Daily Archives: March 30, 2010

Three Tips to Get Strategy Right

A recent blog entry on strategy on the morph from The Conversation over at the Harvard Business Review had three great tips on how to get your strategy right in these turbulent times that need to be highlighted.

  1. Distribute the right to make strategy throughout your organization
    Strategy needs to be a collective effort — not an edict handed down from on high — and people need to be empowered to make the right decisions.
  2. One process does not fit all decisions
    Some processes need to be long and drawn out because the decision will affect everyone at all levels of the organization … others, that involve decisions that will only affect a single department, can be made more quickly. The key is knowing what process to use when, and distributing that knowledge throughout the organization.
  3. Resources — money and talent — needs to move as fast as decision making
    A strategy needs to be executed. Otherwise, it’s just another pointless decision.

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Algorhythm: Still Pounding Out the Optimization Rhythm on the Tabla (Part I)

Since I last covered Algorhythm and their supply chain optimization rhythm, they’ve been pounding out a steady beat and extending the breadth and power of their unique supply chain optimization platform. Not only do they have extensive optimization capabilities in production planning, network planning, and logistics planning — with specialized solutions for oil, steel, and packaging, but they now have a best of breed multi-echelon inventory optimization capabilities and a best of breed distribution network design optimization platform that can take multi-echelon inventory requirements into account and allow you to optimize your distribution network around your detailed inventory requirements, which can be specified at daily demand levels if you desire. This is a very powerful capability that sets their platform apart from the other solutions on the market, as most of the other supply chain optimization platforms focus on inventory, or network design, but not both simultaneously.

To understand just how powerful their new solution is, we have to start by discussing how hard it is just to optimize inventory. There’s a lot more to inventory than just the carrying cost that is recorded on the books. There’s the cost of replenishment, the cost of a stock-out, and the cost of missed service levels, for starters. If your planning is poor and you’re always having to rush inventory, or if you’re not maximizing truckload volume, you’re spending a lot more on inventory replenishment than you should be. If a stock-out results in lost sales, that’s missed revenue opportunities which go straight to the bottom line. And if you keep missing your service level targets, your customers might just find a new source of supply at contract renewal time. (And on the flip side, if you are constantly carrying too much inventory to make sure you don’t miss service levels, your carrying costs will go through the roof.)

To optimize inventory, you have to take into account the many layers of your distribution network: factories, (first tier) national warehouses, (second tier) regional / provincial warehouses, and (third tier) local warehouses; storage space at each location; valid flows from one tier to another, as well as valid flows between nearby warehouses at the same tier; transportation options available; stores or end-use facilities that require the SKUs; the individual SKU demand patterns (and [expected] forecast accuracies); lead times (and variabilities); service levels; and costs associated with storage, transportation, and stock-outs at various inventory levels. (Transportation costs in particular will vary.)

This is because you don’t need the same service level at every node in the network to achieve that service level at an end customer location, especially if a customer location can be serviced by multiple distribution centres. For example, if an end customer location can be serviced by three different distribution centres, you can achieve a 98% service level (defined in terms of SKU availability) as long as each individual distribution centre has a 75% service level (as the chance of all three distribution centres being simultaneously out of stock and unable to service the customer location is 0.25 * 0.25 * 0.25 or 1.5625%). Furthermore, as the lead time from each DC to each customer location will vary depending upon distance, transportation options, and local routes, and so on, the inventory levels at each DC can vary and still allow you to meet your target service levels, which can in fact vary by location (as you’ll want a higher service level at a high-profit location than you will at a low-profit location as service levels drive inventory which drive costs). In fact, the deeper you dive into inventory, the more complex the cost equation becomes and you see that you really do need to take into account all of the elements supported in the Algorhythm Xtra Sensory Inventory Optimizer, inventrhythm, if you truly want to optimize your inventory costs.

But this is just the beginning. Since your distribution network design will ultimately dictate your inventory costs, to truly optimize your inventory costs, you have to simultaneously optimize your network (to the extent that you are able). Algorhythm‘s platform can do this, and we’ll discuss what’s involved in Part II.

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