Supply chain complexity has increased dramatically in the past decade. As today’s consumers expect more personalized goods and product diversity rises, manufacturers are feeling the effects. Product proliferation has led to greater demand volatility and an industry shift as manufacturers see more of their revenue coming from a wider range of slower moving products. Old inventory management strategies, such as gut instinct approximations and a one-size-fits-all approach to demand planning, fail to address these challenges of the modern manufacturing supply chain. Let’s look at the three primary pains manufacturers face today.
The long tail: Intermittent demand and “unforecastable” SKUs
Historically, manufacturers have been well equipped to deal with the normal demand patterns associated with fast-moving goods. However, increased long tail demand has left manufacturers struggling to adjust.
At first, long tail demand was primarily a problem for aftermarket parts distributors and massive online retailers. However, recent manufacturing trends have made the long tail a reality across the entire manufacturing industry. Product proliferation has led to increased replenishment frequency, as there are more and more unique goods and parts with smaller production runs. With this shift, manufacturers face the challenge of forecasting demand that is “intermittent” or “lumpy” without the smoothing effect of demand patterns associated with fast-moving goods. Most organizations are unable to accurately forecast demand for these SKUs (stock keeping units) and are struggling to efficiently and effectively manage long tail products, harming service levels and wasting resources. But that’s not the only effect of an ever-increasing SKU count.
Managing an exploding number of SKU-Locations
Product proliferation has also caused the supply chain to see more SKU-Location (SKU-L) combinations. Multiplying increased components and finished goods across geographic locations with independent inventory stocking levels adds exponentially to supply chain complexity.
To manage an increasing number of SKU-Ls, companies often use a segmentation strategy that groups SKU-Ls into arbitrary ABC segments and assigns all products the same target service level. This approach often creates poor recommendations, failing to account for logical differences in consumer or product behavior, such as highly profitable product lines or mission critical items calling for higher service levels. Product proliferation has not only led to major challenges forecasting demand and managing a multitude of SKU-Location combinations, it has also caused manufacturers to make huge mistakes.
Overreactive response to volatile demand
Under pressure and unsure how to manage an increasingly complex supply chain, many manufacturers reactively increase inventory levels to provide an inventory buffer from unpredictable customer demand. However, simply adding new inventory without fully understanding what is driving demand is generally counterproductive. Manufacturers may find themselves faced with cost overruns or excessive inventory if careful planning hasn’t taken place.1
This is exacerbated by the bullwhip effect—a slight increase in demand at the point of sale is distorted as the indication of demand moves up the supply chain, yielding highly inaccurate forecasts and an over-production of goods. The bullwhip effect can create particular distortion in the long tail, due to most manufacturers’ inability to effectively predict demand for slow-moving products. For example, customers might see a celebrity praising a product and rush to buy it from their local store. The store might conclude that the 35% spike in sales is indicative of a bigger trend, and order 70% more from their warehouse supplier. Seeing a sharp uptick in orders, the factory then increases their production by 140%. Unfortunately for every echelon of the supply chain, the demand is artificially inflated and the factory, warehouse, and store all end up with expensive, excess inventory.
Address the pains of modern inventory management with a transformative solution
Today’s supply chain presents manufacturers with many complex challenges. To succeed, manufacturers need a modern inventory optimization solution that empowers them to manage long tail demand and an exploding number of SKU-Location combinations without adding excessive inventory and wasting resources.
ToolsGroup Multi-Echelon Inventory Optimization, Built on Microsoft technology, enables modern manufacturers to overcome the challenges created by today’s complex supply chain, maximizing service levels while minimizing costs. ToolsGroup leverages proprietary algorithms to optimize inventory and customer service levels even for slow moving items in the long tail. Additionally, the solution enables manufacturers to easily manages countless SKU-Location combinations with unique service level targets for each individual SKU-L, maximizing inventory efficiency. Finally, the solution addresses the bullwhip effect by optimizing complex supply chains intelligently and effectively, using advanced analytics to handle inventory across multiple distribution and manufacturing echelons.
With ToolsGroup Multi-Echelon Inventory Optimization, manufacturers can easily overcome the pains of modern supply chain planning, increasing service levels while simultaneously decreasing costs. Learn more about ToolsGroup Multi-Echelon Inventory Optimization and try the solution for yourself today on Microsoft AppSource.