Preface
Chapter 5: The Market Demand for Enterprise Resource Planning Software and Customer
5.5 The Trimming of Inventories Can Be Greatly Assisted by Smart Materials
Auto industry experts venture the opinion that shifting from mass production to direct factory sales can slash car prices by up to 30 percent because trimming inventories would take a lot of cost out of the system. Direct factory sales and fast flow replenishment, however, do require moving at Internet speed in the back end of the business: motor vehicle design, procurement, and assembly affecting both parts and materials suppliers.[2]
Perceptive readers will recognize, between the lines of this statement, that their companies and their suppliers will be out of luck without new, more sophisticated types of software; this means systems that are able to boost manufacturing efficiency and squeeze inventories without running out of product. That is the meaning of keeping up optimization chores at the pace of Internet time.
To appreciate the sense of this reference to real-time optimization and immediate corrective action, one should recall that, to a very large measure, inventories are buffers enabling a smoother production process despite changes in supply and demand. Inventories include final products, intermediate products at the assembly and component levels, as well as raw materials. Typically, currently held inventories relate to different stages of the production process and they can only be optimized in conjunction with production and sales, not independently of them.
Changes in inventories reflect differences between actual and expected demand on one side and production capability on the other. In the short term, the desired stock-to-sales ratio can be assumed to be fairly constant; but in the medium term, it can be affected by volatility in sales, manufacturing, and general logistics. Many ERP packages are wanting in terms of inventory optimization.
Just-in-time (JIT) production and deliveries based on fast flow replenishment (FFR) cause changes in the stock-to-sales ratio. Inventory tightening is reflected not only in income statements, but also in national accounts statistics, including those of finished products, goods for resale, raw materials, and work in progress.
While there are agricultural inventories as well as stocks of precious metals and art objects, the manufacturing and merchandising trades account for the bulk of nationally reported inventories.
Macroeconomic statistics from euroland in the 1993 to 1999 timeframe are shown in Exhibit 5.6.
Exhibit 5.6: Inventory Statistics from Euroland: Changes in Inventory and the Assessment of Stocks It is interesting to note that at the microeconomic level, until the 1950s, no one really worried
excessively about production inventories, except maybe during annual stocktaking. Improvements to machining, presswork, assembly, and finishing were piecemeal up until that time period, hence intermediate banks of goods were necessary. But above all, there were no means to measure exactly inventory levels and ongoing demand.
Computers changed that culture. The 1960s were a period of transition, and many experts believe it was the reality of Japanese competition in the early 1970s that spurred, for example, Western car and truck plants to take seriously and examine in greater detail production economics and logistics.
Competition drove tooling, presswork, machining, welding, and assembly line technology into higher productivity levels. But the really visible aftermath of competition, computers, and models has been in inventory planning and control and the resulting economies.
Theoretically, inventories are viewed as the moving gear of the global supply chain, highly influenced by B2B and B2C marketing. Practically, however, Exhibit 5.6 proves that this is not the case, at least in euroland. During the 1990s, inventories were at their lowest in 1993 when there was no Internet around and very little ERP. The lesson is that improvements upon current methods call not only for catchwords, but also for a quantum leap in inventory management — from smart production processing identification during manufacturing to systems using smart materials technology, able to monitor the goods flow (see Chapters 8 and 9).
Such monitoring must be accomplished in real-time, with high levels of accuracy at every node, linking the information system of the supply chain. As discussed in Section II, smart materials provide a mechanism that promotes inventory identification, and hence accuracy, at a higher level of confidence.
It can also aid in detection of theft and pilferage while informing on procurement needs. If materials identification is timely and accurate, then a sophisticated model for inventory management can specify a customer service level as percentage of orders filled. This can be accomplished within a target lead- time, rather than by resorting to a penalty cost for orders not filled in time. With this and similar models for effective inventory planning and control, sound management must specify that 90, 95, or 99 percent of all orders need to be filled on time — which essentially means at the 90-, 95-, or 99-percent level of confidence, respectively. The concept of confidence intervals is illustrated in Exhibit 5.7: an example from market risk management.
Exhibit 5.7: An Example from Market Risk Management: Assumed Rist at Three Levels of Confidence In Exhibit 5.7, the ordinate is market exposure assumed by a given entity because of interest rate risk embedded in debt securities in its portfolio. The abscissa is the maturity of these securities up to ten years. A similar concept can be used with inventories. Algorithms and heuristics must be applied to optimize inventory levels to meet the specified service with the least inventory cost. These should be included in ERP software, but currently they are not part of it.
Next to the ability to define the level of confidence at which one manages inventory is the need to create a higher-up level of metadata; this is very helpful in the implementation of enterprise resource planning.
Few organizations, however, have done the preliminary work or put in place incentives to acquire and apply the appropriate skills necessary to generate and handle metadata (e.g., dynamic directories).
(More about this in Chapter 7.)
The benefits to be derived from adoption of ERP, CRM, and other programming products in conjunction with Web-based solutions depend on many factors that are partly within and partly outside a company's control. These factors include the development of cost-effective technology and applications that allow enterprises to adopt online business solutions as well as:
Availability of new technology standards facilitating easier integration of multiple vendors' wares and applications
Performance and reliability of the Internet connection as online usage grows
Better approaches to security and authentication concerns regarding transmission of confidential information over the Net
Laws that penalize attempts by unauthorized users, or hackers, to penetrate online security systems
In 2000, there were voices suggesting that use of the Internet might decline if gathering of information about I-commerce users, without their knowledge or consent, would result in increased concerns about privacy. The opposite view is that too much concern over privacy can lead to federal and state
governments adopting restrictive laws or regulations relating to the Internet.
Legislation regarding privacy and security is an exogenous factor. An endogenous factor is potential bottlenecks because of the inability of companies to attack the limitations of their legacy systems and processes. This results in the sub-utilization of enterprise resource management solutions and the inability to meet forecasts about rewards from enterprise resource planning systems, customer relationship management software, and supply chain management systems (SCM).
Because they still work with Paleolithic IT, some companies find it difficult to answer, in a factual and documented manner, when and how questions associated with implementing enterprisewide solutions.
Another reason is that the infrastructure of many firms was designed for brick-and-mortar operations — not for Internet commerce. As business transactions are increasingly conducted electronically, the weaknesses of Old Economy structures become bottlenecks. It is no less true that not all companies are agile in making return on investment (ROI) studies, and this limits the clarity of their choice among alternatives.
[2]D.N. Chorafas, Internet Supply Chain — Impact on Accounting and Logistics, Macmillan, London, 2001.