What is Activity Analysis? Part 3, Inventory Planning and Optimization

In our previous two blogs, we have discussed Activity Analysis in different ways, now let’s talk about Inventory Planning and Optimization and how it comes into play with our Activity Analysis.

Luckily, many of us have sophisticated computer systems, even Enterprise Resource Planning (ERP) systems like SAP and Oracle to assist in this effort to organize the mountain of data into actionable information and act on that data we do! We plan, replenish, and optimize inventories based on this data… assuming it is correct.  

It is impossible to conduct a meaningful Activity Analysis without good and sound data. This is one of the biggest issues for those first embarking on a serious and in-depth Activity Analysis. The data may not be clean and probably will not be up-to-date. This is part of the natural entropy of something that has not been tightly managed for a few years.  

When we first engage with a client, we use our DemandCaster® software to conduct an Activity Analysis to determine the size and scope of the improvement opportunity. When we begin to load the data into DemandCaster® there are invariably issues with the data structure and the completeness of the data.  The first thing we must do with the assistance of the client is organize and scrub the database. Only then, can we proceed with the Activity Analysis.

In the case of inventory management, the core of the work we do at Cadent Resources, Inc. for our clients, our Activity Analysis covers the following:

1.   Demand Planning: We will evaluate the accuracy of the Demand Plans historically. The Demand Plan is the cornerstone on which all material, manufacturing, and inventory management is built. We will look at Mean Absolute Deviation and Mean Squared Deviation. Using the same historical data, we will best fit a statistical forecast to the client data and compare our accuracy to theirs.  

2.   Inventory Sizing:  We then turn our attention to calculating what the inventory could or should be versus what it currently is. With more accurate data from the above mentioned data cleansing, we use DemandCaster® algorithms to size the inventory by materials based on the ABC classification of the materials and the demand placed on the buffer (again, it only customer demand and variability for the buffers that are used to fill customer orders).

3.   Manufacturing Planning: Manufacturing scheduling must be optimized for lead times, set up times, machine availability, throughput, quality, and demand to ensure the inventory buffers are properly stocked and replenished.  

These three analyses are very detailed. They would be most cumbersome to do using spreadsheets and tare not necessarily easy to do in ERP systems unless they have a specific supply chain analytic module.