Replacing inventory with information?

From the late 90’s until today one of the top slogans in discussions of supply chain management has been “replacing inventory with information”. This inherently sounds like a good idea – why wouldn’t it be a good thing to replace an expensive asset like inventory with something that essentially costs nothing? But is it really possible?

At  Teleste we have a typical setup for this industry; our service level, i.e. the order fulfillment lead times that we have promised to our customers, are quite much shorter than the production lead times. This means we would need to prepare both materials and capacity based on forecast.  Additionally, we have identified a strong bullwhip effect in our business. Bullwhip effect means that the small changes in demand have a tendency to amplify when moving upstream in the supply chain. To improve forecast accuracy and to manage the bullwhip effect we have started a customer collaboration program. On top of these two goals we wanted also to run the extra mile for our customers – or maybe it would be better to say running the extra mile WITH them.

An oversimplified version of this collaborative planning, forecasting and replenishment (CPFR) process is to regularly share demand and supply information and react a bit faster on the alerts based on projected stock calculations. By definition, customers should possess better knowledge of demand and its uncertainties and respectively supplier should have good info on supply. By sharing the stock levels throughout the channel, demand and supply info we should be able to steer our supply chain better and maybe even replace (at least some of the) inventories with information. Having transparency on how much stock is in the channel and how is it moving will help us to cope with the bullwhip effect. More info on this process can be found on https://en.wikipedia.org/wiki/Collaborative_planning,_forecasting,_and_replenishment

We started the first CPFR pilot with Virgin Media in the UK in Autumn 2015, and after 6 months we were able to move from piloting to implementation and now we have started with several other customers.  Demand Planner  Mandy Triebel from VM says ”With the new process we have a good joint understanding of demand and supply and we have been able to identify and react early to any potential scheduling issues.”

So far so good – however, I need to deliver a disappointment for the readers who got excited of the header of this blog post. I believe we have been able to reduce the stock levels but we will never be able to replace it completely. Setting the inventory levels will be an optimizing game – not a minimizing game. The main reasons for holding inventory will still remain:

  • Hedging against demand (or supply) uncertainty.
  • Balancing against highly seasonal demand.
  • Enabling purchasing, manufacturing or transportation of products in economically sensible quantities.
  • Reaching required service levels.

Customer collaboration is part of Teleste’s  program to implement LEAN principles in our operations, logistics and sourcing. LEAN is largely focusing on reduction of throughput time and actually this is what we would like to do for demand information as well in the customer collaboration.

optimikuva

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Jussi Laaksonen

I have approximately 20 years of supply chain management under my belt, ranging from purchasing to sales and from large multinationals to startups. Currently, I am heading a team in Teleste that works with inventories, shipping, transportation and customer service.

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