What Is Redeployment?

What This Article Covers 

  • What is Redeployment?
  • Redeployment as a Form of Inventory Analysis.
  • The Relationship Between Redeployment, Slow Moving Inventory and Inventory Obsolescence
  • Redeployment as it Differs by Product Type.
  • How Redeployment Compares Across Supply Panning Methods.
  • The History of Redeployment

Introduction

Redeployment is the redistribution of stock that is already in a forward location in the supply network at an inventory position to another forward location or back to the parent location. I can also be called inventory re-balancing and sometimes inventory repositioning, and is the least well known of the major supply planning threads. To understand redeployment, it is helpful to contrast it to normal deployment. 

normal-deployment

The deployment follows a rigid flow of parent to children locations which is essentially designed to minimize logistics costs.

redployment

Redeployment is quite different because it means that the normal parent-child valid location-to-location relationships are in turned off, allowing any location to be shipped stock from any other location. 

Redeployment can be considered the correction of an error in the deployment supply plan in that product was moved to a location that it was not consumed, and has a lower probability of being consumed in the future at its present location than if transferred to a new location.

Redeployment can be considered the correction of an error in the deployment supply plan in that product was moved to a location that it was not consumed, and has a lower probability of being consumed in the future at its present location than if transferred to a new location.

Redeployment as a Type of Inventory Analysis

Redeployment can be considered a type of inventory analysis because it means analyzing the inventory position in the system and making a determination which inventory should be moved where. Almost all companies end up with an inventory position which they would like to alter. Companies have people and groups that perform inventory analysis to determining

The most common types of inventory that falls into the redeployment category is slow moving inventory and obsolete inventory.

Slow Moving Inventory

Slow moving inventory is difficult to forecast and the average inventory position of slow moving inventory is normally high versus its demand. In some cases, slow moving inventory should not be held at a particular location. In other cases, such as with service parts there may be no alternative because the inventory must be carried at a location in order to meet service goals.

Slow moving inventory is managed best when it can be “pooled.” This can mean that the slow moving inventory is aggregated to the larger distribution centers. Another way of pooling is throught redeployment. Redeployment allows all the inventory in the network to be shared, but at the price of movement.

Slow moving inventory is increasingly being carried due to product proliferation. That is slow moving inventory is in many cases driven by marketing’s desire to have high numbers of SKUs. As this trend sees no sign of abating, redeploying slow moving inventory should be of rising interest to companies.

Obsolete Inventory

Companies have people and groups that perform inventory analysis to determining obsolete stock or obsolete inventory. Inventory obsolescence has several causes.

  • One is product specific. That is the product is only sellable (for its normal price or sometimes for any prices) for a period and so the stock becomes obsolete when it does not sell within this time. But also a primary reason why an obsolete stock or obsolete inventory “goes bad” is because the inventory position is not transferred to a location where it can be consumed. In

Obviously, if the stock can eventually be sold without requiring its movement, then it may make sense to keep it at the present location. Inventory obsolescence is a primary driver for redeployment, as it can mean the company writing off the obsolete stock for nothing or some small fraction of its average sales price.

In some cases, the soon to be obsolete stock is not moved because the inventory analysis is not performed. In other cases the soon to be obsolete inventory is not transferred to a location where it has a higher probability of being consumed is because doing so would violate the company’s transportation budget cap. It is often the case that even though a mathematical inventory analysis can demonstrate an inventory position has a lower likelihood of becoming inventory obsolescence and would earn the company more money, the decision to reposition the stock is still not made. I have been surprised to see how politically complicated it becomes to move stock that has a high likelihood of inventory obsolescence. But also, most companies are still not familiar with software that could automate the inventory obsolescence analysis and stock redeployment inventory analysis.

In this inventory analysis, one applies various factors such as:

  • The forecast for the item at different locations.
  • The current stock level and inventory position for an item at all the locations it is stocked (if the analysis is run open)
  • The service level target at the different locations for the item.
  • The cost of carrying the item.
  • The transportation cost to move the item.

Another factor reinforcing the fact that redeployment is an inventory analysis is that many companies perform this redeployment as a stock analysis. That is without using any specialized software at all to determine what stock should be repositioned. In fact, there are few useful applications on the market for performing redeployment.

Different Redeployment for Different Products

Redeployment is an overlooked supply planning functionality on the part of non-MEIO software companies. Other supply planning methods focus on the initial deployment, but often not at all on redeployment. A case can be made that this is an oversight, as imperfect forecasts will require some percentage of the initial deployment to rationale at a later date. This is not only a matter of simply waiting and taking more inventory costs. The material can and does expire because it was never redeployed, and this means writing off both the cost of the item in addition to the carrying cost of the item until it expires.

How a product can be adjusted post-deployment greatly depends upon the product’s characteristics. Some items only have the opportunity to be sold in the same state but in a different location. Other items like paint can be re-manufactured and can be sold as entirely different colors (possibly a better selling color) This can mean moving the product from its inventory position twice.

  • One to move it back to a manufacturing facility.
  • Then moved a second time to forward locations in the supply network. Which may or may not be where the product originated. In this way, re-manufacture is very similar to the repair redeployment faced by service parts networks.

A Philosophical Opposition to Redeployment with Finished Goods Companies?

It sometimes appears that redeployment contradicts some supply chain decision makers at a philosophical level. I was once told by an executive that they did not want to redeploy their current inventory position, because as he put it:

What if they had to redeploy it yet again?

However, there is nothing to say that the initial deployment and the current stock position is correct or as it should be.

All anyone can do under conditions of uncertainty is apply probabilities. A certain percentage of all supply chain planning decisions will be “wrong,” but that should not prevent us from making due with imperfect information.

How Redeployment Compares Across the Various Supply Planning Methods

Redeployment is one of the strongest areas of functionality for MEIO vendors. It is correspondingly one of the weakest areas of functionality in all other supply planning methods which are.

  • MRP/DRP
  • Heuristics
  • Order Allocation
  • Cost Optimization

Sometimes those with little understanding of redeployment, but with a financial bias to utilize some specific cost optimizing supply planning application, will propose using a cost optimizer for redeployment.

The logic for cost optimizers which essentially compares the transportation costs to the costs of unfulfilled demand at the sending and receiving location, as well as the storage costs at the sending and storage locations, are also not designed for redeployment. Companies that attempt to use cost optimizers for redeployment will normally run into great limitations.

This a greatly underemphasized area of supply planning software development. Every client I have consulted with has a need for redeployment. The lack of enterprise software solutions is why this is a common area for custom development.

The History of Redeployment and Inventory Analysis

The original work on inventory optimization and multi echelon planning was developed for service parts network which has a need for redeployment. Many of the RAND Corporation papers that set the basis for modern MEIO had a strong emphasis on redeployment as this was a requirement of the US Air Force (the party paying for the research), and their airplane service network.

Conclusion

Redeployment is very far down on the list of most companies. That is unfortunate because it should not be and the opportunity to reduce inventory obsolescence, to reduce inventory holding cost and increase revenues is certainly there.

Service parts planning inventory optimization and multi echelon software companies have the strongest redeployment functionality.

In addition to having the functionality built-in, vendors have an advantage conceptually over non-inventory optimization and multi echelon vendors in redistribution. This is because of the traditional logic of deployment, which non-inventory optimization and multi echelon vendors attempt to use for redeployment such as fair share logic, does not translate appropriately for redeployment. The logic for cost optimizers which essentially compares the transportation costs to the costs of unfulfilled demand at the sending and receiving

References

MEIO Book

What is MEIO?

This book explains the emerging technology of inventory optimization and multi-echelon (MEIO) supply planning. The book takes a complex subject and effectively communicates what MEIO is about in plain English terms. This is the only book currently available that describes MEIO for practitioners, rather for mathematicians or academics.

The Interaction with Service Levels

The this book explains how inventory optimization allows the entire supply plan to be controlled with service levels, and how multi-echelon technology answers the question of where to locate inventory in the supply network.
This is the only book on inventory optimization and multi echelon planning which compares how different best of breed vendors apply MEIO technology to their products. It also explains why this technology is so important for supply planning and why companies should be actively investigating this method.
The book moves smoothly between concepts to screen shots and descriptions of how the screens are configured and used. This provides the reader with some of the most intriguing areas of functionality within a variety of applications.
Chapters
  • Chapter 1: Introduction
  • Chapter 2: Where Inventory Optimization and Multi-Echelon Planning
  • Fit within the Supply Chain Planning Footprint
  • Chapter 3: Inventory Optimization Explained
  • Chapter 4: Multi-Echelon Planning Explained
  • Chapter 5: How Inventory Optimization and Multi-Echelon Work
  • Together to Optimize the Supply Plan
  • Chapter 6: MEIO Versus Cost Optimization
  • Chapter 7: MEIO and Simulation
  • Chapter 8: MEIO and Service Level Agreements
  • Chapter 9: How MEIO is Different from APS and MRP/DRP
  • Chapter 10: Conclusion
  • References
  • Vendor Acknowledgements and Profiles
  • Author Profile
  • Abbreviations
  • Links in the Book
  • Appendix A: MEIO Visibility and Analytics
  • Appendix B: The History of Development of MEIO Versus MRP/DRP

How to Socialize Complex Projects Like Optimization

What This Article Covers

  • What is the Present General Level of Optimization Socialization?
  • How Can Managing Complex Projects be Improved by Socialization of Complex Solutions?
  • What are some of the Main Problems?
  • What is a Good Way to Choose and Optimization Solver?
  • A Sample Optimization Problem.

