Inventory in the balance

May 4, 2004
Inventory in the balance When it comes to inventory, having too much is as bad as not having enough Every night, Ace Hardware Corp.'s (

Inventory in the

When it comes to inventory, having too much is as bad as not having enough

Every night, Ace Hardware Corp.'s ( computer software goes looking for potential orders. After business hours, the system comes to life, reviewing individual items and comparing real-time inventory with service level goals established for each SKU/warehouse combination.

The software determines when to release a replenishment order. If the balance is zero, for example, an order speeds to the supplier. If the system counts x amount of inventory, it holds the order until the next day. The system delays the order release even longer when it detects y amount of inventory, according to Scott Smith, department manager-inventory with Ace Hardware.

Once those order decisions have been made, that day's purchase orders are whisked to manufacturers via electronic data interchange (EDI). As the vendor ships the product, it forwards an advance ship notice (ASN) to Ace for the items that were invoiced and shipped.

“This information supports our expediting decisions and our receiving process,” Smith says.

“Looking to the future, Ace is trying to connect the market basket level data warehouse back to the production level,” Smith adds. “We are bringing our suppliers into the inventory pipeline via our collaborative planning, forecasting and replenishment (CPFR) program. This program enables the manufacturer to look into the Ace system to do sales forecasting for their products at Ace.”

Suppliers can see product quantities, fine-tune the order policy and actually release their own purchase orders, Smith explains. Since the sales forecast and replenishment processes are handled by the manufacturer, Ace hopes the manufacturer will use this information in its production planning.

“Technology is very important to our performance today and for our future,” notes Smith. “We are a co-op, so our owners are also our customers. As a co-op, we spend money carefully. When it comes to inventory management strategy, we have to balance two important considerations — fill rate vs. warehouse utilization. We cannot over-cube a building without affecting fill rates. And we strive for the highest fill rates for our retailers.”

Overall, Ace Hardware's service level goal for 2004 is 97%. “We'll bump that to 98% over the next couple of years,” Smith adds.

Like most shipper companies trying to better manage their inventory and their assets, third-party logistics provider (3PL) Olson Co. ( concentrates on accuracy and timeliness of orders as they are shipped and arrive at their destination, notes Mike Mutch, senior project manager with the 3PL.

A number of the key performance indicators Olson measures are dictated by their customers; others are for internal use. Mutch measures and tracks details such as the accuracy of pick and pack op-erations. He can evaluate the company's warehouse staff on an individual basis.

Like many of its manufacturer clients, Olson tracks every piece of inventory into and out of its facility via its warehouse management system (WMS). All orders are entered into the WMS. As they are processed throughout the warehouse, Olson tracks each step. “We can tell you where the order is in our process real time,” adds Mutch.

All inbound is tracked by purchase order and product ID number. The WMS tracks every location in the warehouse and is integrated with Olson's radio frequency identification (RFID) system. “We use RFID to validate location and track every move in the warehouse,” claims Mutch.

All that careful tracking is reported back to the customer electronically. Olson provides an electronic interface to each customer's ERP system. Web-based portals allow customers to see real-time inventory and order status, according to Victor Lecato, director of solution delivery and IT with the 3PL.

“Our customers can plan more intelligently because they can see what's in the warehouse,” says Lecato. “Their sales people know what they can promise to ship because they have access to real-time inventory numbers.”

“At the same time, clients' purchasing people can see what inventory is being depleted and authorize new orders to suppliers,” adds Mutch.

Dow Corning Corp.'s ( use of the web for inventory management goes well beyond posting what's available. Customers can actually place orders on the web using a self-service model introduced by the chemical giant in 2003.

“About 35% of our business comes to us through the model,” notes Lori Schock, global business process manager with Dow Corning. “We started with a select group of product lines and are looking to expand the number of lines.”

The simple, yet flexible model provides clearly stated rules for engaging in business. For example, Dow Corning guarantees delivery of material A in x days as its standard. If the customer needs it sooner, the model gives the additional service cost.

“Even though it's self-service, customers have choices,” explains Schock. “The model brings the perfect match between what we're capable of providing and what the customer needs. They can immediately see the cost of an order and compare it with competitors.” The self-service model includes competitive prices, updated several times a day.

Dow Corning's self-service model has reduced back-office costs and improved flexibility. In fact, the model has proven so successful, Dow Corning is marketing its expertise.

“We feel the stronger we can make our customers in the market, the stronger we can become,” suggests Schock. So Dow shares its knowledge of how to set up a self-service model, what kind of tracking system is needed, and the business processes needed to support the model.

While Dow Corning has considerable expertise to share, the corporate giant also has inventory issues to resolve. As a global company with manufacturing sites around the world, it seeks to reduce the 25% to 35% of inventory on ocean carriers at any given time.

“With that amount of inventory constantly in transit, supply chain management becomes more critical to ensure we optimize and streamline everything else that deals with inventory,” says Schock. “Having visibility of where demand is generated is critical. Our supply chain solution [mySAP SCM from SAP]does it very well, but we've picked all the low-hanging fruit.

“Based on our business processes and the amount of inventory we have, we need to make huge fundamental changes to achieve significant inventory reductions,” continues Schock. She suggests Dow Corning needs to refine manufacturing locations, add capability in different parts of the world, or change its sourcing strategy.

In fact, Dow is currently re-examining how it does business. Traditionally, 95% of its product — 60,000 unique SKUs — is made to stock.

“We have lots of sizes and distribution channels,” explains Schock. “We are analyzing inventory and materials and looking at customer ordering patterns. We need to determine first if there are quick wins. We've asked ourselves, ‘If a customer gives us adequate lead times, can we make/assemble to order?' The answer is a resounding ‘Yes.' Moving away from make-to-stock would allow us to reduce inventory while improving delivery to the customer.” LT

May, 2004

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