Data Analytics for Optimizing Inventory

Written by Lim Hun Meng, GDSCM

by Lim Hun Meng, GDSCM

Data Analytics for Optimizing Inventory

Written by Lim Hun Meng, GDSCM

by Lim Hun Meng, GDSCM

by Lim Hun Meng, GDSCM

Data analytics is the process of examining structured and unstructured data sets in order to provide real-time up to update information that can facilitate the company to maximize the decision value in the business.

Inventory optimization is having the right inventory, in the right quantities and at the right locations to meet the supply and demand of parts and materials in the company. That is finding the right balance between inventory and service level.

Data analytics for optimizing inventory will improve the accuracy of inventory orders that is to prevent product shortage and just have enough inventory in the warehouse which will lead to a more organised warehouse that will speed up order fulfilment –ability to get the right stock in the right place at the right time to meet customer’s demand. It also increases efficiency and productivity which eliminate manual processes so that the employees can focus and create values on other more important areas of the business.

Inventory Overview - SIPMM

Picture adapted from http://www.neiltortorella.com/images/warehouse-efficiency-887-clean-warehouse-inventory-507-x-338.jpg, and https://powerbicdn.azureedge.net/mediahandler/partnersv2/partnerfiles/enterprise-dna/powerbi/en-us-inventory-management/ faeb70a1e99ac49b7bb909d8474152b440df172f608eb3d64e1b34fbff60071d.png

Types of Data Analytics

Descriptive Analytics (What’s happening in the business?)

It uses data aggregation and data mining to provide insight into the past and answer: “what has happened?” It is comprehensive, accurate, live data and effective visualization. Common examples are company reports that simply provide a historic review of a company’s operations, sales, financials, inventory, customers, and stakeholders.

Diagnostic Analytics (Why did it happen?)

It is characterized by techniques such as drill-down, data discovery, data mining and correlations to dive deeper at the data to understand the root causes of events and behaviors; ability to isolate all confounding information. An example is how a company can drill the inventory down to aging days categories to find out why these aging inventories are not delivered to customers.

Predictive Analytics (What will happen?)

It uses the findings of descriptive and diagnostic analytics combine with statistical models and forecasting techniques to provide the company with actionable insights based on data as well as to predict future trends. An example is the demand forecasting trend. It is essential to note that forecasting is just an estimate and its accuracy depend highly on the data quality and stability of the situation. Thus the company has to set an acceptable accuracy tolerance.

Prescriptive Analytics (What’ should we do?)

It uses optimization (example business rules) and simulation algorithms to advise what action to take to eliminate a future problem or take full advantage of a promising trend. An example is optimized production scheduling and inventory in the supply chain to make sure the company can deliver the right products at the right time and optimizing the customer experience.

In a nutshell, descriptive and diagnostic analytics offer a reactive approach whereas predictive and prescriptive analytics make users proactive. Current trends show more companies come to the situation when they need advanced data analysis and choose to adopt it. The term advanced analytics was the umbrella term for predictive and prescriptive analytics types.

Item Master Data Enhancement

The item master is the company’s DNA and is a record that typically housed within company Enterprise resource planning (ERP) system. The item master should be set up when a new product is introduced into the company. The ERP will have standard fields to populate for the item master, but there will also be custom fields that can use to tailor the item master to the company’s specific needs.

The item master should contain, at a minimum, the following information:

• Item Name; Item Description; Bill of Materials (BOM); Cost of Goods (COGS); Manufacturing Routers; Manufacturing and Supply Lead Times; Safety Stock Levels; Minimum Order Quantities (MOQ); Order Multiples.

• Enhancement includes defining an item with ABC/XYZ analysis.

The item master should be carefully built and maintained by the centralized data master team who must ensure that every detail within the company’s item master is accurate as from the item master, the ERP will take information to generate data for analysis.

Categorizing Inventory

ABC/XYZ analysis is based on the Pareto principle (often refer to as the 80/20 rule – classical example is that 80% of the sales revenue contribute by 20% of the customers) It is a method of grouping planning item (characteristic value combinations, SKUs) based on their value (revenue or sales volume) and dynamics of consumption or sales. During analysis, items are assigned one of the classes of ABC and XYZ simultaneously. Hence stock management policies, systems, and procedures can be better tailored by taking into account both demand volatility and consumption value. This approach optimizes tensions between costs, risks, and benefits of stock holding.

Policies may include the degree of automation of replenishment processes, buffer stocks, and inventory control. The diagram below illustrates an example.

Automating Demand Forecast

The company’s performance is often dependent on external conditions such as seasonality, market trends, macroeconomic climate conditions and other business trends that can cause unpredictable demand variability (E.g. China –United States trade disputes). By harnessing and applying advance analytics that factor in such external conditions estimates, as well as assigning weight to customer firm orders, customer or sales forecast (also taking account of the past forecast accuracy trend) and historical sales; automation system dynamically calculates to provide a statistical forecast for an item to ensure minimum and maximum order quantities are optimal.