Introduction

Inventory optimization is the second major type of optimization to be implemented for supply planning and is an excellent example of an implementation requiring the ability to manage a complex project. I work in inventory optimization; however, I also do a fair amount of work in SAP SNP’s optimizer, which is a cost optimizer. That is it attempts to minimize costs while meeting demand and respecting capacity constraints. 

Both of these optimizers are considered complex projects. One would think that companies would be able to manage complex projects like this, but it is quite rare for many, even large enterprises to managing complex projects of the type required for optimization projects Something that I find commonly between all the optimization projects I work on is that the optimizer is

Something that I find commonly between all the optimization projects I work on is that the optimizer is not sufficiently socialized within the company. This results in optimization that is considered a black box by the business and by executives.

After having worked on yet another account where optimization was once again not understood by the business and where the results are continually overwritten by the planners, I thought I would write about the need to provide better education to clients. That is managing complex projects by better socializing optimization overall. In this article I will emphasize the connection between managing complex projects and socialization of solutions I have witnessed first hand.

My point to the optimization vendors and consulting companies is this; the primary limiting factor is no longer the technology. The factor limiting the uptake of optimization is the transparency of parameters and in the education on the part of vendors and consultants that work in optimization.

I often come into projects after they are live and I am in a good position to evaluate the effectiveness of the education and knowledge transfer that took place before my visit. I interview the business, see how the system is being used in reality, and review the project and the training documentation. I can say confidently, that the job of education of clients on optimization is being done poorly.

The Main Problems with Optimization Projects

One of the main issues that I see is that both vendors and consultants are not getting the business users at their client’s hands–on feel for what optimization is. I think this is greatly related to the limited number of tools that are used to explain optimization to clients. It seems there are just two educational tools.

  1. One is PowerPoint, which explains optimization with boxes and arrows. Most the optimization PowerPoint decks just are not that useful. If I were managing an optimization vendor, I would contract with a company that specializes in technical education to get people who know how to do this right. A few educational decks could repeatedly be used with different clients.
  2. The second education tool is the application itself. However, few optimization tools are themselves good education tools. Secondly, this is starting for a person new to optimization too quickly. Unless they are quantitative analysis people, need to be eased into a new topic by starting from the basics. Production ready optimization tools are not the basics

Luckily, there are tons of tools to select from to begin to acclimate planners and even executives to how optimization works. As with anything else, we want to start at a basic level, listen gauge the group to make sure that everyone understands. If people begin leaving, the room or start checking email the moderator needs to take a few breaks and or give some one-on-one tutoring to make sure the group can go through as a block.

Using Excel to Teach Optimization

Managing complex projects like optimization projects means getting the users the right exposure to the tool in the right way. I have had success explaining optimization using a few optimization scenarios in Excel. Excel is a great learning tool because while the number of people who can read scientific notation is very rare in groups of planners, everyone can read formulas in a spreadsheet. This makes me question the point of scientific notation, but I will save that tangent for a different post.

Suffice it to say, people are comfortable with Excel, Excel has solvers that can be installed as add-ins (some of them free), and so it is a great learning tool. Secondly, since all users have Excel themselves, by only walking the class through an installation of a solver on their machines, they can use the optimization scenario themselves in the class and outside the classroom as well. Real learning takes place when the user changes constraints and goals and sees the output. This is why I highly recommend that each user has a working solver on their computer and be able to work along with the moderator.

I have had success explaining optimization using a few optimization scenarios in Excel. Excel is a great learning tool because while the number of people who can read scientific notation is very rare in groups of planners, everyone can read formulas in a spreadsheet. This makes me question the point of scientific notation, but I will save that tangent for a different post. Suffice it to say, people are comfortable with Excel, Excel has solvers that can be installed as add-ins (some of them free), and so it is a great learning tool.

Secondly, since all users have Excel themselves, by simply walking the class through an installation of a solver on their machines, they can use the optimization scenario themselves in the class and outside the classroom as well. Real learning takes place when the user changes constraints and goals and sees the output. This is why I highly recommend that each user has a working solver on their computer and be able to work along with the moderator.

Choosing a Solver

For this example, I am using the Frontline Solver for Excel. There are many solver plug-ins for Excel, and I happen to like this one because it works with Mac as well as for PC. When using it I found this particular plug-in very easy to use so that I would recommend it, plus the basic version is free. Frontline offers a basic solver at no charge, and then sells a more advanced solver or pro version that they do cost around $900 for.

This Pro version can handle up to 2000 variables and a production type solver. I tip my hat to Frontline for offering a free basic version, which allows a person to cut their teeth on optimization without having to commit to buying a product. It also allows an unlimited number of users to download a basic solver for teaching without having to place an optimizer in the budget for short-term use.

A Sample Optimization Problem

Below I have setup a simple optimization scenario. This scenario asks the solver to resolve the following problem.

  1. Minimize the transportation dollars spent for 375 pounds of material.
  2. Respect the constraints for the minimum number of pounds to be shipped by truck, and the maximum number of pounds to be shipped by rail.
  3. Allocate material to the different modes (which move at different speeds) such that the average pound of material is moving at greater than or equal to 75 miles per hour.

Below is the initial view of the optimizer scenario. We start with the values that the optimizer will change, the pounds shipped, as set to “1,” next I will go through each of the values and describes how the optimizer will see each of them and use them to come to an optimal solution.


Next, we need to bring up the solver by selecting it from the Tools menu.

 

When the solver window comes up, we will setup the objective, the variables to be changed and the constraints. I find it useful first to name the cells so that the cell names show up in the Solver Parameters window. Having “TotalTransCost” in the window is far clearer than “C13.”

I want the all of the screens to be as clear as possible so that the user can intuitively understand what is happening based on their business experience. Later, when we get into adjusting parameters in the real model, I need complete clarity because ultimately, the business user must provide the right values for the parameters.


Here is our result below.


After the users are comfortable with this first example, I will make a change to the scenario. I will change the average speed to 85 miles per hour and rerun the optimizer.


The users will quickly notice that the optimizer moved roughly 10 pounds from the truck mode to the plane mode to meet the constraint of a higher average speed per pound. The users will also note that this decision cost an extra 78 dollars (roughly).

Conclusion

There are big opportunities to improve the education of clients on these complex projects. This education is in my estimation the number one reason many optimization projects either fail to meet their potential or simply fail overall. In addition to implementing the software, a big push must be made to educate everyone involved with the optimizer output. Since supply chain directors and vice presidents often issue policies on inventory management, this includes educating the executive decision makers. They must be motivated to get into the details of managing complex projects like optimization projects, and there is a lot to know. I have yet to find an account where the users or executive decision makers were educated up to their potential and had been to some accounts where the business does not understand the solution at all.

I have found success in using simple tools to socialize optimization concepts. The example I have provided is just one of these. Starting with the basics, and showing users and executives multiple optimization scenarios can rapidly increase their understanding of a topic that is unfamiliar to most. Vendors and consulting firms that follow a similar approach will significantly improve the success ratio of their projects, and improve the utilization of projects that are already considered successful.

References

I cover optimization in depth in the following book.

MEIO Book

What is MEIO?

This book explains the emerging technology of inventory optimization and multi-echelon (MEIO) supply planning. The book takes a complex subject and effectively communicates what MEIO is about in plain English terms. This is the only book currently available that describes MEIO for practitioners, rather for mathematicians or academics.

