Article

Inventory management trends focus on improved forecasting

David Essex

Let's assume your inventory automation strategy is well past the 90s -- that's the Eighteen 90s -- and you have long been tracking and planning inventory in your ERP system or via a specialized piece of inventory planning software. You might even have made the leap to demand planning and, better still, linked the two sides to bring supply into sync with the real demand for your product.

What's next in terms of inventory planning? 

According to analysts who cover the inventory management market, users can expect several technology options that will be able to improve forecasting by analyzing the information that goes into them, whether it comes from a point-of-sale (POS) system's overnight data dump or the mind of George in sales.

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Demand planning a key component of inventory management

Although today's inventory management trends are focused on improving inventory forecasts by attacking the demand side, some companies that already have deployed inventory management and planning software will add a multi-echelon inventory optimization tool to determine the best inventory levels and locations. This type of software can provide a quick return on investment by helping to reduce inventories and manufacturing costs.

But inventory optimization goes only so far, according to analysts, and further gains in inventory management will require a comprehensive demand planning strategy. In an October 2008 article, Inventory Optimization Market Outlook: Challenging Times Ahead, Noha Tohamy, vice president of supply chain research at AMR Research, listed four factors that could limit the usefulness and potential growth of inventory optimization:

  1. transportation costs
  2. demand variability
  3. cultural resistance
  4. a shortage of analytical skills

Indeed, innovation is shifting away from planning based on historical sales and shipment data and toward real-time analysis and visibility. Demand "sensing" is what everybody wants.

"Point-of-sale is probably one of the leading indicators in demand sensing," said Ron Burnette, product director at Logility, which sells the Voyager supply chain suite. Burnette said that one Logility customer achieves 85% forecast accuracy through demand sensing. He cited another customer that had had limited success using shipment data in its forecasts and tried using orders -- with the same result. When the company finally turned to POS data, it found that a weekly snapshot was more accurate than monthly figures.

Inventory management software vendors are introducing demand planning modules for analyzing special situations, such as product promotions and launches. In an April 2009 article, Four Demand-Planning Technologies Worth a Look, Lora Cecere, vice president of value chain services at AMR, wrote that Logility's new Voyager Fashion Forecasting and New Product Introductions modules are already helping companies reduce forecast errors by allowing employees to collaboratively review photos of a new product and generate a consensus on the likely demand.

Sales and operations planning brings analytics together

For many companies, the next step is to bring everything under the umbrella of a sales and operations planning (S&OP) process. S&OP extends the purview of demand planning and analysis to inventory and, most importantly, to the supply chain personnel and systems that manufacture and distribute it.

But S&OP ought to be the first step, experts say, because the technology won't work well unless you master your underlying business processes.

That was the experience of Michael Burke, director of supply chain planning at Continental Mills, a Seattle food company known for its Ghirardelli and Krusteaz baking mix brands. Continental Mills instituted a formal S&OP process in 2006, a year before installing Logility's Voyager Demand Planning, Inventory Planning and Supply Planning modules.

"A lot of the benefit that an S&OP process provides is having some kind of discipline in your work process," Burke said. "That discipline needs to exist before you put in a software product that's designed to optimize it."

Burke nonetheless wishes that Continental Mills had spent more time learning the software and understanding its impact on business processes, including those managed by the company's warehouse management system (WMS) and Oracle JD Edwards EnterpriseOne ERP system. Still, Continental improved inventory turns by 20% in one year and is a hair short of its goal of a 99.5% case-fill rate (cases ordered vs. cases shipped). Next phase: using Logility's Web components to put Voyager in salespeople's hands and standardize the interface that everyone sees.

Vendor managed inventory regaining popularity

S&OP, in fact, goes back to the late 1970s, Burnette said. "All these things that are old are becoming new again," he said, citing vendor managed inventory (VMI) as another newly popular technique. In the VMI process, the vendor assumes responsibility for managing the replenishment of stock. Rather than a customer submitting orders, the vendor will replenish stock as needed.

Cecere also predicts a VMI renaissance, based on what she's seeing in products from Terra Technology, John Galt Solutions (vendor of ForecastX Wizard and Atlas Planning Suite inventory management packages), One Network (whose SaaS inventory management solution provides real-time inventory visibility and management across stores, data centers and plants), and Retail Solutions Inc. (formerly known as T3Ci), a vendor of SaaS solutions that turn retailer data such as POS, supply chain, merchandiser feedback and EPC data into actionable visibility into the store and onto the shelf.

"Where everyone's moving is to more of an executive S&OP process and business intelligence," said Mark Humphlett, director of supply chain global solutions marketing at Infor, a vendor of ERP and demand-planning software. Humphlett said Infor will next year release software that will run a comprehensive S&OP process like one recommended by Tohamy that includes what-if scenarios and risk analysis.

While vendors such as SteelWedge Software and Right90 sell standalone S&OP software, including on-demand versions, Tohamy expressed a preference for integrated tools, saying the offerings from i2 Technologies, Logility and JDA Software Group's Manugistics are particularly strong. "Probably nine times out of 10, the organization wants sales and operations planning to be an extension of an existing solution," she said. "You want one tool that's going to be able to speak every group's language." 

Where everyone's moving is to more of an executive S&OP process and business intelligence.

Mark Humphlett
director of supply chain global solutions marketing

Infor

Companies are increasingly feeding S&OP data into business-intelligence software from the likes of SAS and IBM's Cognos, these observers said. Modeling and simulation are also becoming more common, according to Humphlett, as is the use of business analytics and real-time event management in S&OP.

In her report, Cecere said business analytics tools can be effective add-ons to demand-planning "engines," which need periodic tune-ups. She said AMR Research was tracking five companies that had added demand-driven forecasting software from SAS in an effort to reduce bias and error in their consensus forecasts, some of it caused by managerial overrides. In addition, Terra Technology's Multi-Enterprise Demand Sensing (MDS) product uses pattern recognition to determine which inputs -- orders, for example, or warehouse inventories -- are the best predictors of demand. After running several pilots, Procter & Gamble said it expected better than 50% improvement in accuracy from using MDS, according to Cecere.

Demand planning is also swept along in broader movements in IT and supply chain technology. Cloud computing could bolster an ongoing trend of offering demand planning software as a service, and in modular form, which can appeal to companies that want to roll out S&OP and its demand and inventory components gradually. But demand planning inherently involves corporate secrets, so some companies might not be comfortable running it outside their networks.

Radio frequency identification (RFID) technology is likely to become an increasing source of demand data, Burnette said, as social networking sites such as Facebook get more adept at sensing what members want to buy.

Such advances, he said, could lead to the day when video ads in storefront windows will change to suit the interests of passersby -- a vision seen only in a recent movie. Now that's demand visibility.

About the author: Freelancer David Essex has covered information technology for BYTE, Computerworld, PC World, and numerous other publications and websites.


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