Supply chain optimization
is the application of processes and tools to ensure the optimal operation of a manufacturing and distribution supply chain
A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer. Supply chain activities transform natural resources, raw materials and components into a finished product that is delivered to...
. This includes the optimal placement of inventory
Inventory means a list compiled for some formal purpose, such as the details of an estate going to probate, or the contents of a house let furnished. This remains the prime meaning in British English...
within the supply chain, minimizing operating costs (including manufacturing costs, transportation costs, and distribution costs). This often involves the application of mathematical modelling techniques using computer software.
What need is being addressed?
Typically, supply chain managers are trying to maximize the profitable operation of their manufacturing and distribution supply chain. This could include measures like maximizing gross margin return on inventory invested
(GMROII) (balancing the cost of inventory at all points in the supply chain with availability to the customer), minimizing total operating expenses (transportation, inventory and manufacturing), or maximizing gross profit of products distributed through the supply chain. Supply chain optimization addresses the general supply chain problem of delivering products to customers at the lowest total cost and highest profit. This includes trading off the costs of inventory, transportation, distributing and manufacturing.
Supply chain optimization has applications in all industries manufacturing and/or distributing goods, including retail
Retail consists of the sale of physical goods or merchandise from a fixed location, such as a department store, boutique or kiosk, or by mail, in small or individual lots for direct consumption by the purchaser. Retailing may include subordinated services, such as delivery. Purchasers may be...
, industrial products, and consumer packaged goods (CPG).
What approaches and solutions exist?
The classic supply chain approach has been to try to forecast future inventory demand
- Economics :*Demand , the desire to own something and the ability to pay for it*Demand curve, a graphic representation of a demand schedule*Demand deposit, the money in checking accounts...
as possible, by applying statistical trending and "best fit" techniques based on historic demand and predicted future events. The advantage of this approach is that it can be applied to data aggregated at a fairly high level (e.g. category of merchandise, weekly, by group of customers), requiring modest database sizes and small amounts of manipulation. Unpredictability in demand is then managed by setting safety stock
Safety stock is a term used by logisticians to describe a level of extra stock that is maintained to mitigate risk of stockouts due to uncertainties in supply and demand. Adequate safety stock levels permit business operations to proceed according to their plans...
levels, so that for example a distributor might hold two weeks of supply of an article with steady demand but twice that amount for an article where the demand is more erratic.
Then, using this forecast demand, a supply chain manufacturing and distribution plan is created to manufacture and distribute products to meet this forecast demand at lowest cost (or highest profitability). This plan typically addresses the following business concerns:
- How much of each product should be manufactured each day?
- How much of each product should be made at each manufacturing plant?
- Which manufacturing plants should re-stock which warehouses with which products?
- What transportation modes should be used for warehouse replenishment and customer deliveries?
The technical ability to record and manipulate larger databases more quickly has now enabled a new breed of supply chain optimization solutions to emerge, which are capable of forecasting at a much more granular
level (for example, per article per customer per day). Some vendors are applying "best fit" models to this data, to which safety stock rules are applied, while other vendors have started to apply stochastic
Stochastic refers to systems whose behaviour is intrinsically non-deterministic. A stochastic process is one whose behavior is non-deterministic, in that a system's subsequent state is determined both by the process's predictable actions and by a random element. However, according to M. Kac and E...
techniques to the optimization problem. They calculate the most desirable inventory level per article for each individual store for their retail customers, trading off cost of inventory against expectation of sale. The resulting optimized inventory level is known as a model stock
. Meeting the model stock level is also an area requiring optimization. Because the movement of product to meet the model stock, called the stock transfer, needs to be in economic shipping units such as complete unit loads or a full truckload, there are a series of decisions that must be made. Many existing distribution requirements planning systems round the quantity up to the nearest full shipping unit. The creation of for example, truckloads as economic shipment units requires optimization systems to ensure that axle constraints and space constraints are met while loading can be achieved in a damage-free way. This is generally achieved by continuing to add time-phased requirements until the loads meet some minimum weight or cube. More sophisticated optimization algorithms take into account stackability constraints, load and unloading rules, palletizing logic, warehouse efficiency and load stability with an objective to reduce transportation spend (minimize 'shipping air').
