Inventory Optimization for the Consumer

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    IBM Sales and Distribution

    Solution Brief

    Consumer Products

    Inventory Optimizationfor the ConsumerProducts Industry

    Highlights

    Helps improve service levels and reduceworking capital costs by enabling

    improved inventory planning and

    optimization

    Dynamically adjusts inventory levels

    using tested planning methodology

    Facilitates coordinated, multi-echelon

    inventory planning for the entire

    consumer products supply chain

    IntroductionHow do you efficiently manage your working capital in the supply

    chainin particular, capital that is tied up in inventory? What type of

    ERP systems do you have and are you complementing them withglobal inventory optimization capabilities? Have you optimally

    determined where, when and how much inventory you should hold for

    each product? How do you determine how much inventory to keep close

    to customers versus close to manufacturing facilities?

    IBM offers an inventory optimization solution that can help consumer

    products companies who want to increase the efficiency of their inventory

    planning processes. This solution facilitates coordinated, integrated,

    multi-echelon inventory planning and provides insight into the optimal

    level of inventory needed to improve turns and service levels while

    freeing working capital. To enable successful outcomes, IBM has deep

    experience with enterprise resource planning (ERP), advanced planning

    and scheduling (APS) and supply chain management. In addition, we

    offer state-of-the-art mathematical algorithms and technology to help

    optimize inventory levels for the whole supply chain.

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    IBM Sales and Distribution Consumer Products

    Solution Brief

    Why inventory optimization?In the consumer products industry, the emergence of inventory

    optimization over the last few years is the result of a variety of

    factors. The pressure to reduce costs in a volatile commodity

    market re-emphasized the importance of lean operations.Consumer and shopper expectations for service have increased.

    In an era of fierce competition, it is becoming more critical to

    ensure on-shelf availability and satisfy desired levels of service

    in the supply chain. The increased complexity of globalized

    supply chains, defined by the introduction of copackers and

    comanufacturers on the supply side, outsourcing engagements

    on the distribution side and differentiated service requirements

    for various sales channels, makes supply chain and inventory

    planning more difficult. Inventory optimization can ease

    this burden.

    The typical inventory planning strategy for most of the industry

    is built on local planning practices. Each location in the supply

    chainretail warehouses, local and regional distribution centers

    and even plantsconducts its own inventory planning, using

    planning practices established many years ago or individual andlocation-based metrics. The inventory planning strategies can

    range from generic coverage policies, differentiated coverage

    policies, min-max inventory to order-up-to levels. In todays

    competitive and demanding marketplace, this type of inventory

    planning leads to low inventory turns, inconsistent service levels

    and lack of understanding of the full picture.

    Global, multi-echelon (Figure 1) inventory optimization

    strategically positions raw materials, semifinished and finished

    goods inventory to improve inventory turns, service levels and

    Multi-Echelon Inventory Optimization

    What impact does each

    supplier have on theentire supply chain?

    What is the cost ofdifferentiating

    inbound servicelevels from supliers?

    What sould be thepostponement

    strategy? Whereshould components /semi-finished products

    be kept?

    How much inventory

    of each SKU shouldbe at each locationin the supply chain?

    What is the impact ofchanging the promised

    service times to customers?

    Which facilitiesshould be make toorder or make to

    stock?

    How should shipments andpolicies be coordinated?

    How should I takeadvantage of

    centralization toreduce inventory?

    Customer ServiceManufacturingProcurement Packaging &Distribution

    Figure 1: How multi-echelon inventory optimization works for consumer products

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    IBM Sales and Distribution Consumer Products

    Solution Brief

    cash flow and to free working capital. Individual islands of

    planning are replaced by enterprise optimization capabilities

    that look at the demand signals coming from retailers or

    point-of-sale data and set the inventory levels for each product

    in the supply chain. Consumer products companies can mitigate

    the risk of excess inventory resulting from bullwhip effect

    (the increase in demand variability in the supply chain from

    downstream to upstream). The result is coordinated inventory

    planning for the entire supply chain that reduces inventory and

    costs and speeds responsiveness to changing demands.

    With a strong portfolio of solutions and services, this is the

    type of next-generation inventory planning that IBM offers

    consumer products companies.