The Interaction with Service Levels

The this book explains how inventory optimization allows the entire supply plan to be controlled with service levels, and how multi-echelon technology answers the question of where to locate inventory in the supply network.
This is the only book on inventory optimization and multi echelon planning which compares how different best of breed vendors apply MEIO technology to their products. It also explains why this technology is so important for supply planning and why companies should be actively investigating this method.
The book moves smoothly between concepts to screen shots and descriptions of how the screens are configured and used. This provides the reader with some of the most intriguing areas of functionality within a variety of applications.
Chapters
  • Chapter 1: Introduction
  • Chapter 2: Where Inventory Optimization and Multi-Echelon Planning
  • Fit within the Supply Chain Planning Footprint
  • Chapter 3: Inventory Optimization Explained
  • Chapter 4: Multi-Echelon Planning Explained
  • Chapter 5: How Inventory Optimization and Multi-Echelon Work
  • Together to Optimize the Supply Plan
  • Chapter 6: MEIO Versus Cost Optimization
  • Chapter 7: MEIO and Simulation
  • Chapter 8: MEIO and Service Level Agreements
  • Chapter 9: How MEIO is Different from APS and MRP/DRP
  • Chapter 10: Conclusion
  • References
  • Vendor Acknowledgements and Profiles
  • Author Profile
  • Abbreviations
  • Links in the Book
  • Appendix A: MEIO Visibility and Analytics
  • Appendix B: The History of Development of MEIO Versus MRP/DRP

SAP is About to Change Its Inventory Optimization Story

What This Article Covers

  • What has SAP’s Story on Inventory Optimization Been?
  • What is SAP’s Pattern on Partnering with Vendors?
  • Does SAP have a Good Chance at Being Good at Inventory Optimization and Multi Echelon?

Introduction

I was recently doing research on SAP’s APO Add-In related to inventory optimization. I was surprised to read what appeared to be the beginnings of an inventory optimization product in one of the add-ins.

SAP’s Old Story on Inventory Optimization

I sat in a combined SmartOps and SAP presentation to a client over a year ago where SAP declared that it was not at the time and had no interest in developing an inventory optimization product in the future. However, its unmistakable from this documentation that SAP now has a “product” that can be added to APO to enable some inventory optimization functionality. What this means is that SAP is about to change its story on inventory optimization and is going to be a vendor in the MEIO space. This follows an algorithm that I have observed by SAP on their software partnerships which I have traced back to the 1990s.

The steps are as follows:

  1. Initiate a partnership with companies that will accept their onerous terms
  2. Declare whoever they select as the best of breed (this is important because of their presentation of the quality of the selected vendor changes in later stages of this algorithm).
  3. Market a rudimentary adapter to the application, but make the partnering vendor do most the work and provide most the funding for this initiative.
  4. Declare no intent to develop a competitive product to the partner vendor and prospects.
  5. Immediately begin developing a competitive product using inside information gleaned from the partner vendor. This is enabled by making the vendor sign a legal document declaring that the prospective partner must declare all IP to SAP, and anything undeclared to SAP is substantially free game to SAP to borrow.
  6. After a few years, sever the relationship and declare that the intent was always to have an “open” system that could connect to any best of breed application. Change the story regarding how good the one partner’s product is, now that a SAP competitive product exists. (I witnessed this 180-degree turn firsthand with MCA Solutions. At the beginning of the MCA Solutions-SAP relationship, SAP spoke of MCA in glowing terms as the best service parts planning applications on the market. However, after the relationship with MCA ended, SAP was extremely coy when discussing MCA, and declared that they always had built their adapter to any service parts planning application. They clearly wanted to change the topic of the conversation, and they wanted to minimize their previous partnership with MCA.)

Will SAP be a Force in Inventory Optimization?

This question has two components. The first is “Will SAP convince some clients to buy its MEIO product?” The answer here is undoubted yes. It will be part of the APO product, so after the product passes through its add-in stage (where it is charged for separately), it will eventually just become part of the APO suite and available to anyone who upgrades to the version of APO which has MEIO. SAP will have no problem getting consultants to invest time in learning it. As an APO consultant, I will readily invest in learning their MEIO as I frequently work in SNP, which is where SAP MEIO will be located.

The second component of the question is “Will SAP will ever build an efficient and competitive MEIO product.” I would bet quite a lot of money against it. My reasoning falls into two categories, one being my exposure to the best of breed MEIO vendors, and the second being my direct experience with SAP in cost optimization. The best of breed MEIO vendors tend to be very knowledgeable and extremely passionate about both the technology and the desire to continually improve that technology. Secondly, the lesson from the history of SAP in cost optimization is indicative of where SAP will be in the future with MEIO.

The feedback I consistently receive from clients who use the SNP or PP/DS cost optimizer is that SAP provides no thought leadership on how to use their product. SAP, with all their resources, has added very little value to cost optimization either in technology or in explaining how to use it since they added the cost optimizer to their product over ten years ago. The recent realization of this fact has given me the idea of creating a cost optimizer simulator to be used to just provide some transparency into what the optimizer is doing, and simulating changes in an external system rather than using SAP’s opaque and technologically flawed simulation versions in APO.

The fact that I any SAP optimization account I visit I find a poorly explained product speaks to the SAP’s capabilities with deep applications. However, MEIO is an in-depth application as well.

SAP’s Sweet Spot?

Cost optimization was never a good fit for SAP because it requires deep subject matter expertise in a technical area of supply chain planning, and this is not their sweet spot. SAP’s sweet spot is proving basic technology in a way that is perceived as low risk by corporate IT buyers. SAP seems to hide their weakness of their understanding of cost optimization by either discussing the proprietary nature of their optimization (and thus details cannot be shared), or by saying that anything related to methodology is “client specific.” However, those arguments are ridiculous. SAP has a large number of cost optimization clients, especially if you include the cost optimization clients that quit the cost optimizer. However, they do nothing to mine that database to explain what works and what does not work to their new customers. This experience with SAP in cost optimization applies to three different APO modules. These are SNP (supply planning), PP/DS (product planning), and TP/VP (transportation planning), all of which have cost optimizers. Because of this experience with the same approach shown in multiple APO modules with cost optimizers, I expect them to take the same approach to inventory optimization, with lots of talk about how all MEIO best practices are in the product, but then with little explanation of how it works to their clients.

The Lack of Passion That Comes with Stenography

When a company copies a concept simply for market reasons to steer people away from best of breed solutions, it’s simply a defensive move for that company. I predict this same result for SAP in inventory optimization that occurred to SAP in cost optimization. They will get APO customers to adopt SAP MEIO, but will only in special cases, where the client requirements are very basic, will they be able to pull off the implementation. From the product management perspective, it will also divert development resources from the rest of SCM-APO, a set of ten modules that had such enormous scope creep that it requires years of concentrated development to bring the vast storehouse of functionality up to par. Some modules such as SPP and EWM require substantial development efforts to simply be made functional and capable of supporting an account in production. The SAP marketing machine has taken these unfinished products as far as they can go, now the code has to be completed. There is much more to say about this issue, but the long and short of it is that SAP already has its hands full with its planning products without venturing off again into virgin territory.

Conclusion

SAP’s story on MEIO is going to change in the future. The add-in discussed above is a start, but they will eventually have a MEIO “product.” My best guess is that it will be in the next version of SCM-APO. However, I am not sure on this, because I can’t determine SAP’s directions on add-ins as they are so new. Either way, it will be a significant event for the industry because with APO’s large installed base, and with so many companies with such a high preference for SAP products regardless of their objective rating in functionality, technology or usability comparisons. It will mean that many businesses will now have access to MEIO technology in some form without going out to a best of breed solution.

All of the major consulting companies will get solidly behind the product. This is because instead of with a best of breed application, they will be able to staff and control the project, which was one of their major concerns with MEIO and why they would recommend heuristics, allocation or cost optimization on many supply planning accounts that would be more appropriate for MEIO. Gartner will begin to rate SAP MEIO higher than it should be, because of SAP more to Gartner every year than any of the best of breed vendors. For best of breed vendors, this will mean a smaller piece of the SAP market. It also means that the best of breed vendors will need to spend some time differentiating their product from SAP’s product. This should combine tightening up some of the messaging around specific benefits of their product in relationship to APO MEIO, which will mean understanding the SAP MEIO and gaining exposure to the product.

References

I cover inventory optimization in depth in the following book.

MEIO Book

What is MEIO?

This book explains the emerging technology of inventory optimization and multi-echelon (MEIO) supply planning. The book takes a complex subject and effectively communicates what MEIO is about in plain English terms. This is the only book currently available that describes MEIO for practitioners, rather for mathematicians or academics.

