establishing manufacturing in India ensures a “Made In India” (MII) certification to satisfy local content requirements among other benefits. The latest revised Order 2017 reaffirms its original minimum 20% local content requirement for certification but now excludes transportation and other non-manufacturing costs in the local content calculation. These changes increase the need for manufacturing presence in India to retain certification.

Order 2017 further requires all companies participating in procurement bids for the Indian government to secure a MII certification. While MII certification is not required for private sector operations, it generates good will among potential customers and mitigates potential political risk from government leaders opposed to foreign businesses.

Conclusion

As companies consider de-risking their supply chain and moving operations out of China to other APAC countries, India should be considered among other regional players like Vietnam, Thailand, and Indonesia. India’s growing population is highly educated and has an appetite to become a new manufacturing powerhouse. Their national government has enabled this aspiration through programs to encourage FDI in manufacturing and investment in infrastructure required for a long future of operations.

The impact of India’s growing manufacturing sector will be felt across the economy as B2B businesses grow in parallel with consumer brands capitalizing on the new tastes of an emerging middle class.

“Companies will need to overcome a more challenging business environment than in other large economies.”

Entering India for operational benefits or as a new sales market is not without risk. Realizing the operational benefits of India’s investment and support structures will require companies to have the appetite to overcome a more challenging business environment than other large economies. Product archetypes (e.g., supply chain intensive, material intensive, labor-intensive, etc.) misaligned to the industry specific support structures and opportunities offered by the Indian market create new structural challenges rather than solving them.

Furthermore, products which may be best produced in India may not be ideal to also sell in India, so organizations should independently assess sales opportunities and their internal appetite to pursue those opportunities before investing.

Over the last several decades, India has pursued becoming a dynamic hub for global operations, and it has realized its multi-decade vision of being a more open economy. India is well on its way to becoming a regional manufacturing location of choice, but it has only started its journey to surpass international manufacturing juggernauts.

Regardless of the disruptions that COVID created, the pandemic was a blessing in disguise for the supply chain discipline, and particularly for S&OP. 

The best way to appreciate something is to realize the impact of its absence or malfunction. COVID made us all acutely aware of the importance of all aspects of the supply chain. Schoolchildren, in their remote classes, were taught about the need to balance supply and demand, and saw first-hand what happens when it goes wrong. The toilet paper hoarding frenzy made the public aware of core supply chain concept: the bullwhip effect.

The increased awareness that COVID created represents a renaissance for the supply chain field. It is up to the professionals in this field to maintain this momentum and continuously drive supply chain advancements.

This is helping not only to bring more people to the field but also to start paving elevated career paths for them. Other than the global increased awareness of the importance of the supply chain, below are the major changes driven by COVID:

1) Ad Hoc Cross-Functional Training

The major disruptions created an unusual phenomenon of ad hoc cross functional training that exists to this day. By training, I mean genuine professional curiosity for the various functions to learn about cross-functional constraints and how everything is interrelated.

It all started with the various segments of the business catching up on the intricacies of the supply chain. For many, Supply Chain Management was limited to order entry. Suddenly, concepts like lead time, forecast accuracy, inventory allocation, and distribution requirement planning started to be understood.

Also, financial acumen increased amongst S&OP participants as expediting and transportation costs in general reached a record high. The danger of not delivering client needs became another key theme. Post COVID, we are seeing an ongoing, stronger collaboration amongst S&OP cross-functional participants in S&OP.

2) Enhanced Process Maturity

In addition to the increased supply chain awareness that COVID created, risk mitigation became a key focus. Concepts that were previously unique to vanguard S&OP processes at the highest maturity level are starting to be embraced by less mature planning organizations.

The quality of the output might not be optimal but companies nonetheless are increasingly attempting to stress test their assumptions and conduct scenario planning to better mitigate risks.

3) Broadened Internal Planning Scope

The classic hierarchy amongst the various planning horizons has flattened. The pandemic forced a realization that Master Scheduling, Material Requirement Planning, Rough-Cut Capacity Planning, and Capacity Requirement Planning necessitate a stronger symbiotic relationship with S&OP. With that, the internal scope of the planning processes has broadened.

4) Broadened External Planning Scope

Many companies realized that agile planning necessitates extending the planning scope outside the walls of the organization. This mindset can be seen in practice with enhanced collaboration with key vendors (CPFR) and by increasingly leveraging outside data sources and research.

While I hope we never have to face a pandemic like COVID-19, as an S&OP practitioner and supply chain professional I hope we don’t lose the momentum these two fields are currently enjoying so we can face any future black swan events with more grace and agility than 2020.

To learn the fundamentals and best practices of S&OP/IBP, join us in Chicago from June 12-14 for the biggest conference of its kind. With several workshop sessions, networking, and panel discussions it is where you’ll make S&OP a reality in your organization or elevate an existing process. Click here for more details.

Efficient inventory management is crucial for any business. While inventory is needed to meet customer service levels and mitigate uncertainties, organizations often struggle to balance customer service levels, inventory costs, and cash tied up in inventory.

This challenge becomes even more complex when dealing with multi-echelon supply chains, where decisions are interrelated, and material availability downstream depends on material and resource availability upstream. A methodology that can be applied to tackle these challenges is termed Multi-Echelon Inventory Optimization (MEIO). In this article, we explore the concept of MEIO and its driving forces, its benefits, and how to successfully implement it in your organization to achieve higher levels of efficiency and profitability.

What is Multi-Echelon Inventory Optimization?

MEIO takes a holistic view of inventory management across multiple echelons (levels) within a supply chain. Traditionally, organizations have focused on optimizing inventories at each location, leading to suboptimal results and excess inventory in the system as a whole. Common reasons for excess inventory include lack of data visibility across the supply chain, lack of policy parameter revisions in organically-grown supply chains, and lack of expertise in right-sizing inventories in an integrated way.

MEIO takes a more integrated and comprehensive approach, optimizing inventory decisions across the entire supply chain rather than in siloes. Such a holistic view avoids inventory buffer duplication while ensuring high customer service levels. This is achieved by setting the goal to meet the target service level of the end customer, modeling interactions between different echelons and locations, and accounting for various effects such as demand and lead time uncertainties.

What Key Forces Drive the Trade-Offs in MEIO?

