New supply chain optimization systems are coming! Look for them in your business area soon. The new software contains complicated and sophisticated mathematical modeling. The days of simple math calculations using spreadsheets for inventory control might be numbered. At this point, it is unclear as to how small companies are going to participate in these new systems, but they likely will.
Seldom are small companies approached by supply chain management software companies. The cost of sophisticated inventory management systems are often beyond the reach of smaller businesses. However, this new type of supply chain optimization software appears to involve every party along the supply chain distribution channel. Therefore, it is important that smaller businesses know where they sit within their existing supply chain distribution channel and understand how this new software will affect their company.
Current Situation – Limited impact
Historically, existing supply chain management optimization software systems had the goal of trying to squeeze out costs and increase service level or fill rates. These existing systems optimize the supply chain distribution channel by displacing the cost either upstream or downstream to other companies within the supply chain distribution channel. Most of the efficiency gains go to the firm that owns the software, thus benefiting a limited few within a segment of the supply chain distribution channel.
Larger firms influence their trading partners through collaboration agreements, to participate in such initiatives. Often, the working relationships between small firms and large firms come down to the larger firm dictating when to jump and how high. These relationships require the smaller business to participate in supply chain management initiatives that can add administrative costs and layers of management for daily data collection, exchange, evaluation and monitoring. These agreements can require both firms to integrate their systems into one supply chain management system, which usually will help the larger firm and do little for the smaller company.
However, not all firms within the supply chain distribution channel participate in these optimization systems. With only a few large companies trying to optimize the supply chain distribution channel, it becomes difficult to achieve a total end to end optimization process. Therefore, large firms employing an inventory optimization system would only impact a few segments along the entire supply chain distribution channel.
Above is an abbreviated view of an entire distribution chain channel. Supply chain systems have many layers of companies and operate within a multi-echelon framework. Each layer or segment is an echelon providing value-added functions along the entire path. As customer orders travel up the supply chain, extra safety stock is added along the entire path to ensure availability of inventory. Each company, both small and large, ensures product availability by having excess inventory, thereby hedging against committing the cardinal sin of not meeting demand. The safety stock mounts with every step until total inventory reaches an irrational, excessive level.
With only one or two large firms trying to optimize a few segments of the entire supply chain distribution channel, little efficiency can be realized. In some situations, two large firms within the same supply chain distribution channel will install two different supply chain management optimizing software systems. The two large firms have good intentions of lowering inventory and increasing service levels, but the two systems are competing with each other. Such a situation causes confusion and the smaller businesses are often the casualties. When this occurs, inventory levels increase and service levels are hampered as the problems are displaced up or down the supply change stream.
New Approach – Multi-echelon Inventory Optimization
The new multi-echelon inventory optimization software takes a holistic view. This new approach provides a clear view of the entire system and decreases the excess inventory accumulated along the entire supply chain. With this approach, both smaller businesses and larger firms can benefit. By focusing on the entire distribution chain channel, the system requires transparency and data collection points throughout the entire supply chain. The system optimizes each segment while at the same time optimizing the entire distribution chain channel. While the older systems operate at the batch, pallet and truck levels, this new system has granularity at the Stock Keeping Unit (SKU) level by location. A key feature is the use of advanced math for smoothing the inventory levels. This advanced math, often used in scientific research, is finding its way into the business arena and uses stochastic algorithms to deal with uncertainty and volatility.
Many of the large firms have already started pilots. The future impact to the smaller businesses is difficult to measure, but small businesses should be prepared for significant changes. Entire new business processes, replenishment policies and network configurations will be required. The effect will be profound as these new software systems begin to touch smaller businesses also the entire supply chain distribution system.
James Ellis is an assistant professor in the business department of Central Oregon Community College and can be reached at 541/383-7718.