The Interaction with Service Levels

The this book explains how inventory optimization allows the entire supply plan to be controlled with service levels, and how multi-echelon technology answers the question of where to locate inventory in the supply network.
This is the only book on inventory optimization and multi echelon planning which compares how different best of breed vendors apply MEIO technology to their products. It also explains why this technology is so important for supply planning and why companies should be actively investigating this method.
The book moves smoothly between concepts to screen shots and descriptions of how the screens are configured and used. This provides the reader with some of the most intriguing areas of functionality within a variety of applications.
Chapters
  • Chapter 1: Introduction
  • Chapter 2: Where Inventory Optimization and Multi-Echelon Planning
  • Fit within the Supply Chain Planning Footprint
  • Chapter 3: Inventory Optimization Explained
  • Chapter 4: Multi-Echelon Planning Explained
  • Chapter 5: How Inventory Optimization and Multi-Echelon Work
  • Together to Optimize the Supply Plan
  • Chapter 6: MEIO Versus Cost Optimization
  • Chapter 7: MEIO and Simulation
  • Chapter 8: MEIO and Service Level Agreements
  • Chapter 9: How MEIO is Different from APS and MRP/DRP
  • Chapter 10: Conclusion
  • References
  • Vendor Acknowledgements and Profiles
  • Author Profile
  • Abbreviations
  • Links in the Book
  • Appendix A: MEIO Visibility and Analytics
  • Appendix B: The History of Development of MEIO Versus MRP/DRP

Why Target Stock Level Not Safety Inventory is the Right Focus

What This Article Covers

  • How is Safety Stock Often Set in Practice?
  • What is the Target Stock Level?
  • What is the Relationship between Safety Stock, Target Stock Level and Inventory Optimization and Multi Echelon Planning Software?

inventory-optimization-focus

Introduction

I have always found the many supply chain professionals and executives have been far too focused on safety inventory. Safety inventory is just that, the inventory that is carried to deal with unforeseen events. It could just as easily be called variability stock, or the stock that is held to account for variability in the supply chain. The exact formula is listed in this link. However, for this article, it’s merely necessary to consider that safety stock is the component of the total stocking level which is designed to account for variability in supply and demand.

The best way to think of safety stock is that at a high level it has three inputs:

Safety Stock = Initial Stocking Level + Supply Variability + Demand Variability

How Safety Inventory is Often Set In Practice

Safety inventory can be calculated with a safety inventory formula, which adjusts with changes in the variability of supply and demand, which is called dynamic safety stock. It can also be set manually. Also, safety stock can be calculated inside of the ERP or planning system, or externally and imported (hard-coded) into the system.

Most companies do not have dynamic safety inventory enabled, and safety stock is usually updated manually with a variety of calculation techniques.

The result of this is that most companies are not taking advantage of their system’s ability (regardless of the supply planning method employed or the particular vendor) to auto-adjust safety stock. This places an extra load on the supply planning organization because it is another parameter which must be actively managed.

Accounting for Variability in Non Inventory Optimization Supply Planning Applications

Unknown to a large contingent of companies that are running the older supply planning methods (MRP/DRP, Heuristic, Cost Optimization and Allocation), safety inventory is the only factor which accounts for variability in the supply chain from the inventory perspective.  It is also the only place where service level is accounted for, for three of the four methods of supply planning listed above. (MRP/DRP, Heuristic, and Allocation). Cost optimization can account for service goals, but only in an indirect manner. A cost optimizer, by comparison, has only the ability to set the service component based upon penalty costs. This is a much more blunt instrument for connecting the service level to the language that the optimizer understands. This is because the penalty cost only has to mean to the cost optimizer about other costs that are included in the system.

This is a major weakness of cost optimization systems. In fact, the best way for a company to proceed in determining if cost optimization is the best choice for them is to first internally agree on all the costs that will drive the optimizer. If they cannot internally drive to this agreement, then cost optimization is not a good choice for them, even if their primary supply chain objective is to minimize costs. This addresses an issue which is often missed. A method selected must not only be the right fit for the business requirements but must also fit with the company’s ability to implemented the chosen method.

Inventory optimization and multi echelon (MEIO) have a superior approach to setting the target stock level which is still not widely understood. MEIO applications can at a very fine level of detail set the target stock level based upon service levels that are applied at either the most disaggregated (product location) or higher levels of aggregation, depending of course on the particular vendor selected.

Target Stock Level and Safety Stock in MEIO Applications

MEIO systems also have and calculate safety stock. However, they have the ability to set the target stock level or TSL at the most accurate and sophisticated way that is currently available in the software. This class of application uses the service level to set both the safety stock and the target stock level.

The way inventory optimization calculates safety stock is in most cases identical to the safety stock functionality with heuristic or cost-based optimization supply planning application calculates safety stock. The main functionality in inventory optimization goes towards the calculation of the initial stocking level or target stock level.

TSLorSS

Understanding the Distinction between Target Stock Level and Safety Stock

When I have the conversation regarding MEIO and its relationship to safety inventory, the person I am speaking with will sometimes propose that he or she agrees with me in principle, but then will add,

However, inventory optimization does improve safety stock.

To simply correlate the two is to miss the point of inventory optimization. Inventory optimization is bigger than safety stock.

  • Dynamic safety stock is a simple calculation that is performed at a product-location combination, while inventory optimization is a set of mathematics that encompasses the entire supply network and meets service level targets by distributing inventory to every product location optimally.
  • It’s the difference between a formula that can be calculated in a single cell of a spreadsheet (safety stock) and a set of mathematics so complex that few people understand what it does. That’s why it is incorrect to say that inventory optimization is focused on safety stock.

While safety stock does not need to be optimized, it should always be dynamic—that is, it should flex with the variability in supply and demand. Therefore, inventory optimization and safety stock are independent of one another. A company can implement dynamic safety stock without implementing inventory optimization, and vice versa.

The Right Focus

  • Safety inventory is critical, but it should never be the primary focus within the supply planning organization.
  • It should be auto-calculated and left to the system to control. If it isn’t, and if the supply planning organization is spending much time discussing its safety stock, then it is wasting time because the formula for dynamic safety stock is correct and extensively tested.

What is to be questioned is the quality of the lead time variability or demand variability, which the dynamic safety stock formula uses to calculate safety inventory. These are questions related to improving the inputs to the formula, which is a different topic. Instead, target stock levels at a product location should be the focus.

MEIO applications allow direct control over the TSL because the objective function of the optimizer is to minimize inventory vs. service level or to maximize service level based upon inventory.

References

I cover inventory optimization in the following book.

MEIO Book

What is MEIO?

This book explains the emerging technology of inventory optimization and multi-echelon (MEIO) supply planning. The book takes a complex subject and effectively communicates what MEIO is about in plain English terms. This is the only book currently available that describes MEIO for practitioners, rather for mathematicians or academics.

The Interaction with Service Levels

The this book explains how inventory optimization allows the entire supply plan to be controlled with service levels, and how multi-echelon technology answers the question of where to locate inventory in the supply network.
This is the only book on inventory optimization and multi echelon planning which compares how different best of breed vendors apply MEIO technology to their products. It also explains why this technology is so important for supply planning and why companies should be actively investigating this method.
The book moves smoothly between concepts to screen shots and descriptions of how the screens are configured and used. This provides the reader with some of the most intriguing areas of functionality within a variety of applications.
Chapters
  • Chapter 1: Introduction
  • Chapter 2: Where Inventory Optimization and Multi-Echelon Planning
  • Fit within the Supply Chain Planning Footprint
  • Chapter 3: Inventory Optimization Explained
  • Chapter 4: Multi-Echelon Planning Explained
  • Chapter 5: How Inventory Optimization and Multi-Echelon Work
  • Together to Optimize the Supply Plan
  • Chapter 6: MEIO Versus Cost Optimization
  • Chapter 7: MEIO and Simulation
  • Chapter 8: MEIO and Service Level Agreements
  • Chapter 9: How MEIO is Different from APS and MRP/DRP
  • Chapter 10: Conclusion
  • References
  • Vendor Acknowledgements and Profiles
  • Author Profile
  • Abbreviations
  • Links in the Book
  • Appendix A: MEIO Visibility and Analytics
  • Appendix B: The History of Development of MEIO Versus MRP/DRP

Segmentation vs. Inventory Optimization

What This Article Covers 

  • What is Supply Chain Segmentation
  • How is it Related to Classification of Inventory
  • How is it Different from Inventory Optimization?
  • What Can Vendors that Offer Supply Chain Segmentation Do to Carve out a Niche Separate from Inventory optimization?

Introduction

There are some problems in the inventory optimization space relating to what is being communicated to potential clients.

One issue relates to what is claimed to be inventory optimization and what is not.

This is because some vendors that perform product database segmentation, calling their solutions inventory optimization. This is a problem for the following reasons:

  1. Segmentation has many benefits, which happen to be different from inventory optimization. By calling the software inventory optimization, segmentation will not become known in its right.
  2. Buyers, already confused, will end up further confused.
  3. Segmentation is not the same thing as inventory optimization.

What is Supply Chain Segmentation?

Supply Chain Segmentation is a method of selecting portions of the product database and applying changes to its control parameters.

  • For instance, one could select all SKU-Locations or product locations that are above a certain number of inventory turns per year and apply on economic order quantity to them.
  • The ability of Supply Chain Segmentation is critical because it allows planners to more efficiently control their products, and because it is a very direct method of filtering and control.

Along with filtering capability comes an ability to report on the products within the planning system. By performing filtration on different characteristics, the planner can gain a better appreciation and understanding for their products overall. It can fulfill many of the master data maintenance of the planning system.

