Inventory optimization

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Information about Inventory optimization
Business & Mgmt

Published on February 27, 2014

Author: Genpactltd



Helping CFOs, COOs, and Supply Chain Heads of diverse blue-chip manufacturing organizations improve working capital, budgeting, planning, and risk management through inventory optimization analytics

Inventory Optimizer Smarter way to manage inventory using unique combination of process, analytics and technology Gianni Giacomelli Senior Vice President, Genpact David Petrucci Vice President, Industrial Solutions, Genpact

A Global Business Process Services Leader: Process Transformation and Outsourcing, Analytics, Technology What we do How we do it Our impact We help leaders of some of the largest enterprises transform and run their processes and operations, including the very complex and industry-specific Unbiased, agile combination of process science, related technology and analytics limits upfront costs and enhances future adaptability We help enterprises to be more competitive by becoming more intelligent: adaptive, innovative, globall y effective and connected… Right critical mass: • we are large (64,000+ global staff) but our solutions appropriately flexible • our top management is directly involved in our client partnerships …by enabling tighter management of costs, risks, regulations, and supporting growth The results: US$22B* of impact for 800+ global clients PROCESS • ANALYTICS • TECHNOLOGY © 2014 Copyright Genpact. All Rights Reserved. 2

THE CHALLENGE PROCESS • ANALYTICS • TECHNOLOGY © 2014 Copyright Genpact. All Rights Reserved. 3

Inventory planning sits at a critical junction of finance, supply SIMPLIFIED chain, procurement and sales External Stakeholders Reporting (financial, non-financial) Forecast, Report (financial, non-financial) Revenue, Working Capital (AR) Sales & marketing COGS for pricing (short and medium term), Demand / Inventory, logistics, supply chain footprint PROCESS • ANALYTICS • TECHNOLOGY Performance expectations (financial, non-financial) CEO, Board Short- and long-term expectations of: Margin, Earnings Growth, Capital Intensity Finance Budget, KPIs , allocation and monitoring of OP/CAPEX, Inventory COGS (short and long term) and respective risk, EHS risks Operations (mfg, facilities) Working Capital (AP) Procurement Demand and availability of production inputs (commodities, energy, co mponents), respective short and medium term price © 2014 Copyright Genpact. All Rights Reserved. 4

Increasingly significant inventory challenges lead to.. • Increased supply chain complexity Sub optimal inventory practices Limited data availability and analytics capacity PROCESS • ANALYTICS • TECHNOLOGY Global footprint, more SKUs sourced, shorter response times, increasing cost and demand volatility, frequent changes in end-customer needs • Managing dynamic cost and service levels requires dynamic and granular inventory management • Sub-optimal allocation of inventory across sites • Inaccurate demand forecasting, often up to 50% • 5-10% wastage due to rapid obsolescence of inventory • Fragmented IT systems across global supply chain adds to complexity and impede optimization • Lack of a granular and dynamic view of inventory e.g. by customer, product type, cost etc. © 2014 Copyright Genpact. All Rights Reserved. 5

..working capital pressure, unrealized revenues.. Working capital pressure • Unnecessary inventory may drive working capital up by 510% • Inventory excess, volatility slows cash flows by 4-5% …resulting in opportunity cost e.g. more limited investment in sales and marketing, or straight cost e.g. short-term interest spread • Stock-outs can lead to 2-3% lost sales Unrealized revenues • Suboptimal level of inventory can also lead to ‒ slow order fulfillment, increasing cash-to-cash cycle and impacting customer service levels ‒ penalty payments due to contractual obligation PROCESS • ANALYTICS • TECHNOLOGY © 2014 Copyright Genpact. All Rights Reserved. 6