When it comes to the positioning of safety stocks across a multi-echelon supply chain, a significant trade-off is holding safety stock buffers upstream (supply chain entry point) vs. downstream (close to the end customer). The four primary effects which impact the positioning are:

• Demand pooling effect: centralizing safety stocks upstream to mitigate uncertainties for multiple products or at multiple locations with the same safety stock.
• Value effect: inventory carrying costs are usually lower upstream.
• Lead time pooling effect: consolidation of safety stock at a downstream location that also covers for lead time and variability of its upstream location(s).
• Service level effect: downstream buffering is preferred if service levels are different per customer.

What are the Benefits of MEIO?

MEIO offers significant benefits to your business. It helps increase customer service levels and optimize or rebalance inventory across the entire supply chain while reducing working capital. Running a MEIO project also helps to understand your supply chain dynamics, and it is not uncommon that it triggers discussions on strategic topics such as customer service offerings or network (re)design.

Why Do MEIO Implementations Often Fail?

MEIO is not new and despite the significant savings that can be achieved, not many multinationals have implemented it. Implementation projects are too often driven by management; the key factor is to take the inventory planners along in the journey. Implementing MEIO is not only about implementing software. A key indicator for a successful implementation is the planner’s acceptance rate of the proposed (safety) stocks. The main reasons a high acceptance rate is not achieved are as follows:

• Each supply chain has specific modelling requirements that most software solutions do not support, resulting in low(er) quality safety stock proposals. Consider full container/truck shipments, seasonal demand, finite production capacity, or a long tail portfolio with slow moving items.
• Planners have not been trained to understand the key drivers in MEIO, and are too often still thinking in their own silo. Planners that don’t understand the results of the MEIO-models will likely reject the safety stock proposals.
• MEIO often proposes a large shift of inventories across the supply chain, so carefully managing the rebalancing of stock is important.

Key Ingredients of Successful MEIO Implementation

It is important to take small steps and go back to revisit data and models if new insights emerge. In short, the key ingredients to a successful MEIO-implementation are:

1. Start with the right mindset: Focus on inventory right-sizing rather than inventory reduction.
2. Simulation-based inventory optimization: This allows us to model real-world complexity, to gradually increase modelling complexity (which fosters buy-in from Planners), and to explain the results in an end-to-end manner (avoiding silo thinking). Make sure to run multiple scenarios to really understand the supply chain dynamics and the main drivers of stock rebalancing.
3. Review and implement results at segment level: Review at segment level rather than item level, which can be time consuming if portfolios have tens or even hundreds of thousands of items. Machine learning has proven to be a powerful tool to segment portfolios with similar stock drivers, and to build a decision tree to review the safety stock proposals per segment rather than by item.
4. Implement results in small steps: If MEIO proposes to reduce a safety stock from 500 to 100, don’t slash stock to 100 units straight away. Rather, reduce it by 100 units per month until the recommended level is reached.

MEIO Case Study in the Fragrances Industry 

Let’s take a look at a real life example of MEIO implementation. I worked with a Europe-based global market leader of flavors and fragrances which had an established inventory management process using SAP. Despite this, they considered their inventory position to be too high. The Inventory Planners optimized safety stocks by item and location, in isolation. My team was brought in to optimize the inventory settings in their supply chain which had more than 60 locations and 13 echelons. The project to right-size inventory resulted in a EUR 20 million saving and would not have been achieved without:

1. Identifying and realizing quick wins: If project stakeholders don’t see tangible benefits already during the project, their involvement and willingness to support decreases quickly and changes into resistance.
2. Increasing model sophistication as Planners’ expertise grows: The advantages of simulation over closed-form algorithms is that modelling complexity can be gradually increased according to Planners’ expertise as their understanding evolves. Moving from inventory optimization in siloes towards MEIO requires not only a step up in the Planners’ understanding of the models and stock drivers, but also significant change management for the company as a whole (e.g. different incentives and KPIs).
3. Applying simulation techniques: This allowed for modelling real-world complexity like full truck load and stock rationing policies (if stock is insufficient, how to split available stock across requesting locations). Further, simulation results are a great facilitator in explaining the interactions between the different driving forces in MEIO.
4. Facilitating a simple, yet sustainable implementation: MEIO is not a one-off exercise and safety stock parameters require a review every month or quarter. Building a decision tree that groups items with similar characteristics was a great solution. Each item and location combination is assigned to one of the roughly 300 different groups and this drastically reduced the workload of the Planners. They now only review each group’s safety stock factor instead of the safety stock for all 200,000 individual item/location combinations.

Strong collaboration between my team and the Planners led to a step up in the client’s knowledge and capability. After this one-off project, we supported the company on a yearly basis to review and update their decision tree and corresponding safety stock factors.

MEIO is not a one-off exercise. Safety stock parameters need periodic (monthly to quarterly) review and revisions. Every company and supply chain is unique and requires its own approach. MEIO is a powerful tool for businesses looking to right-size their inventory across multiple echelons within the supply chain and go beyond basic textbook modeling and siloed thinking. By taking a holistic approach, leveraging data-driven insights, and increasing your Planners’ understanding of the unique supply chain dynamics, organizations can improve their customer service, inventory costs, and cash.

This article first appeared in the Winter 2023/2024 issue of the Journal of Business Forecasting. To get the Journal delivered to your door quarterly, become an IBF member. Membership benefits include access to every Journal ever published, research and benchmarking reports, exclusive workshops and tutorials, and discounted entry to every IBF conference and training boot camp. 

Inventory – can’t live with with it, can’t live without it. Let’s talk about how to balance the competing trade-offs of high service levels, the need to control costs, and freeing up cash – and how to make managing your inventory a whole lot easier.

We want to have sufficient inventory on hand to service customers and maximize sales, especially in a make-to-stock environment. Inventory, is of course, necessary. And there are plenty of reasons to hold lots of it.

Why Inventory is Good

By committing to higher levels of inventory we can optimize batch sizing to lower production costs and cost per item. By ordering more stock/materials we can optimize transportation costs. We can get price breaks by ordering higher volumes on a monthly basis vs lower volumes on a weekly basis.

Having inventory on hand limits fines for late delivery in the case of retailers like Walmart and Amazon. And a high level of inventory limits costs for expediting delivery for stock we didn’t have readily available. Having inventory ahead of a sale is cheaper than having to source it last minute.

The flipside is the cost of tying up cash in stock that isn’t selling. Right now we have a perfect storm of rising inflation where inventory/materials are more expensive to source, debt is more expensive to service, and sales are going down. In such an environment your CFO will be on your back to reduce inventory.

