Segmentation and targeted inventory policy are the secret sauce of inventory risk management

“Don’t put all your eggs in one basket” is the golden mantra for risk management, and the same can be said for the management of customer service fulfillment risk. In pursuit of this goal, the planner community needs a powerful tool that incorporates stochastic modeling to suggest an optimized positioning of strategic inventory (safety stock) to achieve the business objectives best.

However, this aspiration may be hard to come by if a business organization applies the ‘same size fits all’ approach. Several factors make different parts of a supply chain – the products that the business is selling – behave differently. Inherent product characteristics, target audience (buyers), market dynamics, industry thumb rules, customer behavior, production process, suppliers’ commitment, and so on can all affect inventory. A crucial step for the Inventory Planner is to identify such differentiating criteria and classify the products in groups or segments. The business objectives – or customer service level – can then be targeted differently and appropriately for these segments to optimize overall achievement.

Other than the business objective (customer service level), there may be specific other operational considerations that can necessitate some ‘outlier’ products to be segregated and treated differently from their counterparts. These may include but are not limited to products encountering widely different variability (MAPE) or products that do not lend themselves to the standard statistical safety stock calculation process and need distinct types of error distribution (Poisson / binomial) etc.
 

 

Oracle IO: Considering the entire supply chain holistically

ABC Classification is the bread-and-butter approach for item segmentation in the industry. Many commercially available systems provide the means to run the process systemically. This can give a good starting point. The Policy Planning Framework (provided under Oracle Inventory Optimization) can incorporate further criteria to drive the segmentation process. The resulting segmentation scheme can be used in Inventory Optimization to drive policy-based planning (where inventory levels are set based on predefined policies). With some customization, it could be possible to include this segmentation scheme in traditional IO plans, deriving the safety stocks statistically.

A critical aspect of the product segmentation would be to arrive at a mutually exclusive (and preferably exhaustive) set of segments; however, this is easier said than done. While the finished products (typically what is being sold to the customer) can be grouped into mutually exclusive segments, their supply chains, end-end-end, are likely to be much more interdependent due to common subassembly purchased items that go into building the sellable finished products. There can be common resources used to produce these products from across segments too. The ingenuity of IO is in its ability and approach to considering the entire supply chain holistically. This holistic view prevents bull-whip effect and thus determines the optimized inventory level requirements at different nodes of the multi-echelon supply chain model.

This predicament for the planner is the need to segregate the finished products (for applying differentiated strategies and processes) and having their upstream supply chain intertwined (using common materials and resources). In one such example, Inspirage was engaged for a health-check assignment by a leading label manufacturer for their existing implementation of Oracle Inventory Optimization. We found that, while the segmentation approach was attempted with multiple IO Plans in place, the actual safety stock recommendations being implemented were widely exaggerated. Business Users were not equipped to independently validate the Safety Stock recommendation output from IO. Thus, they ended up reviewing the planning recommendations in ASCP (Oracle Supply Planning tool) manually for each and every item before acting. In most of the cases, they reduced the recommended quantity for build and purchase based on their gutfeel and outside-the-system calculations. A redesign / re-configuration of the IO model brought the entire scope within a single unified IO Plan and demonstrated to the Users the rationale behind IO’s calculations. This resulted into a reduction / savings of safety stock recommendation in the tune of $1.8 million.

Putting It All Together

When deciding to implement IO incorporating both segmentation and appropriate targeting, the following should be considered:

• Criteria for segmentation
• Identifying the business requirements and targeting differentiated strategies / policies (target service level etc.) for each segment
• Validating result of segmentation as well as the output from IO
• Business users’ understanding and confidence with the tool and a thorough understanding of IO principles and logic
• Choosing an implementation partner to help with the above, as required

This intelligent use of Inventory Optimization through correct segmentation and appropriate targeting of inventory strategy / policy can go quite far in optimizing the supply chain. This can bring significant benefits in terms of a 15 to 35% reduction in inventory costs and a 10-15% increase in service levels. Inspirage draws from the experiences and learnings from multiple successful implementations (and re-implementation) of Oracle Inventory Optimization tool, and our team members were directly involved with this tool’s development. When searching for an inventory planning tool to address challenges in your organization, both Inspirage and Oracle’s Inventory Optimization Tool have you covered.
 

 
As the Integrated Supply Chain Specialists, with recognition from Gartner, IDC, and winners of Oracle’s ERPM (Enterprise Resource Planning & Management) & Supply Chain Management Cloud Partner of the Year (Global) awards in recent years, Inspirage is uniquely qualified to be your success partner. Whether you’re upgrading your on-prem system or have decided to move to the cloud where continuous improvement is built-in, our team is prepared to guide you on your transformational journey. Contact us to learn more.