Supply Chain Segmentation Versus Classification of Inventory

Supply Chain Segmentation should not be confused with the classification of inventory. Classification of inventory places inventory into categories such as A, B, C. Supply Chain Segmentation is about the categorization of product locations for treating them differently with the application different inventory parameters (lot size, reorder point, etc.) and even different supply planning or forecasting methods.

How Is This Segmentation Different From Inventory Optimization?

Inventory optimization is the ability to derive stocking levels from service levels. The definition continues to be a problem regarding being understood by prospective buyers. There are some reasons for this. Several vendors have confused its meaning through directly hijacking the term to be trendy, while many consultants have overused the term, and in fact, do not know themselves the term’s actual definition.

The more flexible and abstract the setting of the service level is, the more powerful the inventory optimization software can be considered to be. The lowest level of inventory optimization is at the product location, and the highest is the customer. However, not every customer wants, needs or is capable of managing their service levels by the client. Thus MEIO software selection is only partially about the level of the service level specificity of the application.

Supply Chain Segmentation, on the other hand, is about parameter control functionality, and an entirely different category of software from inventory optimization. For instance, the ability to apply a particular inventory parameter to a segment of the product database should not even be on the list of selection criteria for inventory optimization. However, it would be central to the selection of segmentation software.

Discerning the Difference Between Inventory Optimization and Supply Chain Segmentation

It is important to have questions ready when interviewing different vendors. The questions below can help prospective clients to understand what type of software they are dealing with in this space.

  1. Is this product segmentation or inventory optimization software?
  2. Where can the service level be set in the application (i.e. product/location, customer, location)?
  3. What specifically is being optimized?

A Recommendation to Supply Chain Segmentation Vendors

If I were one of those vendors, I would change the message around the product to explain its benefits as a segmentation product, rather than an optimization product. (Do you really want to be competing in an area where you are not offering the declared functionality, when your software is explicitly designed for something else?) Doing this would create a unique value proposition for the application and will also lead to more successful projects because the client need will better match the functionality offered. Using the term inventory optimization may work for a while to get business in the short-term, but it is ultimately not an effective strategy long-term.

Conclusion

The inventory optimization space is crowded, with everyone declaring they have inventory optimization. Among true inventory optimization vendors there are significant design approach differences that make them better or worse fits for different environments. However, the first step in an inventory optimization software selection is removing segmentation vendors. Segmentation software is still quite a value, but it is important to know what you are buying and what you can expect from your software purchases.

References

I cover inventory optimization in depth in the following book.

MEIO Book

What is MEIO?

This book explains the emerging technology of inventory optimization and multi-echelon (MEIO) supply planning. The book takes a complex subject and effectively communicates what MEIO is about in plain English terms. This is the only book currently available that describes MEIO for practitioners, rather for mathematicians or academics.

The Interaction with Service Levels

The this book explains how inventory optimization allows the entire supply plan to be controlled with service levels, and how multi-echelon technology answers the question of where to locate inventory in the supply network.
This is the only book on inventory optimization and multi echelon planning which compares how different best of breed vendors apply MEIO technology to their products. It also explains why this technology is so important for supply planning and why companies should be actively investigating this method.
The book moves smoothly between concepts to screen shots and descriptions of how the screens are configured and used. This provides the reader with some of the most intriguing areas of functionality within a variety of applications.
Chapters
  • Chapter 1: Introduction
  • Chapter 2: Where Inventory Optimization and Multi-Echelon Planning
  • Fit within the Supply Chain Planning Footprint
  • Chapter 3: Inventory Optimization Explained
  • Chapter 4: Multi-Echelon Planning Explained
  • Chapter 5: How Inventory Optimization and Multi-Echelon Work
  • Together to Optimize the Supply Plan
  • Chapter 6: MEIO Versus Cost Optimization
  • Chapter 7: MEIO and Simulation
  • Chapter 8: MEIO and Service Level Agreements
  • Chapter 9: How MEIO is Different from APS and MRP/DRP
  • Chapter 10: Conclusion
  • References
  • Vendor Acknowledgements and Profiles
  • Author Profile
  • Abbreviations
  • Links in the Book
  • Appendix A: MEIO Visibility and Analytics
  • Appendix B: The History of Development of MEIO Versus MRP/DRP

How to Best Understand Inventory Optimization

What This Article Covers

  • Introduction to Inventory Optimization
  • Where it Fits in the Supply Chain Planning Software Space
  • Definition of Inventory Optimization
  • The Relationship Between Service Level and Inventory Strategy
  • The MEIO Inventory System Software Control Over Service Levels
  • Understanding the Stages of Supply Chain Management

Introduction

Inventory optimization is inventory system software that answers the question of how much to keep in inventory, while multi-echelon planning answers the question of where to keep inventory in the supply network.

Unlike supply planning techniques that use sequential processing or calculation, the MEIO inventory system software calculates the level of service level impact of carrying one additional item at every product location combination and then sorts the list of options by their contribution to the level of service levels and selects the best contributor.

Where Inventory Optimization Fits in the Supply Chain Planning Software Space

inventory-optimization

  • As you can see, MEIO is its own category of supply planning and is one of the three major methods of supply planning.
  • MEIO is the most recently developed method and is also the least understood among supply chain professionals.

The Definition Of Inventory Optimization

  • Inventory optimization is the derivation of stocking levels throughout the supply planning network based on service level targets.
  • Inventory optimization answers the question of how much inventory should be carried, while—as I’ll discuss later— multi-echelon answers the question of where in the supply network quantities should be carried.

Unsurprisingly, these are the two most important questions in supply planning. Although all inventory optimization works this way, specifically how stocking levels are controlled by service levels depends on the individual approach of each particular MEIO vendor.

Inventory optimization inventory system software can be further described by where in the supply network service levels can be set. I have come to call this either the “inventory service level specificity” or the “service level hierarchy.” This determines how the model is controlled and, therefore, it is important that companies understand what it is and how the control of level of service differs among MEIO vendors—that is, where the implementing company wants to set the service level must match where the selected software allows the service level to be set. To read more about this topic see the post at the link below.

Inventory optimization inventory system software is further modified by the following:

  • Its Specificity: That is where in the supply chain the service level can be set.
  • Its Automation: How much manual work is required to set the service levels.
  • Its Universality: Whether the inventory optimization can be used by one department, or by multiple departments within a company.

Relationship Between Service Level and Inventory Strategy

The relationship between inventory and service levels is non-linear; higher and higher service levels require disproportionate increases in inventory to support them. The closer service levels come to one hundred percent, the more extreme the costs become. This relationship is one of the best-documented relationships in supply-chain management.

service-level-versus-inventory-cost

This graphic has been seen at one time or another by most supply chain professionals, and it demonstrates the fact that companies must decide what levels of service they can afford and, most importantly, what levels of service their customers are willing to pay for. See this calculated for one’s own inventory is critical to setting the appropriate inventory strategy, as well as setting appropriate and reachable fill rate and level of service goals. 

toolsgroup-service-level-inventory-graphic

This is the same relationship with actual data in an inventory optimization application. This can allow inventory strategy to be set for a product location combination a group of product location combinations or for any grouping larger than that. This brings up the following question….

SLFMEIO

That is what is the appropriate level of service, where for what items. What is the best inventory strategy? For this one can use the mathematics of inventory optimization as a strategic tool as well as a tool for operations. 

The MEIO Inventory System Software Control Over Service Levels

One of the major differences between MEIO and MRP, DRP and APS systems for supply planning is that MEIO has very direct control over service levels. In all other supply planning methods, the only direct control over the level of service level is the dynamic safety stock calculation. This can only be calculated locally (at one particular product-location combination) and is only for a portion of the TSL. MEIO has the ability to move the entire planned system-wide inventory up or down, much like the water level in a shark tank, and can do so very precisely depending upon the level of service selected. This offers the supply planner unparalleled simulation capabilities, allowing him or her to tune the supply plan and to do so quickly.

Stages of Supply Chain Management

Supply chain management has had difficulty in pushing forward to using better techniques. This is called the stages of supply chain management. Stages of supply chain management is essentially maturity model for the use of a technique.

Stages of supply chain management apply to all the domains, demand planning, supply planning, production planning etc. Inventory optimization is currently one of the most advanced techniques that can be used, therefore it represents one of the most advanced stages of supply chain management. Inventory optimization only applies to the supply planning.

