No sane person likes waste. However, in times of crisis — such as the twin emergencies of a pandemic and a global recession that we are experiencing right now — the often-hidden problem of waste comes into particularly sharp relief. In manufacturing, wasted inventory ties up working capital; too much can cost jobs and slow innovation. Unpopular merchandise can clog up warehouse space that could be used for faster-moving items. And obsolete inventory can be expensive to dispose of while adhering to strict protocols, yet it still harms the planet. In short, preventing waste is really a no-brainer — at least in theory. In practice, however, it takes clever planning.
To learn how, consider these three real-world strategies for meaningfully reducing waste in your supply chain:
1. Adopt service-driven inventory planning. Service-driven inventory planning involves establishing an inventory policy to meet different target service levels for different item classes. The ability to do this type of planning depends on having a reliable demand forecast so you can accurately predict the number of goods you need, as well as where and when you need them. Your demand planning team should understand and automatically adapt to the full spectrum of demand behavior in a stock-keeping unit portfolio by factoring in order volume and frequency. This method is known as probability forecasting.
Then, combine probability forecasting with demand modeling for a fuller, more precise view of the various factors that influence demand, such as promotions, seasonality and product life cycle behavior. This approach will enable your organization to consistently place better inventory bets than your competitors do, especially for those difficult-to-forecast items. The ability to reduce overstocking and stockouts also frees up working capital and improves service levels.
Plus, holding the right inventory in the right places leads to several other waste-reduction benefits:
- Slash wasteful expediting costs. When you anticipate customer demand more accurately, you reduce the need to expedite with less-than-truckload (LTL) and air freight, along with costly in-network transfers from warehouse to warehouse. Rush orders and transfers erode profit margins, but companies often don’t recognize that poor demand forecasting and inventory stocking are the root causes of profit loss.
- Reduce carbon emissions. Eliminating wasteful expediting and warehouse transfers means lower carbon emissions caused by inefficient and unnecessary truck and rail transport.
- Minimize inventory space. With optimized stock levels, you minimize the amount of space required for inventory without compromising service levels. You also cut secondary overhead costs, such as power, heat and real estate.
- Improve order timing and efficiency. Companies get so focused on inventory turns that they can end up with inefficient order cycles. For example, placing orders every week might not be as efficient as every two weeks, even if inventory isn’t turning as frequently. This results in too many costly LTL shipments and requires extra labor to receive, cut purchase orders, store and pick the items. To maximize space and profit, identify the optimum order cycle that is aligned with potential customer demand and tied to a service objective.
- Rethink one-size-fits-all service. Today’s consumers want more than delivery speed. Many want the flexibility to reduce packaging and emissions, and many are willing to exchange fast delivery for a lower price. Fulfillment networks are changing to integrate dark stores and city hubs. This means you need robust analytics to help you position inventory across changing networks and demand patterns.
2. Reduce wasted fuel and transportation capacity. There are plenty of ways to improve transportation efficiency through better inventory optimization. First, consider maximizing FTL and container shipments. A vehicle or container running empty or partially full is wasting space and fuel and generating excess carbon emissions. Larger companies with their own fleet can minimize empty return trips with backhauls. Instead of returning empty after drop-offs, your planning solution can help you group vendors for return pickups to make the most of available freight capacity, improve efficiency and balance inventories. Most companies will even offer an allowance when you provide the transportation. Planning technology can also help you take better advantage of economies of scale with international shipments. For example, your system can recommend how best to work with vendors and contractors to fill ocean containers and create balanced loads for optimized freight investments.
Next, make smarter transfer decisions. When you need to move inventory from one location to another, you’re often faced with two options: placing another order (and risking an overstock, along with the extra cost of running a truck) or balancing the inventory via a transfer among a group of associated warehouses. Your planning system can help you identify which transfer option will save the most money and guarantee sustained service. When you input the transportation modes (box, semi, train, ship) and the limitations of each (cube, weight, dollar) your planning system will calculate the most efficient transfer option at the click of a button. It can also suggest opportunities to rebalance inventory when a location has excess stock that can be better utilized in alternate locations.
Finally, choose optimal brackets. You can also use your planning system to compute the best bracket, and the timing of that bracket, to save the most money. You may reduce the number of turns, but you can save money on less truck time.
3. Boost manufacturing efficiency. Better inventory planning also helps improve manufacturing efficiency. More efficient production planning, for example, cuts the need for plant overtime to produce out-of-stock items. It also has a smoothing effect on production, minimizing peaks and troughs. To reduce waste in the manufacturing process, first improve capacity planning. Capacity planning is much more than simply calculating resource load based on production requirements and throughput rates; it’s about managing both constrained and excess capacity, effectively balancing the competing objectives of customer service and manufacturing. When you consider the probabilities associated with demand, there is less of a cost to rescheduling some planned orders than others.
When you have excess capacity, your planning system must pull forward the planned orders that can best contribute to service performance. When you have capacity constraints, you must manage the trade-offs across items to reduce the overall risk of a stockout or a shorted customer order. By managing over a longer horizon, you can better utilize available capacity to reduce the possibility of future shortfalls. This eliminates the need for additional shifts or overtime.
Secondly, reduce product transitions. Service-driven planning has a multiplier effect on manufacturing efficiency. Safety stock levels can be optimized to buffer against demand variability; this increases schedule adherence and reduces the need to run small batches to fill orders for out-of-stock items. Small batches generate higher emissions per unit of output. And by evaluating production requirements over a longer horizon, you can better plan campaigns to minimize the startup and shutdown of equipment required for changeovers. This conserves energy and reduces emissions.
Additionally, work to reduce the risk of obsolete inventory. In longer planning horizons, you can set up your system to provide an early warning signal when stock levels are projected to exceed maximum targets. This gives planners ample time to alter course through supply adjustments or shape demand through promotions or other pricing actions.
Finally, reduce waste due to excess and expiring lots. The difficult job of inventory planning intensifies with products such as perishable food and medicines. It’s also challenging in discrete industries, where frequent new product introductions lead to heavy discounting of older stock. You must identify the items most at risk for obsolescence and when they will expire.
The pandemic and global economic recession have put the problem of supply chain waste in the spotlight. By getting at the root causes, clever supply chain planning can drive down this waste with more accurate demand forecasting and inventory planning.
We are excited to announce that our Certified in Production and Inventory Management (CPIM) credential is now Certified in Planning and Inventory Management (CPIM)! While planning has always been integral to CPIM, the new name better reflects this as a competency. Earn your CPIM today!