    Inventory optimization from IBM: Aphased approach at multiple levelsIBM offers consumer products companies a global, multi-

    echelon, multiuser inventory optimization and planning process

    that complements existing ERP and APS systems. IBMs in-

    depth understanding of the ERP landscape, planning gaps and

    multiple delivery capabilities are key enablers of success. Proven

    planning methodology adjusts inventory levels dynamically,

    improving inventory planning and service levels, which can lead

    to reduced inventory holding costs.

    The IBM solution approaches the successful delivery in

    three phases:

    1. Assess the current operating environment and goals and

    identify ROI using a small-scale modeling effort.

    2. Develop the high-level design, factoring in architecture,

    workflow and operating environment.

    3. Design and develop workflows and integration in detail,

    followed by testing, change management and go-live.

    During the first phase, IBM will assess the current inventory

    planning practices, review the current processes and use

    inventory optimization technology to conduct a pilot

    study. Your ERP system provides the primary inputs and

    IBM technology makes optimal recommendations for the

    inventory requirements in your network. We also offer holistic

    insight into tradeoffs in the supply chain, such as desired service

    level versus inventory, proposed customer response time

    versus inventory and forecast error versus inventory, and we

    proactively recommend service levels by product and location.

    Especially in the first phase of delivery, our emphasis on the

    strategic aspects of optimization will identify inventory drivers

    and return on investment. The strategic level evaluation can

    contribute to the high level design as IBM helps companies

    consider postponement, supplier sourcing, transportation

    options, make versus buy, central stocking and more. As the

    process moves towards the deployment and implementation

    phase, the same models developed in the earlier phases can be

    put into operational use with proper integration technology.

    The state of the art inventory optimization can be seamlessly

    integrated with your ERP solution and the workflows enabled

    specifically for your organization, along with:

    User home-page with alerts and reports and a one-page view

    for planners

    Fill rate optimization Service levels Customer service Demand forecasting Configurable reporting for creating and saving reports Data maintenance and automated review

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    IBM Sales and Distribution Consumer Products

    Solution Brief

    The components of the solution (Figure 2) include

    IBM ILOG and SPSS software, along with strategy and

    transformation, enterprise application integration and business

    analytics optimization services from IBM Global Business

    Services.

    IBM ILOG Inventory and Product Flow Analyst

    IBM ILOG Inventory and Product Flow Analyst is an

    integrated solution for supply chain and inventory optimization

    that enables both strategic and tactical planning. It includes

    different optimization modules that you can use to address

    specific supply chain problems. Modules use a common

    database so users can quickly move from one module to

    another. Built-in integration capabilities make it possible to

    connect to other systems, such as your ERP or APS system.

    The modules include:

    ILOG Inventory Analyst. Powered by SAP NetWeaver, this

    module helps find the true and hidden drivers of inventory

    (such as forecast error, lead times, lot size and so on), so

    that companies can prioritize improvement opportunities

    based on overall inventory impact. It strategically positions

    raw materials, work in progress (WIP) and finished goods

    inventory throughout the supply chain to improve inventory

    turns and increase cash flows.

    Our Inventory Optimization Solution - From Desktop to Enterprise

    Work Flows, Integration to SAPEnabled for your Enterprise

    User home-page with alerts and reports;

    1-page view for planners

    Fill Rate Optimization

    Service Level Tradeoff

    Multi-echelon inventory: The right inventorylevels for each SKU at each location

    Customer Service

    Configurablereporting for creating

    and saving reports

    Data maintenance;

    Auto-review

    StrategicStand-Alone

    SerivceLevel70% 80% 90% 100%

    Inventory

    SAP

    Demand forecasting

    Figure 2: IBM offers an inventory optimization solution that moves from desktop to enterprise

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    IBM Sales and Distribution Consumer Products

    Solution Brief

    ILOG Product Flow Optimization. The Product

    Optimization module helps businesses analyze transportation,

    warehousing, inventory carrying costs and service

    requirements to determine the optimal product delivery

    paths. Companies can view and export solution alternatives

    to tables and graphs for presentations and further analysis. ILOG Demand Profiler. This module analyzes historical

    data to create a demand forecast and forecast error.

    The combination of these modules provide enterprise

    multi-echelon inventory optimization for integrated inventory

    planning in an existing ERP system and strategic multi-echelon

    inventory optimization to determine strategic shifts in inventory

    policies and practices.

