Category Archives: Inventory

Anticipatory Demand Planning is Good, but Anticipatory Shipping?

SI can believe that Amazon patented a Method and System for Anticipatory Package Shipping (US Patent 8615473) but can’t believe it would use this for more than a small number of items. Nor does it believe the system would be implemented as outlined in the patent as filed, at least in the short term.

It took Amazon 7 years to turn its first profit, and while Prime is currently very profitable to Amazon (which makes $78 more in profit per year per Prime customer, on average, than non-prime customer according to CIRP’s market research – Source), those margins would drop substantially if Amazon started shipping tens, or hundreds, of thousands of packages a year that no one wanted. Amazon does have an efficient distribution network and probably has the absolute best deals with postal and courier services that can be papered, but every shipment costs money and every unnecessary shipment eats into profit. Returns cut into profit margins enough, how much are returned shipments to nowhere going to cost?

Thanks to big data, predictive analytics is getting better by the day, but it’s still hit and miss at a granular level. While it’s pretty easy to use correlation data across a large customer base to predict that you are likely to desire an item, it’s harder to predict whether or not you’d actually buy it, and if you would, at what price point, assuming you don’t already own the product in question. (It’s always telling the doctor he wants books and media he already owns.)

As a result, any predictive analytics at the individual consumer level are going to be hit-and-miss at best. Predictive analytics work best across a large consumer base with a lot of data where one can predict that, on average, 5 in 100 people who match a profile will buy the product from Amazon.

And, from Amazon’s viewpoint, the best use of the predictive analytics is on new releases, as the bulk of sales in many of its categories, and books and media in particular, are in the weeks immediately following a new product release. With the right data and the right algorithms, it can not only predict how many units it is likely to sell against its current customer base, but if the demand is enough, how many in each region that is associated with each distribution center and how the orders will likely track over time on a daily basis.

In this, and only this situation, would anticipatory shipping, and in particular, anticipatory packaging, make sense in the short term. For example, if Scott Adams were to release a new Dilbert book and Amazon predicted 200,000 copies would be sold in the first 3 weeks, and expected that it would get 50,000 of those sales, pre-packaging 40,000 for shipment and then distributing those across it’s DCs such that each DC received a number of books proportionate to the expected sales in the serviced area would be a good idea. All Amazon would have to do to speed up shipment would be to slap the delivery address on the boxes as the orders came in and have them ready to go in the next pickup for local delivery.

In the future, once the system is fine-tuned and its delivery partners have the technology to replace a unique delivery address identifier with a specific delivery address on-the-fly, Amazon can pre-ship a set number of these pre-packaged items to the local post office or delivery company every day, which can, in turn, load those packages onto the appropriate courier truck each morning as the addresses in the system are updated with consumer delivery addresses sent over by Amazon upon each purchase.

But not everyone would get faster shipping service. In order to prevent too many unnecessary shipments and loss, Amazon would have to err on the side of caution and pre-package (and pre-ship) less unit of an item than it expected to sell, and restrict the anticipatory shipping and packaging to only those items expected to have a large sales volume. In most cases, the best Amazon will do is optimize the distribution of inventory across its warehouses. However, this can still take a day (or two) off of average delivery time, so this is still a good start.

Any differing opinions?

Making the Warehouse More Sustainable

A recent article over on Logistics Management, which was titled 7 Trends in Sustainable Design but which only gave six (as number six was absent from the list), gave some good tips on making the warehouse more sustainable that can be retroactively applied to existing warehouses.

  • Better Lighting
    Lighting can consume 30% of energy use in a DC. If you reduce this by 33%, that’s 10% off of your energy consumption. And when you consider that many DCs have too many lights that take too much power on for way too long, you see huge opportunities. Be sure to install daylight and motion sensors to make sure that lights only come on when it’s not sufficiently bright and only stay on when there is someone there. Switch to energy-efficient fluorescent fixtures, which can be turned on and off on demand (and are suitable for intermittent operation). And if any renovations are being done, install solar tubes, lighting tubes, and clear glass to take maximum advantage of natural daylight.
  • High-Volume Low-Speed Fans
    Designed to move massive columns of air at low speeds, HVLS fans can help regulate a facility’s temperature year-round from floor to ceiling and permit facilities to increase or decrease thermostat temperature settings between 3 degrees and 5 degrees without realizing any negative temperature changes. Furthermore, if they are networked, monitored, and controlled from a central location, cooling and heating costs can be decreased by up to 50%!
  • Returnable Plastic Containers (RPCs)
    At the very least, use RPCs in internal captive pools designed for a particular (set) of operations, or, if possible, in external shared pools with standardized designs that enable supply chain wide efficiencies. These can minimize operating costs (as non-reusable containers cost money) and minimize waste reduction (by 90% plus), which further reduces costs.