Why Inventory is Bad

Beyond the hard cost of dollars being tied up in assets sitting in storage, there is an opportunity cost associated with tying up capital in inventory. With that extra cash your company could shore up the balance sheet, service debt or deploy it for new initiatives. Storage is also a cost, not just in terms of the space but in terms of people and equipment required for warehousing.

Inventory also comes with damage and pilferage. What’s more, companies with short lifecycles face obsolescence, never being able to shift stock for certain items which have to be disposed of (another cost). Insurance is yet another cost, the premium being paid on the total assets your company holds.

So there are advantages to holding inventory and disadvantages to holding inventory. Finding a balance between the two that is right for your company is the holy grail of planning.

Lean Into Your Company’s Priorities

If you’re thinking I want on-time, in-full to be 99%, I want to have 24 turns a year, I want to have less than one week’s worth of inventory in stock, and I want to maximize my margin – wonderful, everybody wants that! One of those objectives, one is going to win, and it is up to you to decide which is most important. What are your company’s objectives? In the Cost-Service-Cash triangle, your company will naturally lean into one dimension more than the others, and it’s up to you make the trade-offs that support enterprise strategy.

Prioritize customer service, and your costs will increase and cash will be tied up. Prioritize cash, and you’ll have to accept that customer service will suffer and costs will increase. Prioritize lower costs, and service will decrease and cash gets tied up. Which dimension you need to prioritize most will inform your safety stock levels.

Stop Self-Inflicted Uncertainty Now!

There are certain things companies do that unintentionally introduce demand uncertainty, making it more difficult to know the required safety stocks. There are certain supply planning actions we can take to make inventory management more effective.

Beware Demand Shaping: IBF research reveals that a 1% reduction in uncertainty equals a 6% reduction in my safety stock. Dynamic pricing and promotions shift demand, causing uncertainty that has makes inventory management more complicated. While promotions may be necessary, there are consequences to adding in that demand variability.

Reduce your lead times: It’s not just about demand forecasting; proper supply management pays dividends when it comes to reducing the cost of holding inventory. On average, every 1% reduction in lead time results in a 0.95% percent reduction of safety stock.

More SKUs equal more inventory: I can’t believe that some people don’t understand that logic. More SKUs serving the same demand adds uncertainty without increasing the top line. A 10% reduction in SKUs represents a  5% reduction in safety stocks.

Lower your service levels for a given customer: Some customers won’t necessarily need the service level you’re providing, meaning that you can afford to carry less inventory. What does customer X really need, and what can you reasonably get away with?

Improve your supply chain planning at IBF’s Supply Chain Planning Boot Camp in Nashville, TN, from August 9-11, 2023. Learn best practices across demand management, supply planning, S&OP, distribution planning, inventory models, and more. Register your place.

I was recently laid off along with some other very talented employees. Like many people in my situation, my departure was not performance based; it was simply an outcome of business results not meeting expectations. My former employer expanded during COVID expecting the prior year’s record growth to continue. I was hired (along with others) as departments were expanded to handle the additional growth during these go-go times only to find that as the fiscal year progressed sales did not materialize,  and demand dropped to pre-Covid levels.

After working through the grief associated with a job loss, I began to reflect and notice many headlines and stories of organizations struggling with excess inventory having over projected their demand in reaction to the COVID frenzy for inventory. There are seemingly weekly news stories of one retailer or another offering steep discounts to sell through older excess inventory. I get emails daily from premium clothing companies offering 50-70% discounts on assorted apparel. Recently, Funko, a toy company, decided to landfill $30 million in toys. In mid COVID, we heard stories about Peloton over estimating demand as “work from home” brought on other nesting behavior and a forward buying pattern on their exercise equipment. Nike and Adidas are still struggling with their tremendous accumulation of inventory. It seems like many businesses are struggling with excess finished goods or raw material inventory levels, while sales are falling short of projected demand growth.

I consulted with my friend and mentor Pat Bower to get his thoughts on what was happening. Pat offered the following, “the simplest of inventory equations is on-hand inventory minus demand to arrive at some requirement for purchase or production – unfortunately most organizations expected the COVID spiked demand to be permanent and increased their forecasts, which in turn increased their inventories.

As supply chain issues began to diminish over the last six months, many organizations are now realizing this mistake, and lowering their forecasts. We now are being snapped by the end of the bullwhip where we have diminished demand slowly consuming excess inventory. The sad part of this equation is that organizations hired people, like you, based on the increased forecasts. It is one thing to carry excess inventory, it is completely different to impact people’s lives and professional standing.”

Organizations hired people based on the increased forecasts

Pat’s words made my job loss less painful. It did make me wonder about my own planning behaviors during COVID and what I could have done differently. After chatting with several colleagues and considering my own actions, I came up with a few changes I think might help others when the next disruption happens. I share these below:

Actively Manage Lead Times

During my conversations with Pat Bower he offered that “many planners did not track the ever-changing lead-times so when the transportation times gradually declined on the back end of the COVID disruption, most planners were slow to react. Nearly every disruptive event alters lead times, so it is prudent to constantly monitor this critical supply chain parameter”.

Pat noted that many folks have written or talked about lead-times during COVID to explain what happened, yet few have talked about what should have been done. Best practice suggests that lead-times need to be re-evaluated and updated routinely to maintain proper data integrity in your MRP planning system.

It is very clear to me that during a disruption, lead-times should be tracked and adjusted rigorously. Regularly updating lead-times enhances an MRP’s ability to calculate realistic planning schedules, projected inventory levels, and future delivery requirements to maintain service and inventory balances. As the COVID backlog started to clear at the Port of LA, planners should have correspondingly tapered down lead-times. We all collectively underreacted to these improvements – this was an important learning for me.

Rationalizing Demand Surges

Receiving large orders that exceed projections is exciting; however, it is crucial to consider their impact on future demand. Treating them with optimism is natural but if COVID taught us anything, skepticism is essential. For example, if Peloton’s leadership approached their COVID induced demand surge with skepticism, perhaps they would have considered demand was being “pulled forward” from the future due to the extraordinary circumstances and adjusted their future forecasts accordingly to account for the accelerated demand – but they didn’t. Peloton’s CEO John Foley said during a call with shareholders, “It is clear that we underestimated the reopening impact on our company and the overall industry”. In January Peloton reported pausing production of new bikes as warehouses were filled with excess inventory.

