For the first time in years, Inventory and supply chain planning for the wholesale-distributor and their suppliers is undergoing a most fundamental change! A major development is finally moving from “talk” to practice. If you have any involvement in supply chain management, and with your Enterprise ERP system, you would be wise to catch up with this. And yes, there is something in it for manufacturers/suppliers too!
Many years ago our ERP systems evolved beyond utilizing manually set fixed reorder points and reorder quantities. The big conceptual breakthrough was the advent of methodologies exactly like, or similar to, what was described in “Distribution Inventory Management (for the 1990’ s)" by Gordon Graham and the MRP (materials requirements planning) systems used by manufacturers. Software developers latched on to it as the primary “engine” contained in several popular ERP inventory and purchasing modules. Yes, it was an improvement - but has remained essentially unchanged.
In practice, it relied heavily on demand forecasts to drive inventory planning and reordering, and used safety stock inventory to mitigate variability in demand forecasts (forecast error) and lead-times. The results were better, but I believe at the expense of “more inventory than you need immediately”, and sacrificing a focus on - “where inventory should be” as opposed to “how much inventory we have” - particularly in terms of distribution center and branch warehouse inventory replenishment, how wholesale distributors go about ordering product from suppliers, and how suppliers react.
Along the way, “other passes on improvement” have been attempted, at least in part as a desire to obtain some better outcomes. Often, oversimplified versions of Just-In-Time (JIT) appeared, taking its’ queue from the quality management and lean movement in Japan in the 1980’s. JIT relied on simple “demand signals” from customers - to suppliers up and down the supply chain, often with little or no computer support. JIT looked at inventory as “waste”, as opposed to an asset, and sought to minimize it by minimizing the variation in demand and supply, as well as reducing re-order quantities. But its’ emphasis on just inventory reduction, a lack of a systems-wide view of inventory, and an incomplete planning equation often created an inflexible supply chain subject to disruptions.
Embracing “Pull” Inventory & Supply Chain Management
But something did emerge from all of this. If not completely new, it built upon and extended some of the best features of JIT as well as from the lean movement. Called “Pull Inventory & Supply Chain Management”, it sought to align efforts and resources as close as possible to actual customer demand, while at the same time providing more visibility to the total inventory requirements and status across the entire supply chain. It didn’t necessarily view inventory as waste nor did it seek to establish safety stock levels in some static way. Rather it sought:
- To hold the right amount of inventory, at the right place in the supply chain, to promote inventory flow (pulling inventory, not pushing inventory), while minimizing working capital
- To size and dynamically adjust stock positions based on focusing heavily on the “inventory drivers”
- To reduce the emphasis on that elusive goal of forecast accuracy in driving supply plans; instead demand was driven almost entirely by actual customer demand – often called the “buy signal”
- a “new collaboration” approach with manufacturers/suppliers in sharing “buy signals”; in other words fostering the opportunity to share data?
These are just a few of the key concepts. Now, are you thinking; “Pull Inventory & Supply Chain Management” is just a nice theory? Not so. The benefits have been amply demonstrated in several industries. The problem is, that many wholesale distributors and their suppliers think they are a lot different – as opposed to thinking; “supply chain is supply chain – no matter who you are”. As a result, they have settled for incremental improvement - rather than more radical change - not learning from the “new chapters” in supply chain management and accelerating the time-line for adoption.
What’s Coming?
If there is any obstacle to the adoption of this new inventory and supply chain methodology, it will be “the change in thinking” and the general level of supply chain skills required of purchasing, inventory and supply chain managers to execute. Conceptual education will surely be one of the keys – not just some eventual software training. Understanding the impact for both wholesale-distributors and their suppliers will be another; finally an attempt at a win-win relationship through flexibility in their supply chain delivery approach and a true alignment of interests.
Inventory and supply chain management at all channel levels is going to be an even more critical function. Of course it has always been important, but will become more critical, competitively, as some companies adapt…and others don’t. This is no longer just a back-office function consideration. It’s about competitiveness and your company’s resource management; its’ impact on profits, cash flow and customer service levels.
Enterprise software vendors are going to move pretty quickly, I believe, to begin to incorporate these concepts into their systems. But, even before they do, there are several steps you can take right now, with little or no software support.
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for our “white paper” which describes “Pull” in more detail, along with more of “the how to”; what you can do right now!
About the Author
Howard W. Coleman is Principal at MCA Associates, a team of Senior Consultants who provide thought-leadership to wholesale distribution and manufacturing companies that are committed to operational excellence for over 24 years. Howard can be contacted as follows:
Howard W. Coleman, Principal
MCA Associates
66 Derbyshire
Derby, CT 06418
203-732-0603
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www.mcaassociates.com
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