If you engage in direct manufacturing, chances are you have a semi-modern Enterprise Resource Planning solution (or at least a precursor Material Requirements Planning Solution) augmented by a semi-modern Supply Chain Planning solution designed to optimize your forecasts, inventory levels, and production. Chances are also good that based on forecasts (which are at least calculated down to weekly, if not daily, intervals), inventory levels (which are updated based on weekly or daily utilization by production), desired safety stock levels, and safety buffers on lead times, you have auto-replenishment set-up and the ERP will automatically generate re-orders based on lead times, safety stock alerts, or manual forecast alterations.
Chances are even greater that your demand planners will believe these are good and automatically approve them without further thought because the material requirements plan was optimized against the forecast and all available data.
NOTHING COULD BE FURTHER FROM THE TRUTH!
An optimal plan for production is NOT an optimal plan for purchase. Production requires having the right inventory on hand when you need it for the levels you need to support, balancing inventory against stock-out and obsolescence/expiration risk. Purchasing requires buying at the right volumes to take advantage of economies of scale (and tier discounts) and using the right distribution options to optimal capacity, balancing an economic order quantity (that minimizes total landed cost at a minimum) against inventory holding costs and risks of obsolescence/expiration. Your SCP enhanced ERP/MRP does the first. NOT the second. (There may be dozens of SCP systems out there, but since NONE of them support sourcing or procurement, NONE of them have the other half of the data that they would need to do this.)
And for mid-size manufacturers, this is costing them MILLIONS of dollars a year. And for large enterprise manufacturers, tens of millions of dollars a year. (In fact, the average loss from failing to optimize replenishment is 10% of inventory! This means that for every 100 Million of inventory maintained in a large enterprise, 10M is being lost. TEN MILLION.)
This is why GenLots exists — to optimize replenishment and minimize overall material lifecycle costs while maintaining (and, if possible, increasing) service levels and reducing overall working capital needs. In fact, this is so important, that this is all GenLots does (because no one else does it — which is partially the case because none of these SCP solutions do Direct Sourcing or even Direct Procurement properly, as per an ongoing Sourcing Innovation series being co-developed with Supply Chain Matters).
There are three main parts to the GenLots solution:
- Order AI: the core optimization engine that can be directly integrated with your ERP (and is currently directly connected to SAP as a SAP Partner on the SAP store) that automatically pulls (and deletes) all the auto-generated replenishment orders from the ERP and replaces them with MR-optimized orders
- Order UI: the UI that allows the purchasing manager to see all of the orders generated, what the original order was, and what savings and service level increases resulted from the modified order
- Policy Advisor: the optimization-enhanced simulation engine that advises the organization on how to set their safety stocks, lead time buffers, MOQs, preferred discount tiers (for suppliers to bid against), default re-order windows, etc.
Order AI
Built on solid decision optimization and machine learning algorithms, the Order AI automatically retrieves every generated purchase order for a raw material in the ERP and calculates the right order quantity (and order date) based upon the raw material cost model (including the logistics costs using the proper mode of transport and default mode capacity), lot constraints (due to supplier or carrier capacity), scheduling requirements (based on delivery windows and processing time), safety settings (stock levels and lead time buffers), expiry windows (for perishable or decomposable stock), and, if desired, CO2 emissions (based on the available distribution options).
Order UI
This allows you to examine the orders created by GenLots and not only see the differences in order quantity and order/ship date, but the overall impacts on cost, overhead, working capital, and service level. For each material, it will break down the difference between the original supply chain cost with the system generated orders and the current supply chain cost with the GenLots orders by computing the order savings (processing and logistics costs), inventory (overhead) savings, and waste/scrap/obsolescence savings. And while the average is 10%, they have seen savings of 50% or more due to high shipment costs from too many shipments (with trucks going half full) on low value inventory, and from high waste costs (from manufacturers that pushed the safety stock and safety buffers too high and ended up wasting a lot of materials in F&B and Pharma manufacturing where shelf life of some products is very limited). It will also indicate the (estimated) service level achieved with its plan.
Policy Advisor
Optimal buys require not just optimal plans (because if that were enough, then maybe the SCP solutions wouldn’t be doing such a dismal job and costing you 10 Million on every 100 Million that flows through your warehouses), but also optimal parameters. The Policy advisor can be used to run multiple simulations to determine, for each material (based upon the production forecasts it is tied to), the appropriate safety settings (to optimize inventory levels against required service levels, warehouse capacities and carrying costs, and risk of waste), stock levels, lot sizes (and price tiers to request from suppliers), and service levels for the organization, which can lead to even greater cost savings in material replenishment when appropriately defined. (Remember, the optimization works within parameters you restrict it to, so if you restrict it to bad bounds, it won’t be able to save you nearly as much as you could save.)
Expert Support
Even though it’s available on the SAP Store, this is one solution where you should go direct (to GenLots). GenLots preferred methodology, even if the integration is literally plug-and-play for you as a SAP client (who has invested the effort to clean up their forecasting and ERP-based re-order and approval processes and ensure that clean, valid data is always available down to at least weekly intervals) is to work with its clients for the first six to twelve weeks (depending on organizational size), make sure everything runs smooth, and help its clients define the optimal (starting) policy to maximize the value and success of the GenLots solution. This is because they not only want you to see results, but see the full extent of results possible. When it comes to material replenishment, the reality is that just because you identify a few million in savings, that doesn’t mean the solution is working well. If your inventory value over a year exceeds 100 Million, it’s likely that you have a ten million dollar savings opportunity and they want to do everything in their power to maximize your chances of seeing that.
(And if, at the end of the day, with their expert guidance you only see a few million in savings, you can pat yourself on the back for being best in class in forecasting, re-order windows, and optimizing inventory policies, because you’d have to be to not see a massive savings in your first year. [Odds of this happening are less than 1/5 though if you are going through over 100M in inventory a year.] It’s no different than applying strategic sourcing decision optimization across your major categories — no matter how good you thought you were doing, studies showed time and time again an average savings of over 10% because you just couldn’t model all of the variables and compute all of the trade-offs [while adhering to all the constraints] through simple spreadsheet calculations.)
Proven Solution
GenLots may not be a name that you know in North America, but it’s one you should. Founded in 2017, the solution has been under consistent development for eight years, in daily production for six years, and is currently being used by 100 Billion-Plus companies to optimize their replenishment schedules, reduce inventory up to 20%, deliveries up to 50%, and save up to 10 Million for every 100 Million of inventory processed. It’s the best kept secret that needs to be exposed because you’re losing millions, your SCP and ERP providers will never admit otherwise, and you can stem the bleeding with a software license that starts at only 5 figures a year!