If Peloton approached COVID induced demand with skepticism, they might have known demand was being pulled forward

During post Covid discussions with colleagues it became obvious that we experienced a few different types of demand surges. As an example (unlike Peloton), we experienced some noticeable increases in demand (both quantities and frequency) for some product families that were experiencing raw material shortages and increasing backorders. During our demand and supply review meetings we discussed the likelihood that the demand surge might be caused by the bullwhip effect – but, in the end, we still held our higher, less rational forecast levels. Eventually, many of these bullwhip orders were cancelled, depressing sales, and bloating our inventory. We believed the story we told ourselves of increasing demand. Unfortunately, when demand dropped post COVID, our financial plan took the hit.

In both examples, it was a challenge to fully understand what was driving the surging demand. Was it pent up demand, was it bullwhip, was it changes in the market, was it overall material availability? What impact should the changing demand patterns have on forecasts? Do we forecast the growing trend or account for other variables?

We read the demand signals incorrectly and overestimated future demand and over ordered materials

The demand surges created a lot of changes that we didn’t fully understand. The stepped-up volume was not because we were different, offering a better product, or were more cost competitive. It may have been because we had product on-hand, or that customers were trying to hoard available inventory. In each example we read the demand signals incorrectly and overestimated future demand and over ordered materials. We could have done better at evaluating what was driving the increased demand. We failed to rationalize or contextualize demand surges.

Customer Inventory

One of the most important learnings was something Pat said, “most companies failed to even ask the question about how much inventory a customer was carrying, yet it was the first thing I did. I built models to track customer inventory to see if they were hoarding”.

I realized we didn’t check our top customers’ inventory levels as we should have. COVID changed many demand patterns making it even more important to check customer inventory levels to help explain changing or surging ordering patterns. Pat mentioned that at the start of COVID Amazon began to noticeably increase order sizes, in some cases quadrupling their normal order quantities. He began to question the increased order volume and did an analysis to evaluate Amazon’s likely inventory position.

Amazon began increasing order sizes, in some cases quadrupling their normal quantities

Since they have POS consumption data, they were able to estimate inventory levels. The analysis did not support Amazon’s increased order volume, and to prevent hoarding, his company worked with Amazon to reduce their orders. This simple step maintained the supply and inventory balance, avoided disruptive inventory builds, and protected other customers. Checking customer inventory levels made a difference and was a missing element of my analysis.

Inflection points

Many businesses ignored the early signs of softening demand as sales began to miss inflated forecasts as COVID was winding down, influenced by the positive bias that the strong, year-over-year sales growth would continue without understanding what exactly had inflated them. Businesses were slow to react and even loaded the early misses back into future months believing the record sales growth trends would continue.

Having been a part of many of these conversations in demand review consensus meetings, I can attest to the difficulty they present. Forecast reductions are difficult for business leaders to admit to – no one likes a negative Nelly. Increasing a forecast doesn’t generate the same hard questions and actions like dropping a forecast might  Lowering a forecast will meet with far more resistance.

Forecast reductions are difficult for business leaders to admit to

However, to prevent overplanning and excess inventory we need to be intellectually honest and provide equal scrutiny to both raising and lowering of forecasts. Further, and collectively, we could have done a much better job estimating where we were in the disruption cycle; if we knew we were in a recovery phase we would have made decisions to not build inventory, or to lower forecasts earlier. During disruptions, short term information is better than long term information and should be leveraged to make better short-term decisions that would have prevented spreading an increase in volume over a longer horizon. This is the long way to say that a down period should have created a reduction to the forecast. It did not. Lesson learned.

Final Reflection

A few thoughts immediately come to mind. First, not understanding demand surges (during a disruption or otherwise) is just negligent supply chain behavior. Second, having happy ears may be good interpersonally, but not when supply chain planning – it is best to be “Joe Friday” of Dragnet fame and be about just the facts. Third, visibility into a customer’s inventory tells you what they are doing. During disruptive times, your customer may be hoarding and that could be creating a false demand signal.    Understanding their inventory may be instructive on managing your supply chain in a more stable fashion.

COVID was disruptive, but the abandonment of best practices was also evident. I am temporarily out of a job as a result. Lesson learned for me – and hopefully my journey has been instructive.

2022 is beginning with substantial uncertainty and risk for businesses of all types. Much of this comes from the financial markets, and part of it relates to operating for 2 years in the pandemic. The list is long, but the main risks for demand planning and supply chain management are rising interest rates, shifting currency exchange rates, and price and cost inflation.

The interest rate risk is heightened by the planned normalization policies of central banks, including the Federal Reserve Bank of the U.S. Interest rates have been kept exceptionally low by central banks around the world, going back to the Financial Crisis more than 12 years ago. Rising inflation is forcing central banks to unwind their positions after years of accumulation and to increase their lending rates to banks.

Interest Rate Hikes Mean Changes In Demand

These will affect the cost of borrowing for businesses and consumers alike, in turn affecting the cost of inventory as well as the demand for products by businesses and consumers. For consumers who are acquiring products using debt (borrowing and leasing), the ramifications of higher interest rates can have magnified effects. Interest rates also impact currency exchange rates, adding more risk for global supply chains.

Scenario Planning To Mitigate Financial Risk

Now is the time for Demand Planners and Supply Chain Planners working within FP&A to begin developing risk scenarios for their companies, and to develop strategies to mitigate the financial effects for each. Given the number of risk elements for 2022, and the diversity of their effects by company and industry, scenario testing and planning is especially important. Contingency plans are essential in responding to changing conditions that will alter your product demand and business operations.

How Will Your Customers Respond To Interest Rate Hikes?

Consider how customers and consumers are likely to respond to interest rate changes and inflation in their budgets. For companies in your supply chain, how might they attempt to protect their margins with pricing that affects your costs of operation and your inventories? Consider how you can protect margins with price changes, and how that may affect demand for your products. Given the global nature of our businesses and the effects of currency exchange rates, how might company costs be affected by the coming changes in interest rates?

So, the scenario development and testing, and the development of contingency plans should be systematically undertaken. These should look at the effects on product demand, the effects on operational costs, the effects on inventory costs and financing, and how any ‘margin protection’ actions will impact demand.

How Will Your Responses To Risk Impact Your Trading Partners?

These issues you are facing are shared across all companies in the industry, and across all companies in your supply chain. The responses of each can be additive or multiplicative so Demand Planners need to create scenarios that fully incorporate the risk factors and understand the impacts of any resulting actions on our trade partners, as well as the effects of any actions taken by our suppliers and customers and consumers. Such scenario planning requires cross-functional participation to capture the many possible outcomes and risk factors. FP&A is essential to dollarizing each scenario and each course of action.