In addition, the following tips not mentioned are also applicable:

  • Use Electric Lifts
    Fuel-based lift trucks use non-renewable resources and produce pollution, which increases the air circulation requirements of the warehouse (and demands even more energy be used). Electric lift trucks produce no pollution and the batteries can be recharged from renewable energy resources.
  • Harvest Your Own Power
    Use ground source heat pumps, solar panels (on the roof/sides of the building) and/or windmills to maximize the use of your own free, sustainable energy sources and minimize your dependence on the grid.
  • Harvest Rainwater
    And use it for cleaning vehicles, flushing toilets, and other toilets where the water does not have to be pure or sufficiently chlorinated.

Can We Make EOQ Relevant Again?

This summer, Supply & Demand Executive published an article on how to make EOQ relevant again. Going through the recent archives, it got my attention because it is simultaneously a metric that should have never lost relevance and a metric that loses relevance when too much emphasis is placed on JIT or avoiding stock-outs (at all costs).

EOQ, short for Economic Order Quantity, is an old-school metric whose function is to identify the optimum order size that has the lowest cost. Defined as the square root(2UA/IC), where:

  • U is the (annual) usage,
  • A is the acquisition cost per order,
  • I is the inventory carrying rate, and
  • C is the cost per item

if demand is relatively constant, or at least known and predictable, the item is purchased in lots or batches, and the order preparation and inventory carrying costs are constant and known, then the formula tells you how much to order (and, as a result, how often to order) to minimize your overall order cost.

But, as the article points out, even assuming you can mesh this with your JIT production schedule (timing the orders so that you don’t carry too much inventory but still keep production running smoothly), these are not all of the costs associated with an order. Other costs include:

  • purchase order processing cost (which should be included in acquisition cost)
  • a true ICC rate (and not the holding cost computed as the extra cost of money invested in stock) that takes into account opportunity costs (which should be included in I)
  • taxes paid on inventory (which can be substantial and why many auto dealers, for example, have year end clear-outs) (which should also be included in I)
  • stock quantity shrinkage loss due to handling, pilferage, and theft (which should also be included in I)
  • stock risk losses due to product obsolescence, deterioration or shelf life expiration (which should be factored into C)

Thus, in order to use EOQ, you need to first insure that all of these costs can be accounted for. Then, as per the article, you need to insure that:

  • the product(s) are offered at a single price,
  • demand is predictable,
  • prices will not change (significantly) during the time the order is in stock,
  • stock will not exceed the shelf-life,
  • a single order can be placed, and
  • freight is included in the purchase price, or can be factored in.

In this situation, if the additional costs identified above are factored in, EOQ is still very relevant and should be used. However, if multiple assumptions are violated, EOQ may not be appropriate, and, more specifically, if demand is slow, or very unpredictable, then JIT is the preferred method.

And, furthermore, if you

  • establish minimum quantities to reflect minimum purchase volumes,
  • set a maximum ceiling stock for difficult, bulky, or large items, and
  • base adjustments on multiples of packaged lots

then you may find that EOQ is still right for you.

Did Descartes Miss the Point in Its List of Four Things You Can Do Today To Reduce Fuel Costs?

Given that Gas Prices are Too Damn High and that this situation is not about to change anytime in the near, and even not-so-near, future, a recent white paper by Descartes on Reducing Fuel Costs: Four Things You Need to Know and Can Act on Today caught my attention. However, while their suggestions are good, I think they kind of missed the point. Going straight to the section on What You Can Do Today, Descartes suggests that you should:

  • Decrease the Total Miles/Kilometers Driven by the Fleet
    Since the vast majority of fleets still drive inefficient routes to serve their customers, this is a good suggestion on the surface, but it’s easy to take this too far. For example, while the shortest route from Birmingham, Alabama to Indianapolis, Indiana might be straight through Nashville, Tennessee, driving through there at rush hour is not the best move as the trip could take an extra 3 hours and every hour the engine is running, gas is being consumed. This requires some smarts. Sometimes longer trips are more efficient.
  • Minimize Idling
    This is a great suggestion. Not only does this burn fuel, but it harms the environment. However, when a conscientious driver is idling, it’s not when he’s making a delivery, but when he’s waiting to make a left hand turn. The right routes don’t have left turns. That’s why UPS does it’s best to eliminate them. However, this can slightly lengthen a route, which is in conflict with the last suggestion.
  • Change Driver Behaviour
    If driver behaviour is a major cause for fuel inefficiency, then this is obviously a good thing, especially if the driver is excessively speeding (well beyond the fuel efficiency zone), (too) rapidly accelerating, and hard-braking on a regular basis. But the driver’s behaviour might not be entirely his fault — it could be a fault of your training program, which might be mentor-driven by your senior drivers who have had bad habits all of their driving career and pass them on. The first step should be to check your training programs and requirements and make sure your drivers get the right behaviour day one.
  • Implement regular maintenance monitoring plans.
    Vehicles with properly inflated tires, well maintained engines, and good braking systems do maintain less fuel, but don’t go overboard with preventative maintenance. An overly aggressive maintenance plan will replace parts needlessly and eat up the savings you get in decreased fuel utilization pretty quickly. Monitor aggressively, but maintain sparingly.

