Enhancing Supply Chain Network Design with Sophisticated Inventory Optimization

By Chris Keller | Principal, Supply Chain Design | Chainalytics |

The complexity involved in simultaneously optimizing a supply chain network and the inventory within that network has traditionally proven to be a sufficient barrier to completing such exercises. With improvements in tools and methodologies, this no longer need be the case and under certain conditions the benefits can more than justify the commitment in time and resources.

Most of us in the supply chain field are familiar with traditional approaches to modeling inventory in supply chain network optimization exercises. These approaches (square root law, power curves, turns analyses, etc):

  • Are often justifiable, but are underpinned by potentially limiting assumptions including that a company’s turns or target fill-rate will be held constant
  • Approximate how inventory will react in response to a change in the number of stocking locations and help isolate and identify cost and service changes  generated directly by changes to the network configuration

In many cases there are good reasons to use traditional approaches: They provide reasonable, defensible estimates of working capital and warehouse space requirements, are straight-forward to model, often represent the right trade-off of effort and value generation

But what if your company is considering a more fundamental challenge to the status quo, including potential changes to your supply chain that could materially impact working capital and space requirements? For example, you may want to:

  • Reshape or refine your supply chain fulfillment model
  • Consider moving from a multi to single echelon network (or vice versa)
  • Reevaluate on-shelf product availability
  • Build an e-commerce solution that offers guaranteed service response times
  • Understand what a redesigned network and inventory position look like to challenge traditional thinking around what is ‘fixed’ and what is ‘up for grabs’

In such cases, the traditional approach to supply chain network design may not go far enough to consider the breadth of operational and financial implications. At Chainalytics, we have developed a solution that combines supply chain network optimization with multi-echelon inventory optimization at SKU and location level.

Combining these two competencies can be difficult for a few key reasons:

  • Increased Complexity The process of combining the two optimization exercises requires an iterative approach, which brings with it a degree of complexity that doesn’t exist when separate optimizations are conducted.
  • Lack of Enabling Tools There simply hasn’t been a leading optimization platform that optimized both supply chain networks and inventory simultaneously. This has meant one model for the supply chain network design and another for inventory optimization.
  • Lack of Required Skill Mix Most practitioners specialize in either supply chain network optimization or inventory optimization. Rarely will an individual with deep expertise bridge both competencies. This can make it difficult to combine two distinct work streams into a holistic and integrated solution.

Applying our methodology, we have helped many clients achieve significant organizational objectives, including:

  • Re-aligning the supply chain network and inventory planning with the mission of the business
  • Achieving the service promise (in terms of product availability and fulfilment lead times) with lowest possible working capital
  • Reducing operating expense through efficient product flows, less expediting, and “right-sizing” facilities based on a rigorous assessment of storage requirements
  • Providing a SKU-level inventory deployment strategy for the go-forward supply chain, achieving desired service outcomes and simplifying benefit realization

So while it is complex, it is definitely achievable and well worth it in situations where “getting inventory right” is critical. We’re firm believers that the role of good supply chain network design really is about helping you move your firm move beyond operating silos, constraints, skill gaps and questionable information toward rigorously tested, practical solutions that can actually be planned for and realized!

Chris Keller, a Principal in Chainalytics Supply Chain Design competency, specializes in developing and implementing innovative supply chain solutions and transformations that fundamentally reshape Chainalytics’ clients’ businesses and service outcomes. His background includes delivering strategy development, supply chain design and optimization, inventory optimisation, procurement and contract management, operations management, project management and cost-to-serve analysis.

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