FP&A Must Dollarize Each Scenario & Response

Set-up a working group on a cross-functional basis with FP&A taking the lead in putting a dollar value on each scenario and response. This is not an operations forecasting process, but a scenario and contingency planning process. It is important for all members of the working group to realize this. Identifying the interacting elements and their effects on one another is essential. The process and the considerations are dynamic in nature, and will require iterations to test and evaluate the resulting scenarios.

Review these as a group on a regular basis to ensure prompt implementation of contingency plans and action. It is important to be prepared and it is essential to respond to the changing conditions on the ground in a proper and prompt manner.

Join us for IBF’s Demand Planning & Forecasting Boot Camp in Chicago from March 16-18, 2022. You’ll learn the fundamentals and best practices that turbocharge the value you add in your demand planning role. Trusted by Fortune 500 companies to onboard new hires, you’ll benefit from 2 days of expert instruction plus an optional supply chain planning workshop. Super Early Bird pricing now open – register now to secure your place at the lowest cost.

As we close out 2021 and look forward to 2022, it is natural to speculate about what might happen in the global supply chain over the next three to six months. This time horizon is material to me in part (and cynically) because I don’t believe that any prognostication more than six months forward is worth considering. However, I do believe that whatever happens during the next few months will set the tone for the balance of 2022 – and there is value in considering what we are likely to see next.

If we pull back a bit, supply chain conversations over the past few months have mostly focused on supply chain “Grinch” stories. How supply chain woes were going to ruin Christmas because of a lack of inventory. But now that Johnny and Mary have their Christmas electronics, we should begin to emerge from the crunch and push for finished goods inventory to handle the post-holiday consumer onslaught and commence the dialogue about when we might expect a loosening of logistical resources to help with the long-awaited reset.

I envision (and hope for) a short window of time to allow the global supply chain to work through its much needed catch-up. And with luck, this catch-up should trigger a cascade of changes in the North American supply chain. I am hoping that when we look back at the first half of ’22, some of the following will have already occurred:

Our Ship(s) Will Finally Come In

Port backlogs will ease, and product will flow. This does not mean the volume flowing through our ports will decrease, but that the normal, seasonal lull that occurs in late winter/early spring will be used to ease current backlogs and release months of inventory currently on the water. Note the historical import seasonality illustrated in Figure 1 represented as shipping container TEUs (twenty-foot equivalent units.)

This should eventually trigger a cascade of containers being redistributed eastward and a corresponding reduction in container pricing and ocean freight costs. It will also release months of inventory that is currently awaiting off-loading, allowing inventory to repopulate throughout the supply chain.

If this projection is correct, it will set the stage for a much more balanced outlook for the second half of 2022. Already the oft-discussed port of LA has experienced a decline in year-over-year activity over the last six months, which leaves me optimistic that we are past the peak. Hope springs eternal.

Figure 1—Millions of TEUs Imported (Source: Statistica)

Inventory Will Gradually Come Into Balance

As finished good inventory clears the ports, out-of-stock incidents at retail will subside and trade inventory levels will rise. It remains to be seen if inventory levels will rise to historical levels, but we should see some immediate relief by the second quarter. And of course, higher inventory availability will calm the retail supply chain.

One significant but little-discussed truth about inventory, however, is that component and raw material inventories are mismatched at the manufacturer level. I often use the example of body wash to describe this problem. A manufacturer of body wash may have plenty of labels, and bottles, but not enough caps—or fragrance—to complete the finished good. An informal survey I conducted among LinkedIn associates a few months back suggested that about 40% of inventory in manufacturing is mismatched and will remain so until all required component inventory arrives, allowing for the completion of end item production and for internal imbalances to heal. I suspect that actively managing these mismatches downward will be an important effort in the first half of 2022 for most manufacturing organizations. Easing these mismatches will  “complete” finished good production and enable inventory to move down the supply chain into retail thereby reducing out of stocks.

Demand Variability Will Calm

In terms of demand variability, nothing is more disruptive than out-of-stocks; they trigger hoarding behavior among both consumers and retailers, sending automated replenishment algorithms throughout the supply chain into tizzies, while wreaking havoc on forecast pacing with manufacturers.

These days, however, I find myself talking more about total network variability, since an out-of-stock creates excess demand requirements for not only retailers, but also at manufacturers’ distribution and production centers, and in supply chain tiers far below the finished goods manufacturers.

As we continue transitioning back to normal, the level of automated inventory growth, excessive manual intervention, and plain ol’ bullwhip effects should subside as inventory becomes more available throughout the supply chain. I also suspect that as the waves of covid subside, everyone will become more confident in resuming lifestyles marked by a mix of more services and less consumerism cooling off the red-hot demand for consumer goods. This will likely lead to rebalanced demand and…

There Will Be A Wave Of Order Cancellations

I know of one retailer that placed orders for millions of dollars’ worth of hand sanitizers at the peak of market demand, only to cancel all the orders a month later when the market became saturated—no pun intended. This action burdened the manufacturer with extra alcohol, fragrance, packaging, and glycerin — to both store and rationalize. It was ugly, but the manufacturer took it on the chin because of a desire to maintain a long-term relationship with its retail client.

This was an expensive object lesson, and one best learned on someone else’s dime. As COVID loosens its grip and the demand for consumable end items relents and stabilizes, I predict a wave of considerable order cancellations as each supply chain tier puts the brakes on excessive inventory. It will start at the retail level, since retailers are very sensitive to inventory carrying costs, and then it will cascade back through the supply chain. So, if you are a second- or third-tier supplier of some retail consumable, it might be dangerous to consider your seven to nine months’ worth of order bookings as “firm”. I suspect at least some of that demand will prove to be artificial i.e., just-in-case or “placeholder” orders that are easily cancellable, leaving you with little recourse.

Transportation Price Declines Will Cause Havoc

With rebalanced demand, available containers, and normalized material flows, it is easy to project a decline in transportation pricing across the board, and I note that some of these costs have already plateaued. Ocean booking, container and LTL shipments should all see deflation compared with 2021 costs. This will lead reasonably retailers to expect that manufacturer prices will decline proportionately, since many manufacturers took pricing actions based on covid-related disruptions and increased logistics costs.

But will manufacturer pricing ultimately decline? I don’t know. But I suspect there will be a lot of conversations about pricing between buyers and salespeople over the next year. Part of me believes the current higher pricing will be sticky and hold, yet I know it will only take one provider, one manufacturer, or one service provider moving to a lower price to trigger the market toward more pricing efficiency.

