Why IBP is Critical to Inventory Optimisation

  • 4 July 2016
  • Number of views: 6915

Integrated Business Planning requires Executive-level endorsement and approval in order to achieve cross-functional collaboration on a cyclical basis.

Monthly/Quarterly IBP Cycle

Inventory Management is an essential pre-cursor to Integrated Business Planning, focused on reducing risk and cost.

  • Standard MRP logic identifies required materials based on forecasted demand, bill of materials, and current inventory levels
  • Mis-matching of lot-sizes along the supply chain inflates demand
  • Economic Order Quantity (EOQ) is still a widely used measure particularly by ERP system designers, but it has significant limitations
    • Devised in early 1900 but still embedded in ERPs
    • Insensitive to changes in quantity
  • Inventory to achieve “safety stock” is therefore an uncomfortable necessity in most supply chains
    • The carrying cost of inventory is a function of many variables
    • Service level and inventory management parameters must reflect the differences of products/margins across the range of SKUs being addressed
    • Out-of-stocks lead to lost sales, which can quickly be significant
  • There are at least seven ways to optimise inventory below conventional safety stock levels, which all contribute to an Integrated Business Planning process
    • Postpone replenishment orders
    • Segment and prioritise customer order management
    • Complexity reduction (finished goods, WIP, customers, order points, stocking points etc)
    • Network optimization
    • Demand forecast accuracy (throughout the supply chain)
    • Reducing production and delivery leadtimes through localisation/VMI
    • Out-sourcing non-core activities (e.g. spare parts deliveries)

Effective inventory management drives uncertainty out of supply chains; a joined-up approach delivers this most effectively.

If you can get inventory management right, uncertainty and therefore safety stock is significantly reduced along the supply chain

  1. Reduce stock requirements by applying core supply chain principles (e.g. postponing orders)
  2. Compress lead times
  3. Reduce complexity in the supply chain (e.g.disintermediate)
  4. Challenge “sacred cows” e.g. lot sizes, EOQs etc
  5. Then address the root cause of uncertainty in demand and supply through IBP

Four key principles for Integrated Business Planning make this is likely to be achieved

  • Join up both ends of the supply chain (customer demand with supply availability) through a robust, cross-functional forecast management model)
  • Build the discipline throughout the business (sales, marketing, finance, logistics, product and manufacturing)
  • Critically, ensure IBP is C-suite sponsored
  • Pilot, test, deploy, refine, redeploy

To find out how WBS can assist your inventory optimisation in your organisation simply contact us for an initial FREE no obligation consultation.

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