Optimization solutions are typically part of, or linked to, the company's replenishment systems distribution requirements planning, so that orders can be automatically generated to maintain the model stock profile. The algorithms used are similar to those used in making financial investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
decisions; the analogy is quite precise, as inventory can be considered to be an investment in prospective return on sales.
Supply chain optimization may include refinements at various stages of the product lifecycle, so that new, ongoing and obsolete items are optimized in different ways: and adaptations for different classes of products, for example seasonal merchandise.
Whilst most software vendors are offering supply chain optimization as a packaged solution and integrated in ERP software, some vendors are running the software on behalf of their clients as application service provider
An application service provider is a business that provides computer-based services to customers over a network. Software offered using an ASP model is also sometimes called On-demand software or software as a service ....
What are the claims for supply chain optimization?
Firstly, the techniques being applied to supply chain optimization are claimed to be academically credible
. Most of the specialist companies have been created as a result of research projects in academic institutions or consulting firms: and they point to research articles, white paper
A white paper is an authoritative report or guide that helps solve a problem. White papers are used to educate readers and help people make decisions, and are often requested and used in politics, policy, business, and technical fields. In commercial use, the term has also come to refer to...
s, academic advisors and industry reviews to support their credibility.
Secondly, the techniques are claimed to be commercially effective
. The companies publish case studies that show how clients have achieved reductions in inventory whilst maintaining or improving availability. There is limited published data outside of these case studies, and a reluctance for some practitioners to publish details of their successes (which may be commercially sensitive), therefore hard evidence is difficult to come by.
is a term composed of flow of goods
. Collaborative flowcasting is a business process that connects real time daily consumer demand
to trading partners in the retail supply chain to create an integrated and comprehensive model of the business.
The common proposal is on forecasting a load curce for one year. Hence actuality comes with the delay of one year, as long as no modeling concept gets defined for a shorter lok ahead period and more frequent updates. Principally forecasting may apply as well for a period of a week.
While the concept is simple and intuitive, technology has historically limited the ability of software applications to scale economically a complete retail supply chain (in a time-phased manner and one year into the future) to the volumes required by the largest retailers and their suppliers.
The collaborative flowcasting process starts at the head of the retail supply chain (the retail store) and creates a unique sales forecast
for every product in every store and calculates time phased requirements one year into the future all the way from the store shelf to the factory. This process enables retail trading partners to manage their entire retail supply chain inside a single system and driven by a single set of numbers
The collaborative flowcasting business process described in Andre Martin, Mike Doherty and Jeff Harrop’s book Flowcasting the Retail Supply Chain
Actual results to date demonstrate that deploying the collaborative flowcasting business process will enable retailers and their trading partners to increase store in-stock availability into the 98+% range resulting in sales increases of 3–4% at no additional incremental costs. Inventories across retail supply chains in factories and DCs will be reduced in the 20% to 40+% range and the cost of operating retail supply chains will also be reduced in the 2 to 10+% range.
The trend to provide software as a service
is a new business model that is now being applied to building and designing optimization solutions. Services are charged as used, rather than through licensing installed or hosted software.
Direct Plant Shipments (DPS)
Also known as direct shipment, is a method of delivering goods from the plant to the customer directly. At the same time regional centers, strategically located, provide overnight shipments to the maximum number of customers. This delivery scheme reduces transportation and storage costs.
- Demand optimization
Demand optimization is the application of processes and tools to maximize return on sales. This usually involves the application of mathematical modeling techniques using computer software....
Forecasting is the process of making statements about events whose actual outcomes have not yet been observed. A commonplace example might be estimation for some variable of interest at some specified future date. Prediction is a similar, but more general term...
- Service level
Service level measures the performance of a system. Certain goals are defined and the service level gives the percentage to which they should be achieved...