So, What’s Next?

Of course, no one can estimate exactly what will happen. And I was one of those people who thought this whole supply chain mess would come to an end in early 2021, so I have been no more accurate than others. Ultimately, the potential of any possible outcomes lies with improved port backlogs, so if you are looking for one metric to keep a close eye on, I would suggest focusing on backlogs first.

Are there other issues contributing to this mess? For sure. Warehouses have limited receiving hours, carriers are restricted by hours-of-service rules, there are not enough chassis for drayage, transloading has been inefficient, and port clearance has gotten worse not better. But with the prospect of improved port throughput and a traditional post-holiday lull, we may finally see some light at the end of this tunnel. I wish all readers a wonderful and hopefully renormalized 2022.

As demand planners/supply chain planners, we now have a range of advanced supply chain planning solutions available to us. The options are wide-ranging, but one thing is becoming increasingly clear – the value of demand planning/S&OP in the Cloud. Here I share my implementation journey at De La Rue, the world’s largest printer of banknotes, and listed on the London Stock Exchange.

New Tools Mean New Opportunities For Connected Supply Chains

Anaplan has made big strides with their UI and core engine with a renewed focus on supply chain; SAP is solidifying their position in the S&OP space with their IBP solution capitalising on their immense footprint and legacy solutions, connecting with their existing, more traditional core ERP; and Microsoft Dynamics seems to grow exponentially in both connectivity and functionality with seamless integration across business areas starting with CRM.

Even Tableau, at its core a data visualization tool (and a very good one at that) is adding more and more functionality to their inbuilt logical functions suite to run more complicated computations. In short, we have a lot of sophisticated solutions to choose from.

Throw in some SQL skills (which is increasingly common for a supply chain analyst) and you can have a custom, self-service solution built in no time!

S&OP In The Cloud Is The Future Now

I was recently involved in designing and developing custom supply planning solutions using Cloud software. As a supply chain professional, I can’t stress enough the importance of tools that facilitate a medium-long term vision for managing a global demand collection cycle, data analysis, and RCCP planning for a number of global manufacturing sites (covering a big chunk of the S&OP cycle). Thanks to the Cloud, this was managed through a single, central location, without ever relying on IT.

 While there were challenges, there is a simple way to implement Industry 4.0 cloud solutions to run not only a fully connected supply chain but to facilitate full Integrated Business Planning (IBP).

By sharing lessons learned from my own implementation, I am hoping to give you a blueprint for selecting connected planning  software.

What Does Your Planning Software Need To Do?

You have two overarching goals when it comes to software solutions:

1. To establish a centralized approach to run a global supply chain that will drive major short and long-term decision making for the company.

2. To establish a straightforward way of designing and implementing a fully connected global planning system, including advanced manufacturing and scheduling.

For me, the first takeaway is clear. Make no mistake, this is the way forward! Going forward, traditional supply chains will fundamentally change. Supply chain/demand planning will expand its responsibilities, and will empower decision making across an organization. Some organizations have embraced this already, some are trying, and many are yet to consider it.

Most medium and large enterprises are not in the position to unlock the full potential of their existing data.

Now, let’s focus on the second point, the systems that should empower this vision of the modern supply chain. This is easier said than done. Without one of the best of breed solutions, most medium and large enterprises are not in the position to unlock the full potential of their existing data. Nor will they benefit from a fully connected environment.

The Problems Of Trying To Make Legacy Systems Work

Many companies are still plagued my multiple legacy systems that do not “talk” to each other and require extensive capital and resources just to keep them operational. This is where we are at in my current company. We are at the stage where some progress is being made but a strong foundation is lacking.

And this is no surprise. Experienced systems consultants have had to scramble and acquire new Cloud skills and brilliant graduates are grasping the new technologies and solutions well but lack the functional knowledge. Given that stakeholders will often rely on the experts (that’s us), this means there’s a gap between the functional knowledge and technical expertise that needs to be closed as soon as possible. Generally, supply chain leaders and consultancy firms are waking up to this emerging need for a hybrid mix of skills.

The S&OP Implementation Vision

Below is our S&OP Process vision. Take a few minutes to digest it, because it informs every stage of the design, implementation, and adoption process.

“To provide the required functionality that will enable the wider business planning functions to Plan, Execute and Deliver in a Fast, Connected and Sustainable way against our customer expectations, while providing the required Visibility for the business as whole”.

This is the first starting point for any systems implementation – a clear, strong vision that identifies goals and the purpose. This is your first priority, not a document with detailed requirements or organizational design. Those can wait for a bit.

The rationale behind the keywords in our S&OP Process vision is:

Plan: Be able to collect, analyse and run scenario planning against finite and infinite capacity before committing to the best operational and financial outcome for a given opportunity.

Execute: Be able to run advanced scenario planning for manufacturing scheduling, making the best use of available plant resources.

Fast: Enable quick decision making centrally through connecting commercial demand and RCCP, cutting down the noise and letting manufacturing focus on execution.

Connected: Support a multi-site environment managed through a central location with data flowing back and forth continuously.

Sustainable: Implement the vision while sticking to the budget and further leveraging systems for lean business execution.

Visibility: Enable easy to build, fast and powerful reporting functionality leveraging all available data produced by the above, providing “live” visibility of all levels of hierarchy in the business.

Fully understanding this vision and respecting it as much as possible during the design, implementation and adoption phases is critical to having the right solution in place and selling it internally.

Don’t make the mistake of looking at systems implementation as only an IT implementation!

In many cases, a major change in systems causes subsequent changes in processes, but you still need the right approach for the system’s design. Having in mind the longer-term game of how that will affect processes is crucial for people change management. Don’t make the mistake of looking at systems implementation as only an IT implementation! It’s not. It’s about both systems and people!

The more connected the system’s architecture, the more synergy this will drive down the line for process alignment and adoption, which is key. In other words, it’s not only about “systems driving the right business behavior” or “business process design driving systems implementation”; both are important but on their own neither facilitates an optimal long-term approach.

It’s about making sure the wider vision for systems implementation considers the desired state of business processes and requirements while remaining as connected as possible in order to encourage adoption.

Challenges In Systems Implementation

You should expect some bumps along the way. Some of these are:

– Software being developed for only some areas to save time, not taking the full picture into account in the design phase, making it significantly harder to build and implement any changes down the line.

