How to Understand Inventory Optimization and Multi Echelon Planning + SLA = MCA / Servigistics

Executive Summary

  • How to Put Two Software Requirements Together in this Area.
  • Understanding Allocation Software.
  • What is SLA Enabled Inventory Optimization and Multi-Echelon Planning (MEIO) and How Does it Work?

Note: Since this article was written MCA Solutions was acquired by Servigistics. More detail on this can be read at this post.

Putting Two Software Requirements Together

In the previous post, I discussed how service level agreements (SLAs) work and how they are important concepts that are beginning to migrate from service companies to good finished companies. I also noted how they are a powerful way to control supply chain planning and that I have become convinced their proxy; which is service level planning is the most logical, most transparent and lowest effort way to perform planning that I have been exposed to.

I observed in my consulting that companies spend an extraordinary amount of time managing service levels it is amazing. These companies have no other service levels control except for a dynamic safety stock calculation in their ERP system, but if you analyze their reports, you can see report after report which essentially takes different cuts at service level. Here we have a highly evaluated KPI which the higher-ups have their bonuses tied to, but for which they only have relatively rudimentary methods of controlling.

Trying to manage a supply chain to a service level with MRP / DRP or an APS system, is a bit like trying to control a car with a loose steering wheel. Continual adjustment is necessary and the car generally moves all around the lane. This is where the vast majority of supply chains currently are.

The allocation task at many companies is not automatic, but still manual. In many cases, there are times when supply chain directors and even VPs, that should be working on keeping operations running smoothly and on strategic decision making, are brought into discussions and asked to make decisions on which customer will receive an allocation.

To move away from this companies need two things in addition to the normal ERP system to process the orders:

  1. An SLA based multi-echelon and inventory optimization software (MEIO for short)
  2. A method for managing allocations

Software which combines SLA and MEIO set up the inventory in the right location to meet expected demand. Allocation then parcels out the inventory in conjunction (roughly speaking) with the service level objectives. This can prevent a lot of repetitive conversations from happening that typically revolve around how vital a particular customer is. This argument often comes from the salesperson who wants a limited amount of inventory allocated to their customer.

Without a service level agreement, it becomes difficult to quantitatively say that one customer should get inventory over another customer. Thus what often happens is that the biggest customer takes precedence. This is not necessarily the best decision for the company, however, as smaller companies may be more profitable. However, with SLAs, and a method of planning and allocating to those agreements of those customers them a more rational decision can be made which is based upon the present service level vs. the SLA or agreed upon service level.

Allocation Software

Allocation software is well known at this time. SAP CTM is one example of this type of software. I have implemented SAP CTM on several occasions. It essentially creates a queue that allows higher priority customers to consume inventory before lower priority customers. In an SLA environment, the higher SLA customers, regardless of size, would be placed higher in the queue. However, without having effective supply chain planning, the allocation software has limited effectiveness because it only can allocate what is available. If the initial stocking position was not set sufficiently, then lower ranked customers will go without inventory. The less effective the initial planning, the less the allocation engine has to work with. Allocation implementations require a high degree of discipline because they mean systematizing decisions that are normally made by individuals.

Allocation projects face challenges because while the buyers of software often say they want a systematic way of distributing inventory to customers, many other decision-makers in the organization do not. In my experience allocation projects are marked by companies burning quite a lot of money in simply driving to an agreement on elementary priority schemes that have a habit of becoming even more complex post go-live. I have a post on the common problems that face SAP CTM projects specifically, but it also applies to allocation projects in general.

SLA Enabled MEIO

MEIO is one classification of software. It is gradually coming onto the radar of companies, and right now the implementation of this type of software is trailing the discussion of it. SLAs have been around for some time in the service area but has recently moved into finished goods supply chain planning. However, MEIO has often been left out of the SLA discussion even though it a key enabling technology.

Since they are different paradigms, the concepts need to be explained to planners, directors and to the VP level in companies that have not yet implemented this software. Furthermore, few consultants are capable of explaining the relationship, because they don’t understand it themselves.

MEIO software provides a higher level of accuracy than advanced planning software regarding how it models the supply chain. However, for those used to the traditional methods of supply chain planning, MEIO changes some baseline assumptions, and it is these assumptions that should be understood before decision makers can understand the business value of MEIO beyond the hype and the financial benefits.

Obviously, this is an SLA requirement, and currently, many MEIO software vendors do not have this capability. Several do, and the one with probably the most experience doing it is MCA Solutions because of their experience in the service market. If your company wants to combine SLA and MEIO to perform supply chain planning, MCA Solutions an excellent choice that can easily meet the combined SLA and MEIO requirements.

Conclusion

SLA and MEIO naturally go together. The SLA is the contract and incentive system which provides agreed upon service levels per customer. To manage the supply chain in a way that reduces the overhead of manual intervention in allocation setting and rearward looking service level reports, MEIO software combined with allocation software is necessary.

A company which is successful in implementing this design has gone a long way towards automating its supply chain planning. The best-known allocation software that I know of is SAP CTM, while the best SLA enabled MEIO software that I am aware of is MCA Solutions and their SPO product.

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Faster and More Straightforward Approach than Inventory Optimization

Inventory optimization started with a bang but failed to live up to the hype that was built up for it. Inventory optimization software is normally overly complex and while the idea is right, successes with inventory optimization are rare.

After seeing many failed inventory optimization projects we developed a simpler and less invasive way of modeling service levels and inventory. The Brightwork Explorer is free to access until it sees “serious usage” and is free for academics and students. Select the image below for more details.

References

MEIO Book

What is MEIO?

This book explains the emerging technology of inventory optimization and multi-echelon (MEIO) supply planning. The book takes a complex subject and effectively communicates what MEIO is about in plain English terms. This is the only book currently available that describes MEIO for practitioners, rather for mathematicians or academics.

The Interaction with Service Levels

The this book explains how inventory optimization allows the entire supply plan to be controlled with service levels, and how multi-echelon technology answers the question of where to locate inventory in the supply network.
This is the only book on inventory optimization and multi echelon planning which compares how different best of breed vendors apply MEIO technology to their products. It also explains why this technology is so important for supply planning and why companies should be actively investigating this method.
The book moves smoothly between concepts to screen shots and descriptions of how the screens are configured and used. This provides the reader with some of the most intriguing areas of functionality within a variety of applications.
Chapters
  • Chapter 1: Introduction
  • Chapter 2: Where Inventory Optimization and Multi-Echelon Planning
  • Fit within the Supply Chain Planning Footprint
  • Chapter 3: Inventory Optimization Explained
  • Chapter 4: Multi-Echelon Planning Explained
  • Chapter 5: How Inventory Optimization and Multi-Echelon Work
  • Together to Optimize the Supply Plan
  • Chapter 6: MEIO Versus Cost Optimization
  • Chapter 7: MEIO and Simulation
  • Chapter 8: MEIO and Service Level Agreements
  • Chapter 9: How MEIO is Different from APS and MRP/DRP
  • Chapter 10: Conclusion
  • References
  • Vendor Acknowledgements and Profiles
  • Author Profile
  • Abbreviations
  • Links in the Book
  • Appendix A: MEIO Visibility and Analytics
  • Appendix B: The History of Development of MEIO Versus MRP/DRP