……as well as budgeting, planning and risk management issues • Wrong working capital assumptions (stock, replenishment, obsolescence) lead to suboptimal investment in other areas Obsolescence: obsolete inventory immobilizes cash, writeoffs directly hit profit • Claims: significant customer liability can arise from non- or slow fulfillment • PROCESS • ANALYTICS • TECHNOLOGY Stock-outs or write-offs lead to high variance of actual Vs. plan • Risk Management • • Budgeting and Planning Inaccurate and static demand forecasting impairs timely and effective budgeting and resource allocation Regulatory: environmental and waste disposal risk from aged and obsolete inventory in certain industries © 2014 Copyright Genpact. All Rights Reserved. 7

THE SOLUTIONS PROCESS • ANALYTICS • TECHNOLOGY © 2014 Copyright Genpact. All Rights Reserved. 8

Robust and modular inventory optimization approach A B C Multi-criteria inventory segmentation Visibility management D Demand forecasting • Inventory metrics - • Segmentation dashboard based on including flow customer, product and bottleneck and other custom visibility criteria • Sophisticated forecasting models (e.g. for intermittent demand) • Financial metrics including working capital projections • Forecast simulation • Monitoring exceptions to plans • Sensitivity analysis and simulation by segment • Inventory strategies by segment PROCESS • ANALYTICS • TECHNOLOGY • Adjustments based on market and business intelligence E Planning and optimization • Replenishment and ordering strategy • Multi-echelon inventory optimization models Obsolescence management • Identifying and estimating potential obsolescence risks • Develop mitigation strategies • Advanced forecasting and inventory models © 2014 Copyright Genpact. All Rights Reserved. 9

A Visibility management provides granular and actionable reports ILLUSTRATIVE to improve planning and monitoring What can be achieved Sample output • Comprehensive view of metrics for better informed inventory decisions and risk management • Better segmentation of inventory which helps prioritize remedial actions • Improved controllership and effective base lining • Setting realistic improvement targets Delivery approach Technology • QlikView, a flexible cost-effective IT platform, for customized dashboards • Cloud based in-house solution which integrates with existing ERP systems Analytics • KPI enterprise dashboards with multi-dimensional drilldowns (e.g. time, location, product family, etc.), trend analysis On-going services • Benchmarking (internal/external) on key supply chain metrics PROCESS • ANALYTICS • TECHNOLOGY © 2014 Copyright Genpact. All Rights Reserved. 10

B Multi-criteria inventory segmentation enables inventory redeployment, increase cash flows and return on asset ILLUSTRATIVE What can be achieved • Effective inventory redeployment which helps reduce excess inventory and/or re-deploy investment in high performing inventory • Increase return on assets (ROA) • Sample outputs Increase in cash flow, revenue and profitability Delivery approach Technology • Cloud based in-house solution which integrates with existing ERP systems; pay for „solution‟ not „infrastructure‟ Analytics • A multi-criteria approach accounts for financial (e.g., gross margin), operational (e.g., velocity of movement) and customer criticality factors (e.g., high volume products) • AHP (Analytical Hierarchy Process) based algorithm On-going services • Segmentation strategy design, periodic modifications based on business changes and execution PROCESS • ANALYTICS • TECHNOLOGY © 2014 Copyright Genpact. All Rights Reserved. 11

C Standardizing demand forecasting improves forecast accuracy, response to market, and planning efficiency What can be achieved ILLUSTRATIVE • Up to 30-35% reduction in forecasting errors • Up to 20% better planning efficiency through scenario based modeling Sample outputs and templates • Pro-active response to dynamic market conditions Delivery approach Technology • Cloud based in-house solution with seamless access to ERP data • Flexible cost-effective IT platform for granular, frequently updated forecasts Analytics • Advanced forecasting models to handle dynamic and intermittent demand reducing forecasting errors e.g. Croston’s, Fourier • Factoring in market intelligence in the forecasting models enables accurate forecasts On-going services: • Demand planning and forecasting at agreed frequency PROCESS • ANALYTICS • TECHNOLOGY © 2014 Copyright Genpact. All Rights Reserved. 12