– ERP not being equipped with functionality for all business areas yet, i.e, advanced scheduling solutions, forcing sometimes complicated links between these niche applications and the ERP which adds cost and complexity.

– Connectivity issues between the core ERP and 3rd parties that are often prone to user error and require manual interventions.

– Continued use of Excel based reports and exports which are updated offline only.

– Disconnected operating sites using their own in-house built tools (still a widespread practice).Lack of scenario planning functionality meaning it is often done in Excel which is prone to errors and time consuming.

– Lack of functional expertise which causes stakeholders to misinterpret key S&OP/demand planning concepts.

Conclusion

What is your experience with supply chain planning systems based on cloud solutions and what do you think the areas of improvement are? Maybe you are currently on this journey and have some key elements to share, at least conceptually. What are they? Or maybe you’re a supply chain consultant dealing with design and implementations – how do you guide your clients to achieve a more connected business environment?

I hope this article has provided some food for thought. I am happy to discuss S&OP systems implementation with both experienced practitioners and people just starting to build their roadmap. Contact me at cristian.circiumaru@gmail.com, connect on LinkedIn or comment below. 

During my 30-plus years in Supply Chain Management I have participated in many projects as a practitioner, consultant or educator to improve demand forecasting. I have also participated in many projects to improve inventory management. My experience is that most businesses have not done enough to link these two areas from a people-process-technology perspective. This article highlights some lessons I have learned and provides some suggestions to improve the link between these important processes.

New Products & Inventory Control

We all know the story regarding new products. Sales and Marketing are conditioned to over-forecast these in most cases. In their view it is much better to create excess inventory than to risk a loss of revenue. Of course, in most units Sales & Marketing are not held responsible for inventory levels or dysfunctional inventories. Supply Chain is accountable for inventory performance, but this responsibility does not usually address new product introductions in a timely manner. Often excess and aged inventories result from lower than expected demands for new products. Several years ago, a business unit with poor inventory performance got a new leader. When discussing this with the Supply Chain leader, he was told that new product and trial inventory was over $500,000.  He directed the Supply Chain manager to add this inventory performance to the monthly report reviewed in the S&OP meeting. Table 1 depicts an example of the report, along with comments.

• There were no sales for these 10 items in the month.
• Inventory increased on two items which were produced to the original plan although no sales have occurred the past three months.
• The current month-end value of this inventory ($552,000) represents approximately 85% of total new product-trial inventory.

Based on this poor performance, the business implemented a process whereby the sales forecast was used to establish an inventory plan. The actual sales and inventory were compared to plan and a meeting was held every two weeks between the product development, marketing, sales and Supply Chain functions. The result was improved demand-supply balancing in both quantity and timing. Chart 1 explains further sales, production and inventory, and Chart 2, planned and actual inventory.

Chart 1 | New Product Sales & Inventory Plan

Chart 2 | Tracking New Product Sales and Inventory to Plan

Demand versus Stocking Strategy

The textbooks tell us that make-to-stock strategy should be limited to higher volume products that are easy to forecast. This ensures an acceptable inventory investment and that slow-moving and obsolete inventory can be controlled. One mechanism to evaluate the stocking strategy is ABC-XYZ volume variance analysis. Variance is based on the Coefficient of Variation (CV) which is defined as the standard deviation in period sales divided by the average period sales. Most practitioners use a CV threshold of >1.0 to segment those products which will be difficult to forecast. If the product also has low sales volume (C item based on volume), the correct stocking policy is make-to-order (see Table 2).

Table 2 | Sample ABC-XYZ Analysis with CZ Item

Notice Article 551 in Table 2 has both high volume and high variance in demand. Collaboration with the customer resulted in a stocking policy to ensure product availability at the point of order. Here the customer provided an order schedule. In this case Article 552 was being forecasted using a 3-month moving average. The result was being out of stock in some months and having excess inventory in others. Chart 3 depicts the actual demand for this article.

Chart 3 | Actual Sales for Article 552 (CZ Article)

As indicated by the quantitative analysis, this article should not be made-to-stock based on a forecast. Some firms use re-order point planning based on average demand for articles with erratic sales patterns. As such, it would not yield acceptable inventory and service.

After collaboration between Supply Chain, Sales and Marketing, it was decided to place the article on make-to-order status. In addition to the erratic demand pattern this article requires a unique raw material in production and the risk of producing this article to stock is high.

Best practice is to perform the volume-variance analysis periodically. The frequency (monthly, quarterly, twice per year) depends on how dynamic demand is within the business. The Demand Planner should perform the data analysis and the Supply Chain leader should facilitate a review with Sales & Marketing in which decisions must be made. There is a strong link between forecastability and inventory control.

Forecast Error & Safety Stock Inventory

Another key link in planning is the use of the demand variance or forecast error to plan safety stock levels. The use of subjective safety stocks by ordering early is common in industry. This judgment model for determining safety stock quantity leads to high inventory. Below is an example of using forecast error to set safety stock levels.

Chart 4 | Use of Statistical Safety Stock Based on Forecast Error

As shown in Chart 4, the resulting statistical safety stock performs well based on historical sales. Statistical safety stocks assume the sales data is normally distributed (bell curve). In this example, the average sales are 498 units and the standard deviation of sales is 57. This yields a Coefficient of Variance of 0.12 (57/498). As mentioned before, CoV’s of less than 1.0 indicate that variation approximates normal distribution and use of statistics based on normal distribution is a valid approach. Next we will look at an example of erratic demand versus safety stock level.

Erratic Demand & Safety Stock Inventory

For some businesses, many items have demand patterns that are difficult, if not impossible, to forecast. Chart 5 gives such an example.

Chart 5 | Erratic Demand & Safety Stock

The CoV test indicates bell curve statistical techniques are not valid in this case.  CoV is greater than 1.0. If statistical safety stock is used, both over-stocks and stock-outs will occur. In that case, the best solution is to place it on a make-to-order policy. However, if the customer insists on the supplier keeping some stock, the best solution would be to maintain a minimum safety stock of 1,500 units. This covers demand for ten of the twelve months. For the two months when demand far exceeds average, the options are advance warning from the customer, expediting by the supplier or longer delivery lead time.

A key point is that the actual demand pattern can help in developing a stocking policy. So often I have been told by planners they just use re-order point based on average demand for those items with erratic sales. Of course, re-order point was created to handle items with stable demand and random variation and does not work well for patterns like this one.

