The notion that manufacturers and distributors must choose between reducing inventory or improving service levels is a false dichotomy. The truth of the matter is that both improvements are possible simultaneously, given sufficient forecast accuracy.
Not too long ago, a full-service distributor of industrial parts came to us asking if Vanguard could do just that: reduce their safety stock and carrying costs while improving fill rates and other service levels. This company supplies more than 1 million different fasteners, tools, and other supplies to roughly 40,000 customers — lots of SKUs.
The challenges were obvious. In addition to SKU proliferation, a beast in itself, the company had been through a series of acquisitions, which multiplied its number of stocking warehouses across multiple locations. These new and additional operations made it increasingly difficult for supply chain managers to reduce safety stock while maintaining the company’s 99-percent order-fill-rate goal. In addition, most of the company’s SKUs had very sporadic demand. This made it nearly impossible to accurately forecast and plan using their combination of spreadsheets and an in-house purchase recommendation system. To mitigate the financial losses of forecast inaccuracy, the company was carrying an unsustainable level of inventory, especially inventory with very low turn over.
In addition, general lack of trust in the system forced purchasing managers to review and adjust each forecast manually, often using assumptions that were not statistically derived, and that were highly inconsistent from manager to manager. At the time, the company estimated that manual forecast preparation and processing cost each manager 2–3 days per month. Meanwhile, limited reporting features made it difficult to manage inventory with sufficient transparency.
To reduce inventory and associated carrying costs, management wanted a web-based system that could automate forecasting, improve forecast accuracy, and financially optimize inventory levels and policies.
Vanguard delivered a solution that combined our forecast automation with advanced analytic capability, especially around sporadic demand, which made forecasting so difficult for demand and supply planners.
- Accurate forecasts that easily handled intermittent demand.
- Automatic calculations of suggested orders for purchasing managers. These calculations factored reorder level, order minimums, safety stock, fill rate, probability of stock out, profitability, historic demand, and more.
- Multiple inventory control strategies that utilized Monte Carlo simulations to forecast outcomes.
- Outlier detection to warn of unexpected demand.
- Seamless integration with existing systems and accessibility across multiple warehouse locations.
- Easy integration of newly acquired warehouses.
- Ease-of-use and excellent reporting features for buyers and for senior management.
Bottom-line results included:
- Inventory reduction of several million dollars within five months.
- Improved fill-rate stability across all warehouses.