Create a repeatable monthly process for customer or sales forecast accuracy to be measured for continuous improvement and accountability. Accuracy tolerance is dependent on the company’s appetite. A further benefit is that the information input into demand forecasting software is able to be continually updated to ensure that the more accurate forecasts are changing to reflect the changing needs of customers.

Replenishment Automation

Parameters are core settings in the system, use for executing replenishment calculations. These parameters may include demand patterns, inventory classification, inventory turnover ratio, reorder point that take in account the lead time of item. Parameters are dynamic settings that must be updated frequently (usually monthly) in order to prevent stock out (might cause lost sales), excess stock (might turn into obsolete which should be liquidated to eliminate unnecessary carry costs).

Inventory turnover should be closely watched for every item as over the course of the product’s life cycle, demand will fluctuate and cause variability in the supply chain. Tracking demand patterns are one way to ensure product replenishment calculations are accurate and optimized. In cases where the reliability of supply is not very high, it would be good to add some quantities on top of the optimal inventory level in order to cover supply failures and provide higher service level.

Increasing replenishment frequency also enables a faster reaction when market conditions are changing, providing a higher service level in hardly predictable conditions. Beside replenishment, managing the item’s backlog is also critical, system parameters to take into account of cancellation & reschedule window in accord to supplier agreement if the company is a distributor. System to trigger automated push out or pull quantities based on automatically forecasted sales demand.

Dashboard

Dashboard measures all the Key Performance Indicators (KPI) which need to manage the inventory effectively. It gives timely warning and alerts that initiate actions as well as focus attention on where it matters most. Even though there might have thousands of items that contribute to a problem, focusing on only the top 5 to 10 items will make an immediate positive impact.

KPI dashboard can cover the followings:

• Fill rate which track how well the company is actually servicing the customers versus what the company is targeting; overdue orders that are fully fulfilled but not in time, order accuracy where failures result is returned or not-paid deliveries; customer complaints about wrong quantity, quality or damaged cargo.

• Internal operational performance such as inventory turnover, carry a cost, stock-outs result in back-orders, lost sales and dissatisfied customers, excess stock, surplus orders, potential stock-outs which give alerts ahead of time of items heading towards a stock-out.

Real-time intelligence into deliveries, orders and returns can improve operational efficiency.

Conclusion

The saying “what gets the measure, gets done!” and let me add “with the right tools”. Quality data is the single most powerful tool and how to translate big data into meaningful and usable business information. Data has been described as the new oil of the digital economy. The application of data analytics for optimizing inventory ultimately has a positive impact on the company bottom-line profitability and cash flow through lowering inventory cost and at the same time increase customer satisfaction level by meeting customer demand all the time thus with repeated sales order that will increase top-line revenue growth. That is having the right product quantity at the right place and right time. The key is having a well thought through optimization policies and parameters with the definition of the right algorithm that allows companies to effectively manage their Key Performance Indicators to drive most effective possible behaviors, decisions and strategies.


References

Alex Bekker. (2019). “4 types of data analytics to improve decision-making”. Retrieved from https://www.scnsoft.com/blog/4-types-of-data-analytics, accessed 20/06/2019.

CGMA. (2019). “ABC-XYZ inventory management”. Retrieved from https://www.cgma.org/resources/tools/cost-transformation-model/abc-xyz-inventory-management.html, accessed 22/06/2019.

Daniel Fritsch. (2015). “6 Inventory Control techniques for stock optimization”. Retrieved from https://www.eazystock.com/blog/2015/08/03/6-inventory-control-techniques-for-stock-optimization/, accessed 21/06/2019.

Gary Marion. (2019). “The item master is Your Company’s DNA.” Retrieved from https://www.thebalancesmb.com/item-master-company-management-4153514, accessed 21/06/2019.

Ruth Ng, ADPSM. (2019). “Data Analytics and Artificial Intelligence for Cognitive Procurement”. Retrieved from SIPMM: https://sipmm.edu.sg/data-analytics-artificial-intelligence-cognitive-procurement/, accessed 20/06/2019.

Terese Ong, DLSM. (2018). “Five important techniques for effective inventory control.” Retrieved from SIPMM: https://sipmTypes.sg/five-important-techniques-for-effective-inventory-control/, accessed 20/06/2019.

Thomas Maydon. (2017). “The 4 types of Data Analytics”. Retrieved from https://insights.principa.co.za/4-types-of-data-analytics-descriptive-diagnostic-predictive-prescriptive, accessed 20/06/2019.

Thorsten Ohm. (2017). “How to build a KPI dashboard for inventory management”. Retrieved from https://www.tradegecko.com/blog/inventory-management/how-to-build-a-kpi-dashboard-for-inventory-management, accessed 22/06/2019

About the Author: Lim Hun Meng (HM) has extensive years of experiences in the electronics sector, specifically in sales & marketing operations that include asset management, trade compliance, and business continuity management. He is a member of the Singapore Institute of Purchasing and Materials Management (SIPMM). HM holds a Bachelor degree in Management from the University of London. He completed the Graduate Diploma in Supply Chain Management (GDSCM), on July 2019 at SIPMM Institute.

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