The use of forecast error or demand variance in safety stock calculations often gets a bad reputation because the tool is applied to items with erratic, non-normal demand patterns. Use of the CoV data and inspection of the demand pattern can help to ensure statistics is used but not abused.

Using Exception Reports to Link Demand Planning & Inventory

A good practice is to link forecast performance to inventory and service. The “Top Ten” report below is reviewed in the S&OP Meeting each month.

The red numbers represent how much inventory was planned due to over-forecasting these products. The inventory totals over $1.8M for this month. The other items were under-forecasted resulting in schedule changes or stock-outs. In this case, the stock-outs did result in customer backorders. This business offers dozens of finished goods line items and exception reports are used to prioritize improvement efforts.

Summary

The Supply Chain function is usually accountable for inventory management. They should ensure this includes new product inventory management and work with Marketing & Sales to get inventory plans in place. One aspect of product portfolio management is the evaluation of demand volume and variance. Supply Chain should ensure this analysis is performed periodically and that Marketing and Sales participate in review of the data. Decisions regarding whether to stock the product and how to ensure availability if stocked need to be a team effort.

For items with reasonably normal demand patterns, Supply Chain should link safety stock quantities to demand variance or forecast error. Excess and slow-moving inventories should be monitored routinely; this can help to identify when stocking policies and safety stocks need a review. If items with erratic demand patterns must be made-to-stock, Supply Chain must work with Marketing and Sales to decide what stocking policy is required. It is best not to provide an invalid statistical forecast but rather identify items which require decisions based on informed judgment. The use of exception reports such as “top ten” forecast errors, or “worst ten” over stocks each month is a better practice. Also, the use of the ABC principle to ensure resources are focused on those items that significantly impact the bottom line is very important. The “C” items provide more challenges for both demand planning and inventory control but usually represent a small percentage of revenue.

In closing, Supply Chain must take the lead to integrate new product planning and product portfolio review in the S&OP process. Seldom are marketing and sales held accountable for the inventory and cost issues for mistakes in these processes. Demand planning and Supply Chain are accountable for linking actual demand patterns to safety stock decisions. They must also routinely perform inventory analyses (e.g., slow moving, excess, obsolete) to identify priorities and the need for change. Supply Chain serves as the link between Marketing, Sales, Finance and Operations to better balance service-cost-inventory.

This article originally appeared in the Spring 2020 issue of the Journal of Business Forecasting. Click here to become an IBF member and get the journal delivered to your door quarterly, as well discounted access to IBF training events and conferences, members only workshops and tutorials, access to the entire IBF knowledge library, and more.

FMCG distributors are critical actors in the global supply chain. They manage a large variety of products and high levels of inventories and assets, and help ensure retailers deliver to their customers. To be profitable, we must control inventory costs, have effective facilities allocation, and have extremely well-organized logistics. Let’s look at how the insights from demand planning help us in our capacity planning, providing effective inventory management and order fulfillment.

What We Must Achieve In Capacity Planning

Facilities allocation: Deciding the required facilities, i.e. the space of any facility or zone needed to satisfy the anticipated flow of customer orders. It must support any projected higher inventory levels for each product.

Avoiding stockouts: Supplying warehouses to avoid stockouts with optimal frequency to ensure our products are available in our customers’ stores. Supplying these warehouses should take into account anticipated customer demand for each product, promotional campaigns, urgent orders and returns.

Performance of the order-to-cash process: Optimizing resources and reducing the order cycle time to satisfy the actual and future customer demand – in full, on time and without errors. Variables which must be monitored here are the product demand and the characteristics of the daily orders flow, either weekly or monthly.

Understand Demand Variables To Better Plan Capacity

The secret of capacity optimization for distributors is to know customer demand, seasonality, promotions, supply constraints, financial aspects (assets, cash etc.) and delivery regulation (e.g. OTIF), from a short-term horizon to a long-term horizon. This comes from the demand plan.

Inventory management requires planning for warehousing space, resources, manpower and logistics. For this, we need demand planning to know likely future sales.

How We Use Demand Planners For Better Inventory Management

FMCG products are characterized by a high demand variability: seasonality, promotions, new product demand inaccuracy, and urgent and specific orders. So, the order point method is recommended in this situation to manage transfer to the picking warehouse. It has three parameters: Safety Stock, Order Point and Maximum Quantity.

Demand planners give us the following to assist us with this:

• Products families based on demand volume and demand variability,
• The Demand plan which contains quantities of each products per month,
• Other information including shelving measures and zone spaces.

The maximum quantity is defined as the maximum storage capacity of the shelves satisfying the demand plan. In order to determine the maximum quantity more precisely, an optimal distribution of the products in the shelves can be determined, taking into account the relative ratios between the products (importance in terms of demand and volume of the box) and the maximum volume of the shelves. Linear programming can be a good way to resolve this problem, by using the Solver tool in MS Excel.

The order point policy aims at initiating replenishment as soon as an order point is reached (including the safety stock), with a quantity that cannot exceed a predefined maximum. ERP systems can simplify this policy and provide the following complementary functions:

• Real-time tracking of product volumes in their locations, based on the calculation of the updated inventory after each internal move.
• Alert notifications will be sent in case of reaching or exceeding a pre-set order point.

Scenario Planning For Order Cycle Process Optimization

In the order cycle process, orders can have significant waiting times during the picking operations. These long waiting times mean that operators will lose the opportunity to serve other customers (downtime) and often have to work overtime. In general, the problem is perceived as a lack of facilities and workers, which makes sense as managers have to control the costs associated with these. Therefore, managers should perform scenario planning in order to find the strategy that will optimize the order cycle time and overcome the problem of overtime while increasing logistics capacity.

Demand planners should know when customer orders are likely to come in for a certain period of time, and the demand we will experience for products in each zone in the warehouse. The what-if Analysis can use different performance levers: the inter-arrival time of customer orders, the waiting time for picking, and the number of resources.

Analytics can have a significant role in optimizing the process. The following information helps us translate the demand plan to a supply and capacity plan (as well order arrival policy): Picking Time in each zone of the warehouse, number of lines per order in each zone, and probability that Picking-List visits each zone.

Demand Planning Process Has A Great Impact On Capacity Optimization

As we see, the demand planning process has a great impact in optimizing capacity for FMCG distributors. Accurate demand forecasts and a deep knowledge of customers’ behaviors, and even demand forecasts at the zone level for the warehouse, are key factors in optimizing the supply side, along the with the support of an ERP system and analytics.