Conclusion

Inventory optimization inventory system software is effective for supply planning because it is customized for the most important business goal of many, although certainly not all, supply planning organizations: the minimization of inventory at any level of service. One of MEIO’s major features is the control it gives planners and organizations over the level of service level. Highlighting their flexibility, MEIO applications can also start from an inventory goal and work toward the level of service. MEIO software can demonstrate the relationship of every possible combination of the level of service level versus inventory investment and can recreate the relationship based on SKU level modeling. This capability replicates the inventory-to-service-levels graphic that is familiar to most supply chain

One of MEIO’s major features is the control it gives planners and organizations over the level of service level. Highlighting their flexibility, MEIO applications can also start from an inventory goal and work toward the level of service. MEIO software can demonstrate the relationship of every possible combination of the level of service level versus inventory investment and can recreate the relationship based on SKU level modeling. This capability replicates the inventory-to-service-levels graphic that is familiar to most supply chain professionals, and does so in a way that is very precisely based upon the company’s real data, making MEIO applications very powerful for simulation. In fact, several MEIO applications allow for simulation by planners and do not require any special set-up.

Inventory optimization and its accompanying technology multi ehelon planning are one of the most advanced stages of supply chain management.

Reference

I cover inventory optimization in depth in the following book.

MEIO Book

What is MEIO?

This book explains the emerging technology of inventory optimization and multi-echelon (MEIO) supply planning. The book takes a complex subject and effectively communicates what MEIO is about in plain English terms. This is the only book currently available that describes MEIO for practitioners, rather for mathematicians or academics.

The Interaction with Service Levels

The this book explains how inventory optimization allows the entire supply plan to be controlled with service levels, and how multi-echelon technology answers the question of where to locate inventory in the supply network.
This is the only book on inventory optimization and multi echelon planning which compares how different best of breed vendors apply MEIO technology to their products. It also explains why this technology is so important for supply planning and why companies should be actively investigating this method.
The book moves smoothly between concepts to screen shots and descriptions of how the screens are configured and used. This provides the reader with some of the most intriguing areas of functionality within a variety of applications.
Chapters
  • Chapter 1: Introduction
  • Chapter 2: Where Inventory Optimization and Multi-Echelon Planning
  • Fit within the Supply Chain Planning Footprint
  • Chapter 3: Inventory Optimization Explained
  • Chapter 4: Multi-Echelon Planning Explained
  • Chapter 5: How Inventory Optimization and Multi-Echelon Work
  • Together to Optimize the Supply Plan
  • Chapter 6: MEIO Versus Cost Optimization
  • Chapter 7: MEIO and Simulation
  • Chapter 8: MEIO and Service Level Agreements
  • Chapter 9: How MEIO is Different from APS and MRP/DRP
  • Chapter 10: Conclusion
  • References
  • Vendor Acknowledgements and Profiles
  • Author Profile
  • Abbreviations
  • Links in the Book
  • Appendix A: MEIO Visibility and Analytics
  • Appendix B: The History of Development of MEIO Versus MRP/DRP

SmartOps MIPO

What This Article Covers

  • What is MIPO?
  • The SmartOps Software Design
  • How SmartOps Rates on the Inventory Optimization Specificity.

SmartOps

SmartOps is a software company which makes several products, but the subject of this post will be their MIPO product (Multistage Inventory Planning and Optimization). SmartOps is one of the major vendors in this space, and currently gets the majority of the press, one for this reason for this being that they have very tightly tied themselves to SAP.

MIPO

MIPO is optimization and multi echelon simulation tool that is primarily concerned with setting safety stock and inventory targets. MIPO is a product location-based service level optimizer that provides some fast views into how metrics such as pipeline stock and safety stock changes with service level changes. It also has an alert system, which can be evaluated after each simulation run. Unlike some of the other solutions in this space MIPO does not perform forecasting, (although their DIM (Demand Intelligence Module) does, however, MIPO uses the forecast to calculate how products will be treated in supply planning. Thus MIPO requires the forecast from either the ERP system or planning system.

The SmartOps Software Design

After MIPO performs its calculations, SmartOps integrates to either the SAP execution or planning system by sending either parameter(s) that populate the material master in SAP ERP or actual safety stock values that populate the APO planning book. For companies that are not setting up service level agreements and which want a very simple and straightforward integration (as SmartOps only integrates master data and not transaction data to SAP) to either ERP or SAP) ERP, SmartOps would be a good choice. This is likely why SmartOps was selected by SAP as their partner for multi echelon and inventory optimization (MEIO).

How SmartOps Rates on the Inventory Optimization Specificity

The inventory optimization specificity is a term that I defined to describe the various levels at which service level can be set in inventory optimization software. The inventory optimization specificity determines how service levels are set in the inventory optimization software is, although it does not describe the quality of the mathematics of the optimization (either inventory or multi echelon). As is listed in the post below, setting service levels at the product location is how many companies and people think of performing inventory optimization.

Conclusion

MEIO vendors have different approaches, and SmartOps is one approach which focuses on parameter calculation. One of the most important factors to a successful MEIO implementation is matching the approach of the software to client needs. Along with IBM ILOG Inventory Analyst, SmartOps can be implemented quickly because they integrate at the master data level with the planning system or execution system. Neither Inventory Analyst or SmartOps MIPO would be appropriate for companies that want transaction recommendations (purchase order, stock transport order, sales order recommendations), or those that want to manage service level agreements (SLAs) and manage the service level at the customer. However, it would be very appropriate for companies looking for a fast return on investment and which want the tone of the most straightforward integrations to SAP.

References

I cover inventory optimization and multi echelon software in detail in the following book.

MEIO Book

What is MEIO?

This book explains the emerging technology of inventory optimization and multi-echelon (MEIO) supply planning. The book takes a complex subject and effectively communicates what MEIO is about in plain English terms. This is the only book currently available that describes MEIO for practitioners, rather for mathematicians or academics.

The Interaction with Service Levels

The this book explains how inventory optimization allows the entire supply plan to be controlled with service levels, and how multi-echelon technology answers the question of where to locate inventory in the supply network.
This is the only book on inventory optimization and multi echelon planning which compares how different best of breed vendors apply MEIO technology to their products. It also explains why this technology is so important for supply planning and why companies should be actively investigating this method.
The book moves smoothly between concepts to screen shots and descriptions of how the screens are configured and used. This provides the reader with some of the most intriguing areas of functionality within a variety of applications.
Chapters
  • Chapter 1: Introduction
  • Chapter 2: Where Inventory Optimization and Multi-Echelon Planning
  • Fit within the Supply Chain Planning Footprint
  • Chapter 3: Inventory Optimization Explained
  • Chapter 4: Multi-Echelon Planning Explained
  • Chapter 5: How Inventory Optimization and Multi-Echelon Work
  • Together to Optimize the Supply Plan
  • Chapter 6: MEIO Versus Cost Optimization
  • Chapter 7: MEIO and Simulation
  • Chapter 8: MEIO and Service Level Agreements
  • Chapter 9: How MEIO is Different from APS and MRP/DRP
  • Chapter 10: Conclusion
  • References
  • Vendor Acknowledgements and Profiles
  • Author Profile
  • Abbreviations
  • Links in the Book
  • Appendix A: MEIO Visibility and Analytics
  • Appendix B: The History of Development of MEIO Versus MRP/DRP

Inventory Optimization and Multi Echelon Planning + SLA = MCA / Servigistics

What This Article Covers

  • How to put two software requirements together in this area.
  • Understanding allocation software.
  • What is SLA enabled inventory optimization and multi-echelon planning (MEIO) and how does it work?

Note: Since this article was written MCA Solutions was acquired by Servigistics. More detail on this can be read at this post.

Putting Two Software Requirements Together

In the previous post I discussed how service level agreements (SLAs) work and how they are important concepts that are beginning to migrate from service companies to finished good companies. I also noted how they are a powerful way to control supply chain planning and that I have become convinced their proxy; which is service level planning is the most logical, most transparent and lowest effort way to perform planning that I have been exposed to.

I observed in my consulting that companies spend an extraordinary amount of time managing service levels it is amazing. These companies have no other service level control except for a dynamic safety stock calculation in their ERP system, but if you analyze their reports you can see report after report which essentially take different cuts at service level. Here we have a highly evaluated KPI which the higher ups have their bonuses tied to, but for which they only have relatively rudimentary methods of controlling.

Trying to manage a supply chain to a service level with MRP / DRP or an APS system, is a bit like trying to control a car with a loose steering where. Continual adjustment is necessary and the car generally moves all around the lane. This is where the vast majority of supply chains currently are.

The allocation task at many companies is not automatic, but still manual. In many cases there are times when supply chain directors and even VPs, that should be working on keeping operations running smoothly and on strategic decision making, are brought into discussions and asked to make decisions on which customer will receive an allocation.

To move away from this companies need two things in addition to the normal ERP system to process the orders:

  1. An SLA based multi echelon and inventory optimization software (MEIO for short)
  2. A method for managing allocations

Software which combines SLA and MEIO sets up the inventory in the right location to meet expected demand. Allocation then parcels out the inventory in conjunction (roughly speaking) with the service level objectives. This can prevent a lot of repetitive conversations from happening that typically revolve around how important a particular customer is. This argument often comes from the sales person who wants a limited amount of inventory allocated to their customer.