    In short, the IBM ILOG Inventory and Product Flow

    Analyst technology can help your consumer products company

    turn supply chains into drivers of profitability, efficiency and

    growth. You also get the answers to a broad range of business

    questionsfrom determining the right inventory policies and

    strategic positioning of inventory, to the ongoing setting of

    safety stocks and inventory levels in operational environments.

    IBM SPSS Modeler

    IBM SPSS Modeler is a powerful, versatile data and text

    analytics workbench that helps you build accurate predictive

    models quickly and intuitively without programming.

    Interactive streams visually map the data mining process, sousers can interact with inventory information at any point and

    develop models quickly and confidently. These timesaving

    techniques lead to greater efficiency and accuracy and lower

    overhead costs.

    SPSS Modeler can help your consumer products company

    discover patterns and trends in inventory management and

    planning more easily, using a unique visual interface supported

    by advanced analytics. Users model outcomes and understand

    what factors influence multiple levels of inventory so they can

    take advantage of opportunities and mitigate risks. Companies

    can choose from a complete range of advanced analytical

    functions, including state-of-the-art algorithms, automated

    data preparation and rich, interactive visualization capabilities.

    For example, using IBM SPSS Modeler, a company can analyze

    historical data for all items in its inventory. It can then chart

    the demand life cycle for each item and generate demand

    forecasts. Based on these forecasts, analysts can apply simple

    planning rules to make decisions about what parts to stock

    and what parts to pull from the shelves in any given store.

    IBM Strategy and Transformation Services forinventory optimization

    IBM Strategy and Transformation combines IBMs

    management consulting capabilities with executable strategies

    to enable client success, providing differentiation with

    technology-enabled transformation. Our expertise can help

    you plan and implement end-to-end inventory optimization,

    from strategy to implementation, and gain efficiency in cross-

    functional collaboration. As part of inventory optimization

    from IBM, we call on the experience of the IBM Supply Chain

    Strategy practice, which focuses on identifying and quantifying

    supply chain improvements and assisting clients in transforming

    their operations, from suppliers to ultimate customer, to enable

    strategic change and competitive advantage. In addition,

    IBMs Supply Chain Strategy experience has allowed for the

    development of tools and templates to accelerate projects and

    reduce risk for our clients. These tools represent the combined

    experiences from significant number of leading supply chain

    strategy projects over the last several years.

    Because inventory optimization requires significant change, we

    provide process and change management as part of our strategy

    and transformation services. Our consultants use leading edge

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    IBM Sales and Distribution Consumer Products

    Solution Brief

    change strategies to manage business transformation and realize

    the value in major program implementations, such as global

    and multi-echelon inventory optimization. We also provide

    project management to facilitate the transformation, creating

    organizational design and governance plans that align

    individuals and teams.

    ERP and APS integration services for inventoryoptimization: IBM and SAP

    No one is a bigger systems integration partner with SAP

    than IBM. We have broad SAP application knowledge,

    both technical and functional, and a dense combination of

    competence centers, labs, sales support centers and briefing

    centers all dedicated to ensuring that our clients get the most

    out of their SAP application implementations. We also respect

    the fact that no two SAP application implementations are the

    same and that strategic business requirements drive unique

    twists. Our integration tools are designed for real-time, batch

    integration or both. We have installed thousands of SAP

    adaptors and our tools enable business users to change

    integration parameters while supporting SAP business services

    and models (Figure 3).

    For the SAP integration needed for effective inventory

    optimization, we offer several alternatives. For companies that

    need to retrieve inventory data directly from their SAP

    implementations, we can either use Advanced Business

    Application Programming (ABAP) or SAP Process Integration.

    SAP Process Integration provides mapping and error handling

    using, which is faster and more robustand offers better

    control. We can also use any middleware or ETL tools that our

    clients are comfortable with for the integration processes.

