We believe that inventory is the final arbiter of supply chain performance. To get it right takes more than just good clean data and using the proper calculations for Demand Planning, Inventory Sizing, and Manufacturing Planning. It requires well conceived business policies and the people part of the process.
The DemandCaster review is only the first part of our Activity Analysis. When the DemandCaster part of the analysis is complete we review the following people dominant processes:
- SKU management: How is the number of finished goods determined and managed? How are products born? How are they phased out? Is there any set review of the product portfolio? If these questions are hard to answer and if the answer to the last question is “no.” There will be room for improvement and there will be excess inventory due to the complexity of the portfolio.
- This part of the Activity Analysis must be done with Finance and Marketing. Finance is needed to determine the profitability of the various SKUs. Marketing is involved to determine what the profitability threshold should be to decide which products in a specific category to keep and which might be candidates for discontinuation.
- Artificial Sales Peaking: This is an issue we have written about before at DemandCaster. If the monthly or quarterly peaking is significant, it can dominate the planning. If such peaking occurs, it is usually dominated by SKUs and perhaps promotions. This, of course, needs to be verified. Activity Analysis of Artificial Sales Peaking is critical to developing protocols and strategies for sound and viable inventory management.
- Looking at peaking and SKU classifications are not enough. Manufacturing capacities and run rates must also be evaluated. High period end peaking could be too much for make-to-order systems (the kind we all want to operate) to keep up. This part of the Activity Analysis could easily determine how much of a given period, be it month or quarter, needs to be run in a make-to-stock mode.
- Promotion Management: Are promotions a significant part of the business? If so, part of the Activity Analysis must focus on promotions both in terms of planning and execution. How effective is the planning of the promotion? Were the SKUs to support the promotion or offer availability in the right quantities in the right DCs at the right time? How effective was the sell through? These numbers need to be available for each promotion so the data can be sliced and diced by product line and the various types of promotions from volume discounts like BOGO style deals to specialty packaging.
- In the case of specialty packaging, which is exclusive truly to consumer packaged goods, the question of selling out the promotion is key. If these promotions do not sell out, the remaining stock can easily become Excess & Obsolete.
- Again Finance should be involved to help evaluate the effectiveness of each promotion in terms of both sales generation or lift and ultimately the profitability. These numbers are not often easy to capture even with some of the best ERP systems.
- Demand Planning: The people part of Demand Planning is simply when people think they are smarter than statistical forecasting. The risk is to impose managerial will, desires, and wishes into the process and overriding the results of the statistical model. There are certainly occasions where this is called for (e.g. there are extraneous factors in the marketplace such as natural disasters, material shortages, and abrupt economic events). In lieu of these random shocks, the hardest thing for smart driven managers and executives to do is… nothing. Let the system do what it was designed to do. This is very difficult to do.
The above processes where “the people part” is significant are often the hardest processes to analyze and evaluate. This makes them the hardest processes to manage and improve.