D Improved planning and optimization helps minimize overall inventory, improve service levels What can be achieved • Customized business policies and strategies, such as optimal safety stock for top-selling products and low-selling products • Minimize the total inventory costs, including carrying cost, stock-out cost, and ordering cost, while setting adequate service levels • ILLUSTRATIVE Effective service level planning through lead time optimization on a continuous basis Delivery approach Technology • Pragmatic technology in partnership with industry leading players e.g. Steelwedge and Kenaxis Analytics • A hybrid approach to customized replenishment policies that account for inventory classification, demand pattern, customer criticality and other business-specific parameters On-going services • Continuous support in response to business changes using experienced resources PROCESS • ANALYTICS • TECHNOLOGY © 2014 Copyright Genpact. All Rights Reserved. 13

E Obsolescence management helps minimizing working capital requirement, manage obsolescence risk ILLUSTRATIVE What can be achieved • Minimizing working capital and increasing profitability by releasing cash from excess inventory • Effective inventory redeployment • Sample outputs Estimating risk of obsolescence Delivery approach Technology • Interactive dashboards with slicing and dicing capability for granular and timely visibility Analytics • Identifying existing and potential obsolescence • Risk estimation and mitigation recommendations On-going services • Obsolescence management on a periodic basis or at a product family level PROCESS • ANALYTICS • TECHNOLOGY © 2014 Copyright Genpact. All Rights Reserved. 14

Inventory optimization’s advantages over other approaches Classic Inventory Management Advanced Inventory Management Inventory Optimization • Materials Requirements Planning (MRP) Constraint based planning (APS) IO engine Days of supply rules for setting inventory levels ABC Classification Profit-driven analysis Materials Management System Closed loop planning and analytics with inventory control via execution management Resorts to chase techniques Optimized considering production and transportation Cycle counting No control over production scheduling Advantage of Inventory Optimization over prior methods PROCESS • ANALYTICS • TECHNOLOGY Better characterized demand uncertainty lead time variability • Advanced modeling integrates with MRP and APS Rationalizes inventory with minimal impact on revenue/profit • More predictable materials flow • Faster re-configuration of supply chain • Smoother absorption and handling of unexpected supply or demand swings Better synchronization between production and dispatch © 2014 Copyright Genpact. All Rights Reserved. 15

Up to 10% working capital reduction can be achieved through robust inventory optimization Improvement potential Visibility management Multi-criteria inventory classification Demand forecasting Planning and optimization Near-time KPIs visibility aids quick decisions 1.5% Structured techniques for optimal segmentation and prioritize inventory investments 2.5% Advanced models coupled with market intelligence to improve forecast accuracy 3.0% 2.0% Obsolescence management 1.0% Proprietary techniques for optimal replenishment and service strategies Proactively predict, track and manage inventory risks throughout the lifecycle Total improvement up to 10% of working capital PROCESS • ANALYTICS • TECHNOLOGY © 2014 Copyright Genpact. All Rights Reserved. 16


About Genpact Genpact Limited (NYSE: G) is a global leader in transforming and running business processes and operations, including those that are complex and industry-specific. Our mission is to help clients become more competitive by making their enterprises more intelligent through becoming more adaptive, innovative, globally effective and connected to their own clients. Genpact stands for Generating Impact – visible in tighter cost management as well as better management of risk, regulations and growth for hundreds of long-term clients including more than 100 of the Fortune Global 500. Our approach is distinctive – we offer an unbiased, agile combination of smarter processes, crystallized in our Smart Enterprise Processes (SEPSM) proprietary framework, along with analytics and technology, which limits upfront investments and enhances future adaptability. We have global critical mass – 62,000+ employees in 24 countries with key management and corporate offices in New York City – while remaining flexible and collaborative, and a management team that drives client partnerships personally. Our history is unique – behind our single-minded passion for process and operational excellence is the Lean and Six Sigma heritage of a former General Electric division that has served GE businesses for more than 15 years. For more information, visit Follow Genpact on Twitter, Facebook, and LinkedIn. PROCESS • ANALYTICS • TECHNOLOGY © 2014 Copyright Genpact. All Rights Reserved. 18

Thank You Gianni.giacomelli[at] David.petrucci[at]

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