The starting point
Most companies are not really aware of the true cost of holding inventory. Every year, billions of dollars are lost in the distribution and manufacturing sectors: either in shortages or in excess inventory. See (1).
In 2020, most companies are equipped with an ERP and have a good visibility over their current inventory levels. Nonetheless, the poor management of inventory and the related financial losses have never been greater. The graphic below (source données Supply Chain Insights LLC, May 2019) displays how the number of inventory days of coverage haven’t stopped increasing across all industries between 2004 and 2019.
Why is it so difficult to know what is the right level of stock to hold? Why are we still facing this problem today?
The problem is complex because it is systemic. It cannot be solved by considering each company as an entity independent of its customers and suppliers. The best analogy for this is that of a traffic jam. One company can be assimilated to one car, and the supply chain to the car lane. As soon as an incident occurs (say, a red light), it will amplify along the chain of cars and will eventually create a traffic jam. The equivalent in the supply chain would be as soon as a promotion starts selling better than planned, rush orders of ever bigger quantity will travel upstream in the supply chain to suppliers eventually causing more and more important shortages.
The traditional way to solve the problem is to make the individual company more efficient, which is like trying to improve the car to solve the traffic jam problem. It doesn’t solve anything. Yet these are the choices that are made today in supply chain management, for example by trying to improve forecasts or by adding stocks everywhere… This is the main reason why in 2020, companies spend their time making a constant balance between overstocking and stock shortages.
How to actually solve this Problem? Synchronization
To solve this problem, it is necessary to have a systemic approach of the supply chain: adapt its speed according to other cars, i.e. synchronize the cars in the lane, or the companies in the chain.
For some years now, this point has been acknowledged. To address this issue, a first step has been taken towards extended supply chain visibility. This is the goal that lies behind control tower or supplier portal type of approaches. The idea is simple: set up a tool to share information with business partners (suppliers, 3PLs, customers…) with the intent of increasing visibility to be able to react proactively to whatever may occur along the chain.
A second approach is about collaborative planning. In this case the concept is to sit together with your supplier to define the replenishment and inventory plan together. Theoretically this approach has been validated by numerous academic studies. For instance, a study of the MIT on CPFR (collaborative planning forecasting and replenishment) has shown that for a manufacturer with a turnorver of 10 billion € this approach could reduce costs of somewhere between 3 and 7.8% while increasing revenues between 1.75% and 4%. Put differently, the approach could have an impact of several percentage points on the gross margin of a company!
However both approaches didn’t reach the initially expected success and were never deployed on a large scale to become standard practice. There are many reasons for that but 2 stand out in particular:
- Trust and sharing of sensitive data. These approaches would require total transparency with suppliers or customers. This means, sharing with them data like inventory levels and order book filling. This information is sensitive and could be use as leverage in commercial negotiations
- Ability to use and exploit data. We are forced to realize that many companies may have a tremendous amount of available data without necessarily being able to make use of it. They often don’t have the necessary tools and skill set to manage the tremendous volume of information and put it to a use.
Flowlity: a new approach of synchronization
It is based on this understanding that Flowlity is born. We believe that supply chain managers expect above all to have an efficient Supply Chain, without stock shortages and without overstocks. Flowlity can achieve this goal for 3 reasons:
- Flowlity acts as an intelligent trusted third party between one company and its suppliers and customers. It allows everyone to have optimal stock recommendations without the need for direct sharing sensitive data between that company and their business partners.
- Flowlity is a simple and robust SaaS It replaces unreliable solutions such as Excel files or the stock calculation of an incorrectly configured ERP
- Flowlity uses artificial intelligence in its algorithms. This makes it possible to identify potential problems (shortages or overstocks) and make the company reactive and agile.
Flowlity will thus allow synchronization of the supply chain between a customer and a supplier without the disadvantages of visibility or collaboration solutions:
- There is no sharing of sensitive data (production plan, order book, inventory levels…) between a company and its business partners
- The recommendation is given in a directly actionable way to the company (safety stock and supply)
Our bet is that this is the only way to build the network of networks.
See (2) for examples
Consequences and Results
Flowlity’s approach is new, revolutionary and unique in the world. It makes the Supply Chain more efficient, simple and synchronized.
We were thus able to observe stock reductions from 30 to 60% while decreasing stock-outs from 10% to 70% on the first ten customers. These results were observed independently of the industrial sector (high-tech, automotive, aerospace or retail). They are also in line with what is expected from the academic research on collaboration mentioned earlier.
The SaaS, web architecture of our solution allows us to deploy it in a simple way without any lasting and costly project. Do you want to hear more about Flowlity? Contact us at firstname.lastname@example.org
(1) Some people misevaluate the cost of inventory holding by estimating it to the cost of money, around 1 or 2% of the value which is low. Yet, in average, the cost of holding inventory is rather about 15% of the value of the product (between 10 and 25% depending on the industry) because it induces many other types of costs: storing and maintenance costs, insurance, risk of loss and obsolescence, etc. We can see overstocking can be very costly then but so can stock-outs be.
(2) Let’s take 2 examples to understand the benefits of Flowlity:
- Let’s consider a manufacturer and a retailer, if a promotion at the retailer is selling better than expected, the manufacturer will automatically see its stock levels raise to avoid shortages and lost sales.
- Let’s now consider a manufacturer and one of its parts suppliers, if the two are synchronized the stock levels of the manufacturer would take into account the level of stocks of finished good and the available capacity at its supplier. In the case of available stock and available capacity at the supplier, the shortage risk at the manufacturer is very low, hence inventory levels can be drastically lower.