In other words, it’s suggestions for what you can do today were good, but not great. However, the section on how technology can help was much better. In this section, it made four recommendations, and three of them were on the money.

  • Route Planning and Optimization
    This optimizes the routes to balance minimum driving distance and minimum run time (by adding in right turns to reduce idling and slight detours to bypass commonly congested areas) across the fleet and, as the paper notes, can result in a reduction of total route length by 5% to 30% when done properly.
  • Mobile & Tracking Solutions
    This allows you to track your trucks and know the exact location of your drivers, the routes they have taken and, most importantly, how the fleet is performing against the plan.
  • Telematics
    A constant measurement of engine data and driver performance can allow engine problems to be identified immediately and bad drivers to be singled out for training to improve their performance.

The last recommendation, not so much. Basically, the paper recommended a cloud-based solution for all the standard reasons, but clearly forgot that the cloud is not a fluffy magic box and not all of the promised advantages will materialize.

If you track, measure, and optimize, you will minimize fuel requirements while improving performance, but no one tip is going to save you and over-simplifying the problem can cause as many problems as it solves. The only way to truly save fuel is to reduce delivery requirements. Do you need as much? Do you need it as often? Can you get the product from a geographically more proximate supplier at a comparable cost? These are the real questions you need to ask!

Are All of Your Supply Management Planning Processes Aligned?

A recent article over on Supply Chain Brain from JDA software on Building the Supply Chain of the Future made a great point when it noted that in any supply chain there are … core business processes that must be closely synchronized in order to enable organizational agility and market responsiveness. Unless business processes are aligned in closed-loop planning processes, the organization will be unable to sense demand shits and … balance a number of priorities, including costs, customer service levels, supply risks, production constraints and environmental targets in its quest to achieve the best possible outcome.

The article from JDA indicated that six core planning processes must be synchronized in order to achieve agility, market responsiveness, and success. And they are right. The following six planning processes must be synchronized:

  • Sales & Operations Planning (S&OP)
    A good S&OP process provides a disciplined cadence for monitoring and synchronizing demand, production, supply, inventory, and financial plans via a rigorous Plan-Do-Check-Act process as a foundation for allowing the supply chain to share a common perspective on issues and potential resolutions.
  • Demand Planning
    Typically involves the utilization of advanced statistical and predictive modelling to ensure that sourcing, production, inventory, transportation, and distribution models are optimized on a shared forecast.
  • Inventory Planning
    Good inventory planning allows for tailored “designer” models for each category and commodity to minimize overstock, out-of-stock, and financial risks based upon key commodity and category attributes.
  • Master Planning
    That allows for S&OP, inventory, and demand-based supply plans to be analyzed and updated daily in response to demand and supply changes.
  • Factory Planning & Scheduling
    The creation of optimized production plans by plants by scheduling backward from the requirement date, with material and capacity constraints simultaneously considered for feasible plan creation.
  • Collaborative Supply Planning
    That allows manufacturers to monitor multiple tiers of the supply chain and each supplier that is supplying a raw material, component, or service necessary for the creation of each product being sourced from a tier 1 supplier and work with multiple suppliers simultaneously to identify minor hiccups before they become major issues to collaboratively resolve a problem before it becomes a major headache.

But this is not enough to ensure success in today’s fast-paced fickle global marketplace. Not only do we have extreme demand, supply, and cost volatility across materials, components, products, and markets, but we also have extreme competition on the sales side as penny pinching buyers, short on cash, are looking for the best deal possible. As a result, your organization not only has to be leaner and meaner than ever before, but it has to be more focussed on the value it can provide. As a result, your S&OP, demand, inventory, factory, master, and collaborative supply plans have to be linked to, and reinforce, your organizational strategy. As a result, each of these plans need to be aligned with organizational:

  • Strategic Planning
    which is the process of defining the organizational strategy and direction and the allocation of resources, financial and human capital, to pursue this strategy.

If these seven planning processes are aligned, your organization just might have what it takes to make it through this decade and emerge a supply management leader when the smoke clears.