    Data Integration Model - IA and SAP (ES)

    Provide support for SAP

    Enterprise Services as well

    ECC

    Data Mapping &

    Communication

    Data Mapping and

    communication

    Data Mapping and

    communication

    Data to/from

    in SAP and IA

    Formats

    Data in IA

    Format

    BI

    Extractor

    SAP

    BAPI

    IA Data

    Repository

    Indicative List of

    APO BAPIs

    Time phased

    Safety stockSAPDelivered-Cubeto

    PlanningAreaLoadBIDataExtractors

    Data in SAP

    Format

    SAP Resident Data Flow

    Extract From SAP

    using SAP BAPI

    /QISS, or SAP TableAPO

    FI

    CO

    TR

    PS

    WF

    ISHR

    PM

    QM

    PP

    MM

    SD

    SAPDeliv

    ered-CIF

    BIDa

    taEx

    tracto

    rs

    Data Load/Extract

    in SAP using SAP -

    BAPI/IDOC/QISS

    SAP R/3

    Data in SAP

    Format

    Figure 3: How your data can be integrated with your ERP

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    IBM Sales and Distribution Consumer Products

    Solution Brief

    Business Analytics Optimization services forinventory optimization

    Business Analytics Optimization services from IBM Global

    Business Services can help consumer products companies

    realize business optimization objectives faster with less risk andat a lower cost using an effective information strategy. Applied

    throughout the enterprise or deep in a business function,

    Business Analytics Optimization provides resolution that spans

    policy, analytics, business process, organization, applications

    and data.

    With help from IBM experts, consumer products companies

    can improve inventory operations by tackling and solving

    their most complex inventory problems and creating unique

    predictive capabilities for intelligent inventory management

    decisions. IBMs advanced innovative research in data analytics

    and optimization helps us establish a proactive versus reactive

    strategy for optimizing inventory. Our Business Analytics

    Optimization consultants can also provide strategies for

    improving inventory decision-making, productivity and

    efficiency in an environment where relevant, actionable,

    accurate and timely information is used to monitor and improve

    inventory management.

    The benefits of inventory optimization from IBM

    The combination of IBM inventory optimization software with

    services from IBM Global Business Services helps consumer

    products companies determine what product should be made

    where, when and how much. In addition, the solution can be

    used both strategically to answer high-level questions and

    tactically when integrated with an ERP system to set optimal

    inventory levels on an ongoing basis. For example, the solution

    can help your company not only accurately capture inventory

    requirements in current and future networks but also capture

    business rules that take into account service times and customer

    fill ratesall in the same process. Our scenario analysis

    capabilities can help you assess the impact of different networks

    on inventory levels and our experts can work with you to

    develop warehouse space requirements and identify possible

    bottlenecks. The result is optimized inventory levels at all tiers

    of your network.

    ConclusionChanging consumer behavior has resulted in the need for

    extensive product portfolios, faster time to market, reduced

    capital outlays and improved service levels. Combined with

    globalization and heightened supply chain complexity,

    consumer products companies face significant inventoryplanning challenges. Inventory optimization can help reduce

    inventory and working capital costs and speed responsiveness to

    changing demands by facilitating coordinated inventory

    planning for the entire supply chain.

    IBM provides an inventory optimization solution that facilitates

    coordinated, multi-echelon inventory planning and provides

    recommendations for the optimal product flow to help improve

    inventory turns and service levels while freeing working capital.

    Our deep experience with ERP and APS systems and supply

    chain management, along with state-of-the-art mathematical

    algorithms and technology, enable us to provide positivefinancial results for our clients.

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    Please Recycle

    For more informationTo learn more about the [enter the name of product or offering

    here], please contact your IBM marketing representative or

    IBM Business Partner, or visit the following website:

    ibm.com/consumerproducts

    Additionally, financing solutions from IBM Global Financing

    can enable effective cash management, protection from

    technology obsolescence, improved total cost of ownership and

    return on investment. Also, our Global Asset Recovery Services

    help address environmental concerns with new, more energy-

    efficient solutions. For more information on IBM Global

    Financing, visit:ibm.com/financing

    Copyright IBM Corporation 2011

    IBM Corporation1 New Orchard RoadArmonk, New York 10504-1722U.S.A.

    Produced in the United States of AmericaMarch 2011All Rights Reserved

    IBM, the IBM logo, ibm.com, Global Business Services and ILOG aretrademarks of International Business Machines Corporation in theUnited States, other countries or both. If these and other IBM trademarkedterms are marked on their first occurrence in this information with a

    trademark symbol ( or ), these symbols indicate U.S. registered orcommon law trademarks owned by IBM at the time this informationwas published. Such trademarks may also be registered or common lawtrademarks in other countries. A current list of IBM trademarks isavailable on the web at Copyright and trademark information atibm.com/legal/copytrade.shtml

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