Silvon: The Incredible Shrinking Safety Stock
New software helps companies systematically match inventory to fluctuating customer demand.
'When times are good, you can cover up some of the challenges associated with inventory," says Michael Hennel, CEO of Silvon Software, Westmont, Ill. But when customer demand drops, and you start working to trim all the costs you can, you need to take a more deliberate approach.
"You need tools that can help manage how you plan and set your inventory levels," Hennel says.
Tools of this kind are the latest addition to Silvon Software's Stratum suite of Enterprise Performance Management applications. Called Inventory Performance Management (IPM), the new module is designed to help a company analyze past inventory trends, understand its current position, and optimize inventory levels for the future.
Silvon Software's roots lie in sales performance analysis. Its first products helped companies evaluate the factors that drive revenues and gross margins. When Silvon introduced the Stratum suite, it addressed sales, marketing, customer and supplier relationship management, and profitability.
Version 3 added demand forecasting. Companies weren't used to investing a great deal of effort in that function, Hennel says. Faced with a steady demand for their products, they could assume that tomorrow's needs would mirror today's. But "with the shift in the economy, companies saw the tried-and-true demand of the past vanish," he says, and now they have to predict the future more precisely.
Aiding that effort, developers at Silvon also saw an opportunity to better manage inventory. As it became harder to predict demand, companies relied on larger safety stocks to make sure they could always fill orders. But "most companies can't afford to keep the level of inventory they want to hit order fill rates," Hennel explains.
Remember the Pain
Unfortunately, many companies let emotion, rather than science, guide their inventory decisions. "They remember the pain of the last stockout, and that's why they've increased the numbers," Hennel says.
Also, when setting re-order levels, they fail to distinguish between fast- and slow-moving items, so more money gets tied up in inventory that doesn't move.
Silvon's IPM module includes three applications to help companies take better control:
- Inventory Trends and Analysis draws data from an enterprise resource planning (ERP) system or warehouse management system (WMS) to provide a historical look at a company's inventory. "Simple metrics, such as inventory-to-sales ratios, can give companies a feel for slow-moving items," Hennel says. Among other functions, the system can compare year-to-year inventory value by warehouse, location or business unit, track how inventory builds over time, and analyze inventory turns.
- Inventory Positions and Projections offers a picture of current inventory, indicating what's on hand, what's in production, what's in transit, what has been ordered, and where shortages might develop. It also provides analysis to help the user react to potential problems.
"For example, a user might ask, 'If I have a shortage on a specified product, which customers will that impact?'" Hennel says. If the list includes important accounts, the user might order larger quantities from suppliers or expedite delivery of products already in the pipeline.
- Inventory Planning and Optimization helps set inventory levels for various products and adjust those levels as conditions change. The user can rank slow-, medium-, and fast-moving items, consider manufacturing and procurement variability, look at the lead times necessary for different products, examine carrying costs, and rank customers by how much they contribute to the company's profits.
Maintaining the right levels requires both initial fine-tuning and follow-up correction. When the system first calculates a safety stock level for each product, "typically, users say, 'I can't afford to do that,'" Hennel says. "So they take into account their ABC classifications of customers, and might adjust different safety stock levels and order fill rates to get the right balance of inventory and service levels.
"Once they get those set up, they want to start tracking how well they're doing. If they start to drop off, because they fall either below or above a certain safety stock level, that's when they want to alert their inventory planners."
This ability to spot potential problems and send alerts is one aspect of Silvon's inventory functions that pleases Steve Poswillo, director of sales administration for Pharmavite, Northridge, Calif. "If I see something odd, I call the demand planning people. I can quickly e-mail them a view of it, such as an HTML file, and point out issues," he says.
Pharmavite manufactures vitamins, minerals, and nutritional supplements sold under the Nature Made and Nature's Resource brands. From its distribution center in Valencia, Calif., it supplies products to food, drug, mass market retail and shoppers' club chains.
The company has used Silvon's sales management software for eight years. It implemented the Stratum suite 18 months ago, and recently started using the new inventory features.
Pharmavite employs a separate program, from Atlanta-based Logility, to manage its demand planning. The Stratum suite gathers information from that system and other sources, such as customers' point-of-sale systems, and stores it in its own repository. It then uses the data to create reports tailored to different users—in sales, marketing, planning and finance, for instance.
Before Pharmavite integrated the Logility system with Stratum, only a few people could directly access demand forecasts. "Now you expose the data to a much greater audience," Poswillo says.
Like any manufacturer of consumer packaged goods, Pharmavite must continually monitor consumer demand and adjust inventories accordingly. "We need to understand the retailers as well, when they're looking at product realignments and planogram changes," Poswillo says. "They could discontinue an item, or add an item. Obviously, that affects our inventory."
The company also needs to monitor the results of product promotions and stay on top of retailers' own inventory strategies. "Sometimes, coming up to fiscal periods, retailers shrink inventory just to meet certain numbers. Other times, inventories grow," Poswillo says.
How Much Life Left?
Pharmavite also has to track the expiration dates of its products, which have a shelf life of 24 to 48 months.
"That's where we use the Stratum product to build a view by product and by lot," Poswillo says. "We can see the remaining life of a product. We can look at the average prior six month sales and calculate, using the Stratum calculation fields, the number of months of inventory we might be carrying, and the dollars associated with that."
The user can look at inventory by brands, product types, and individual items. "On top of that, we can also bring in our syndicated data to look at national movement, or movement by major customer," he says.
Consolidating inventory and point-of-sale data in Stratum gives Pharmavite better information for managing relations with customers, Poswillo says. "I can ask a particular customer to view how much we've shipped to them in the last six months, and how much they may have returned. We come up with a net units number, then subtract the point-of-sale information to arrive at what kind of inventory our customer might be carrying."
Calculating the ratio of shipments to consumption is also important, Poswillo adds. "We look for a ratio of one, obviously. Anything over a 1.2 ratio deserves attention. And anything under a 0.8 ratio deserves attention, as you could be looking at shelf out-of-stock on those kinds of items."
The widespread visibility that Stratum offers through its browser interface is one of the system's great advantages, Poswillo says. Making supply chain information available to people who couldn't easily access it before can bring unexpected benefits.
"For instance, our customer replenishment has always had an issue of how much product will fit on a truck," he says. "Because we have the product's weight in these views, we can tell whether an order will be a truckload, greater than a truckload, or less than a truckload. We've got an inquisitive employee base who create value from the data we present to them."
Clearly, Pharmavite has answered the call to bring more science and deliberation to its inventory challenges. Before it harnessed the Stratum suite, the company tended to analyze inventory on an ad hoc basis, putting numbers into spreadsheets.
"This is obviously an attempt to institutionalize those kinds of understandings," Poswillo says.