Without a service level agreement, it becomes difficult to quantitatively say that one customer should get inventory over another customer. Thus what often happens is that the biggest customer takes precedence. This is not necessarily the best decision for the company however, as smaller companies may be more profitable. However, with SLAs, and a method of planning and allocating to those agreements of those customers them a more rational decision can be made which is based upon the present service level vs. the SLA or agreed upon service level.

Allocation Software

Allocation software is well known at this time. SAP CTM is one example of this type of software. I have implemented SAP CTM on several occasions. It essentially creates a queue that allows higher priority customers to consume inventory before lower priority customers. In an SLA environment, the higher SLA customers, regardless of size, would be placed higher in the queue. However, without having effective supply chain planning, the allocation software has limited effectiveness because it only can allocate what is available. If the initial stocking position was not set sufficiently, then lower ranked customers will go without inventory. The less effective the initial planning, the less the allocation engine has to work with. Allocation implementations require a high degree of discipline because they mean systematizing decisions that are normally made by individuals. Allocation projects face challenges because while the buyers of software often say they want a systematic way of distributing inventory to customers, many other decision makers in the organization do not. In my experience allocation projects are marked by companies burning quite a lot of money in simply driving to agreement on elementary priority schemes that have a habit of becoming even more complex post go-live. I have a post on the common problems that face SAP CTM projects specifically, but it also applies to allocation projects in general.

SLA Enabled MEIO

MEIO is one classification of software. It is gradually coming onto the radar of companies and right now the implementation of this type of software is trailing the discussion of it. SLAs have been around for some time in the service area, but has recently moved into finished goods supply chain planning. However, MEIO is often left out of the SLA discussion even though it a key enabling technology.

Since they are different paradigms, the concepts need to be explained to planners, directors and to the VP level in companies that have not yet implemented this software. Furthermore, few consultants are capable of explaining the relationship, because they don’t understand it themselves.

MEIO software provides a higher level of accuracy than advanced planning software in terms of how it models the supply chain. However, for those used to the traditional methods of supply chain planning, MEIO changes some baseline assumptions, and it is these assumptions that should be understood before decision makers can understand the business value of MEIO beyond the hype and the financial benefits.

Obviously, this is an SLA requirement, and currently many MEIO software vendors do not have this capability. Several do, and the one with probably the most experience doing it is MCA Solutions because of their experience in the service market. If your company wants to combine SLA and MEIO to perform supply chain planning, MCA Solutions a very good choice that can easily meet the combined SLA and MEIO requirements.

Conclusion

SLA and MEIO naturally go together. The SLA is the contract and incentive system which provides agreed upon service levels per customer. In order to manage the supply chain in a way that reduces the overhead of manual intervention in allocation setting and rearward looking service level reports, MEIO software combined with allocation software is necessary. A company which is successful in implementing this design has gone a long way towards automating its supply chain planning. The best known allocation software that I know of is SAP CTM, while the best SLA enabled MEIO software that I am aware of is MCA Solutions and their SPO product.

 

Considering ILOG Inventory Optimization and Multi Echelon

What This Article Covers

  • What is ILOG?
  • How do the Products that IBM Acquired Work, and How are they Different from other Inventory Optimization and Multi Echelon Planning Offerings?
  • What is the Problem with the ILOG Acquisition by IBM?

What Is ILOG?

IBM ILOG, formerly just ILOG, which includes the merged LogicTools which ILOG purchased in 2007, is a company that provides advanced supply chain software.

ILOG was created in 2007 and is a major supplier of software products in three areas: optimization, visualization, and business rules. The optimization products are ILOG CPLEX for LP (Linear Programming), and MIP (Mixed Integer Programming) and ILOG Solver for constraint programming. – Real Optimization with SAP APO

They also offer products in the areas of network design to inventory optimization. The inventory optimization and multi echelon product are called IBM ILOG Inventory Analyst.

How Does Inventory Analyst Work?

ILOG Inventory Analyst is according to IBM material, the only product they have that does both strategic and tactical planning. However, like SmartOps, it does not create transaction recommendations (i.e. purchase requisitions, stock transport requisitions). After evaluating Inventory Analyst, it sounds as if it has a duplicate footprint to the SmartOps inventory optimization product called MIPO.

What is the Scope of Inventory Analyst?

A quotation from IBM collateral gives one pause. The quote is the following:

Training and implementation can be completed in seven to 10 business days, with a total project timeline of around 60 days. Companies report operational improvement within90 days. – IBM

This brings up the question of what this solution is. No planning system that I am aware of can be implemented in two weeks, so Inventory Analyst may not be a planning system at all, but a parameter and safety stock calculator. This approach can add value, however, in the view of this author, taking this approach creates a smaller footprint for the inventory optimization and multi echelon functionality than should exist. Inventory optimization and multi echelon should not be an offline adjunct to the planning system, updating its parameters, but rather should be deeply integrated and central to it.

Is Being Acquired by IBM Good for Software?

The problem is that these large companies like IBM are very bureaucratic, so being acquired by them can be like being acquired by the Department of Motor Vehicles. Endless meetings and bureaucracy, as well as obligatory rah rah session, tend to suck the life out of creative types who often move off to less structured pastures. This is one reason why so little innovation is generated by large companies, despite all the hype to the contrary.

Thus the main point of acquiring software is to pitch it to IBM’s current client base, so it’s a financial consideration over a product solution. However, this brings up a separate issue…

Conflicts of Interest

How objective can IBM be when it is comparing ILOG vs. SmartOps? IBM is paid by companies to perform vendor evaluations and recommendations, which is already bad enough with its extensive involvement with SAP, which is a company they do not own. However, this has an added dimension of bias when they are pitching software that they do own. For instance, would it be wise to hire Oracle to perform an evaluation as to whether to install Oracle or a competitor? Even if Larry Ellison sent you a letter promising to be unbiased?Gartner, not known for calling out conflicts of interests even brought up the following:

This provides a logical “home” for SCM solutions focused on process innovation, although it does bring into question the independence of IBM consulting when it will likely be intended, in some fashion, toward using IBM SCM tools to help clients manage their supply chains. – Gartner

Reference Accounts for Optimization

I wrote this article to possibly evaluate the Inventory Analyst for a possible project. I had heard of ILOG previously (and even used to drive past their Palo Alto office for several years). However, I had been unaware that they had an inventory optimization project (note I am saying inventory optimization, not cost-based optimization for which they are well-known). After researching, I found that ILOG’s most popular tool historically had been their network design tools and their CPLEX generalized optimizer. (the user manual for which is available at this link.) CPLEX is used to teach optimization at universities around the world. As for inventory optimization, it does not appear that ILOG has many reference accounts in stock optimization. This is not to say the solution should be discounted out of hand, but that the added risk needs to be considered and taken into account by the purchasing company.

What is ILOG’s Sweet Spot?

This blog is to at least some degree being able to differentiate the various MEIO software. This can allow customers to make more informed decisions. In that vein, I found this quote from Gartner interesting…

The center of gravity, however, is focused on SCM process innovation, so users should be aware of this. The result means that IBM is not targeting the broad, wider market where SCM packaged applications reside (where LogicTools had primarily focused in the past), but is better oriented where configuration, and even customization, are sought.

Inventory Analyst

Inventory Analyst seems like a possible solution for clients looking for an offline parameter calculator and simulation engine. I do not consider it a planning engine because it does not make recommendations that are sent to the ERP system, but rather interact with either the advanced planning or ERP system by overwriting master data.

Gartner’s View

As a general point, while Gartner stated that they found the rationalization between previous IBM products like DIOS and the new ILOG products now under IBM’s umbrella to be rational, I really didn’t. (Let’s just say Gartner gets a check from IBM ever year to see things IBM’s way, which explains why they are so inaccurate when predicting the future of the products from the large vendors, which is described in this post.) Getting back to ILOG, It seems that there is significant overlap between different products and that the purchase had more to do with buying a customer base rather than any inherent product logic for the acquisition.

IBM Product Mishmash

Clearly, several of the product need to be merged into fewer products and the marketing literature needs to be cleaned up with this pruning process. These are fundamental questions of product management — “who is doing what?”, “what are the demarcations between the solutions?” and so on. It is likely that this process is underway. However, how long can IBM continue to develop ILOG within IBM? Many of the developers never wanted to work for a large bureaucracy, and after a year, many are already probably chafing at the yoke. While Gartner is optimistic about how much money IBM is paying them to write articles about their products, it is not axiomatic that these products will continue to be developed with the type of concentration that they have been in the past.

