"Ten Days" and Other Myths -- Is your supply chain running at maximum efficiency? Inventory shortages can be eliminated by implementing optimization.

In today's highly competitive electronics manufacturing industry, strategic inventory management is a critical component of success-but can also be the industry's Achilles heel. Maintaining the critical balance between carrying too much inventory and not having enough remains a tough challenge.

The Problem

Inventory management means having the right parts, in the right place, at the right time. Here's a scenario all-too-familiar to many manufacturers: The inventory target for a critical component is set to 10- days-of-supply for every stage in the supply chain. Where did this number originate? Ten-days-of-supply is a company rule-of-thumb; the way inventory management has always been done.

Ten days of inventory may be appropriate, but, when demand surges and a key supplier has a 15-day lead-time, the manufacturing facility is at the mercy of the supplier's schedule. The result is a critical shortage that brings the supply chain to a halt. On the other hand, holding unused inventory is not a favorable alternative.

What if a way to truly know how much inventory can be held at every stage of the supply chain existed?

Optimization is the Solution

Optimization technology allows a company to build in supply chain flexibility to better meet top goals-improved customer service, the lowest cost and the shortest time-to-market. Such technology is an efficient way to compare the hundreds of factors influencing on-time delivery and inventory levels at all locations.

Current supply chain optimization applications leverage powerful mathematical models to simultaneously evaluate the entire supply chain, incorporating key drivers of supply chain performance, such as production cost, demand variability and interdependencies, to identify the management solution. Optimization applications, when deployed in an Internet-based infrastructure, support collaborative decision-making and information exchange to leverage existing company, supplier, partner and product data. For maximum performance, optimization applications should be built on open-standards technologies, be simple to use and should support leading supply chain and enterprise systems.

Four main factors fuel the need for optimization:

1. Demand variability-unexpected spikes in customer demand inevitably force manufacturers to dip into buffer inventories.

2. Supply uncertainty-limited capacity, supplier delays and critical parts shortages are facts of life in the manufacturing business. But manufacturers can plan for such uncertainty.

3. Lack of coordination and communication across the supply chain-supply chain managers often make decisions in isolation. Such decisions are often based only on local or functional information and metrics, which can inevitably lead to other departments bearing extra costs.

4. Inventory held at the wrong place in the supply chain-not understanding the best stocking points for shared inventory can lead to complicated inventory excess at certain sites and shortages at others.

Today's optimization technologies have a new application-one that strategically addresses inventory deployment and inventory policies. The method of optimization is applied at the earliest, most neglected and most costly point of the product lifecycle-the design of the supply chain.

Optimization sheds new light on critical supply chain setup and sourcing stages, in which nearly 80 percent of product and inventory costs are locked in. Advanced optimization technology also allows manufacturers to treat inventory with an end-to-end, holistic approach by factoring in "what if" scenarios that can affect other inventory levels and locations. Optimization, when deployed in an Internet-based infrastructure, brings collaboration to the decision-making process by increasing the sharing of information among manufacturers, suppliers and customers. No spreadsheet or inflexible policy can account for the impact of such factors on the overall supply chain.

Conclusion

In fast-moving markets, best-in-class inventory management and overall supply chain performance can mean the difference between being a market leader and being an "also-ran." Ways to understand, and control, complex factors driving the supply chain exist.

So, what are you waiting for-another inventory shortage?

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Dr. Sean P. Willems is chief scientist at Optiant; e-mail: [e-mail].

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