Conclusion

IBM seems to have a lightweight solution, however, unless IBM is already the implementation partner on the account, it would be difficult for me to recommend IBM’s Inventory Analyst because the product comes with all the IBM baggage, which will mean being slowly extracted from by IBM’s consulting division. IBM simply can not play well with other consulting companies or independent contractors, and often even their clients. And they are a bad vendor to have in your building. The purchase of ILOG has simply made the situation worse and even less trustworthy than they were before. All of these things makes ILOG a solution that I would not recommend to clients. There are many excellent alternatives from higher quality vendors available.

References

“Real Optimization with SAP APO,” Josef Kallrath, Thomas I. Maindl, Springer Press, 2006

I cover inventory optimization and mult echelon software in depth in the following book.

MEIO Book

What is MEIO?

This book explains the emerging technology of inventory optimization and multi-echelon (MEIO) supply planning. The book takes a complex subject and effectively communicates what MEIO is about in plain English terms. This is the only book currently available that describes MEIO for practitioners, rather for mathematicians or academics.

The Interaction with Service Levels

The this book explains how inventory optimization allows the entire supply plan to be controlled with service levels, and how multi-echelon technology answers the question of where to locate inventory in the supply network.
This is the only book on inventory optimization and multi echelon planning which compares how different best of breed vendors apply MEIO technology to their products. It also explains why this technology is so important for supply planning and why companies should be actively investigating this method.
The book moves smoothly between concepts to screen shots and descriptions of how the screens are configured and used. This provides the reader with some of the most intriguing areas of functionality within a variety of applications.
Chapters
  • Chapter 1: Introduction
  • Chapter 2: Where Inventory Optimization and Multi-Echelon Planning
  • Fit within the Supply Chain Planning Footprint
  • Chapter 3: Inventory Optimization Explained
  • Chapter 4: Multi-Echelon Planning Explained
  • Chapter 5: How Inventory Optimization and Multi-Echelon Work
  • Together to Optimize the Supply Plan
  • Chapter 6: MEIO Versus Cost Optimization
  • Chapter 7: MEIO and Simulation
  • Chapter 8: MEIO and Service Level Agreements
  • Chapter 9: How MEIO is Different from APS and MRP/DRP
  • Chapter 10: Conclusion
  • References
  • Vendor Acknowledgements and Profiles
  • Author Profile
  • Abbreviations
  • Links in the Book
  • Appendix A: MEIO Visibility and Analytics
  • Appendix B: The History of Development of MEIO Versus MRP/DRP

How to Better Understand Effective Lead Time

What This Article Covers

  • What is Effective Lead Time?
  • How is Effective Lead Time Different From “Normal” Lead Time?
  • What is the Similarity to the Delivery Lead Time or Order Lead Time?
  • Why is Effective Lead Time Central to Multi Echelon Planning and the Key to Understanding the Topic?


Introduction

Interestingly, the term “effective lead time“ is both rare and very important to understanding multi echelon planning. See this post on multi echelon planning after you have read this for a primer. 

Effective lead-time is not an intuitive concept, as I can relay from my experience explaining the concept to a number of people. I was exposed to the concept of effective lead-time for the first time through MCA Solutions’ manuals, and I certainly did not understand effective lead-time the first time I was exposed to it. Since then, I have written several articles at SCM Focus positioning effective lead-time as the foundational concept of multi-echelon planning. No other supply planning method (MRP/DRP, heuristic, allocation, or cost optimization) has this concept or capability and as such, none are as efficient at locating inventory as MEIO applications.

Effective Lead Time Versus The “Normal” Lead Time Concept

Effective lead-time is not the standard static lead-time between two locations that is brought in through the master data (which is how most supply chain professionals are trained to understand lead-times), but instead it is a calculated value. Unlike standard lead times, effective lead-times are situational. It is the lead-time required in the particular circumstance or scenario in question. With multi-echelon software, the lead-times between the DC and RDC change depending upon the stocking quantity and the service level at the RDC. Software that lacks multi-echelon capability keeps the same static lead time regardless of the inventory held at the RDC.

Flexible Calculation

Effective lead-time—the concept that stocking positions are determined and affected by connected locations and the ability to model this in the decision making — is why this functionality is more accurate in determining where inventory should be stocked than the other methods of supply planning.

Effective lead-time variable calculation of the delivery lead time or order lead time based upon the flexible calculation of of things like the procurement lead time, production lead time. is the total lead-time required to deliver the product to its final destination.

  • It is variable and dependent upon the stocking positions of higher echelons in the supply network.
  • This is a conditional concept of lead time and can be considered the delivery lead time or order lead time in reality. That is it is the delivery lead time or order lead time based on the circumstance of the order.

This concept is entirely foreign to the normal usage of the term lead time, which is static and hard-coded into a system. The concept presented before effective lead time is that the total lead time is some fixed value. But if we look at the order lead time or delivery lead time of a particular order, we can see that the lead time or effective lead time changes depending upon whether and where stock is in the supply network at the time the order is placed.

In the excellent paper by Cohen, Agrawal, and Agrawal on effective asset deployment, this is described.

Similarly, investing in additional safety stock at a central depot reduces the effective lead-time for replenishment at the “child” locations connected to it. This lead-time reduction will, in turn, affect the stocking requirements at the child locations. Alternatively, such decisions are often constrained by the budgets allocated to the service organization. Consequently, if a particular asset is assigned to a specific location, it affects what can be assigned to other locations. Thus, the service levels that can be offered to customers at various locations are affected by these decisions, and are, therefore, interrelated; a high level of service to one customer may imply a lower level of service to another. – Achieving Breakthrough Service Delivery Through Dynamic Asset Deployment Strategies, Cohen, Agrawal and Agrawal 2004

Definition of Effective Lead Time

Different demand levels, lead to different circumstances and different needs to move to a higher echelon in the supply network.

  • The most important thing to consider is that while lead times between locations do not change (in the short term) effective lead times do change.
  • For software to be considered multi echelon, it must have the ability to reflect the changes in effective lead time in its planning. This, combined with inventory optimization, is what allows the software to properly
  • This, coupled with inventory optimization, is what allows the software to properly position, inventory to the right location, and in the right quantity based upon the demand, the current stocking position and the service level.

It can also be described graphically which can allow the reader to more intuitively understand what effective lead time is.

Other Users of the Term Effective Lead Time

Another use of the term is when a company needs to determine if it has the raw materials/components/packaging material to make an order quantity.

  • If a company can produce the sales order quantity from the available stock of all input materials, then the effective lead time is the production lead time.
  • If the order quantity exceeds this, the effective lead time must include the procurement lead time.

That is the production lead time and procurement lead time’s implication into the effective lead time is conditional based upon the stock position in the network.

Obviously being able to calculate the delivery lead time or order lead time while conditionally including the production lead time or procurement lead time is a very sophisticated mathematical feat.

Conclusion

Two of the rules of what makes software multi echelon are the ability to manage effective lead time.

  1. Effective Lead-time: Users must have the ability to compare the stocking position at different locations by calculating effective lead-times.
  2. Account for All Lead-time Variations:

Effective lead time requires software to be properly employed and calculated. However, even as a concept it is important to understanding how supply networks operate.

References

I cover effective lead time in depth in the following book.

What is MEIO?

This book explains the emerging technology of inventory optimization and multi-echelon (MEIO) supply planning. The book takes a complex subject and effectively communicates what MEIO is about in plain English terms. This is the only book currently available that describes MEIO for practitioners, rather for mathematicians or academics.

The Interaction with Service Levels

The this book explains how inventory optimization allows the entire supply plan to be controlled with service levels, and how multi-echelon technology answers the question of where to locate inventory in the supply network.
This is the only book on inventory optimization and multi echelon planning which compares how different best of breed vendors apply MEIO technology to their products. It also explains why this technology is so important for supply planning and why companies should be actively investigating this method.
The book moves smoothly between concepts to screen shots and descriptions of how the screens are configured and used. This provides the reader with some of the most intriguing areas of functionality within a variety of applications.
Chapters
  • Chapter 1: Introduction
  • Chapter 2: Where Inventory Optimization and Multi-Echelon Planning
  • Fit within the Supply Chain Planning Footprint
  • Chapter 3: Inventory Optimization Explained
  • Chapter 4: Multi-Echelon Planning Explained
  • Chapter 5: How Inventory Optimization and Multi-Echelon Work
  • Together to Optimize the Supply Plan
  • Chapter 6: MEIO Versus Cost Optimization
  • Chapter 7: MEIO and Simulation
  • Chapter 8: MEIO and Service Level Agreements
  • Chapter 9: How MEIO is Different from APS and MRP/DRP
  • Chapter 10: Conclusion
  • References
  • Vendor Acknowledgements and Profiles
  • Author Profile
  • Abbreviations
  • Links in the Book
  • Appendix A: MEIO Visibility and Analytics
  • Appendix B: The History of Development of MEIO Versus MRP/DRP

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