Efficient supply chain and inventory management are critical to achieving operational efficiency and enhancing customer satisfaction. This blog offers straightforward answers to some common questions from our Smart IP&O customers, providing practical guidance to tackle typical challenges and refine your inventory management practices. By focusing on these key areas, we assist you in converting complex inventory problems into strategic, actionable steps that cut costs and boost overall performance through Smart IP&O.

1. What is lead time demand?
Lead time demand represents the anticipated demand during the replenishment lead time. It's calculated using Smart’s forecasting methods.

2. What is the Min, and how is it computed?
The Min, visible in the drivers section of SIO, is the reorder point. It equals the lead time demand plus the safety stock. When inventory drops below the Min due to demand, you'll need to place an order. Additionally, SIO includes a "min" in the "ordering rules" field, which refers to the minimum order quantity you can place with a supplier.

3. What is the Max, and how is it computed?
The Max is the highest quantity of inventory you can have on the shelf if you follow the ordering policy. It's the sum of the Min (reorder point) and the defined OQ.

4. How do you determine the order quantity (OQ)?
The initial OQ is imported from your ERP system. It can be adjusted based on various user-defined preferences, such as multiple lead time demands, multiple monthly or weekly demands, or Smart’s recommended OQ.

5. What is the Economic Order Quantity?
Economic Order Quantity (EOQ) minimizes total costs by balancing the cost of holding inventory with the cost of placing orders.

6. What is the “recommended OQ” that Smart computes?
The recommended OQ is the EOQ adjusted to ensure the order size covers the demand over the lead time.

7. Why is the system predicting a low service level?
Smart calculates the service level based on the specified inventory policy (Min/Max or Reorder Point/Order Quantity). A low predicted service level may indicate that the expected demand over the lead time exceeds the reorder point (Min). If the demand exceeds the reorder point, there's a higher chance of stockouts, leading to a lower service level. Incorrectly entered lead times can also cause this issue. Double-check your lead time inputs to ensure accuracy.

8. Why is the Service level showing as zero when the reorder point (or min) is not zero?
If the predicted service level is zero despite a non-zero reorder point, it suggests that the expected demand over the lead time far exceeds the reorder point, almost guaranteeing a stockout. Again, verify your lead time inputs to ensure they reflect reality.

9. But my actual service levels aren’t as low as Smart is predicting, why?
This discrepancy may arise because Smart assumes strict adherence to the policy. If your on-hand inventory exceeds the Max quantity, you’re not following the policy. Review your lead time assumptions—your actual lead times may be shorter than those entered, affecting the predicted service level.

10. Smart seems to be recommending too much inventory, why?
Reassess your inputs like service levels and lead times. Your actual lead times may be shorter than those used by Smart. Sometimes, suppliers inflate lead times to ensure timely deliveries. If this inflated lead time is used in calculations, it results in excessive inventory. Analyze your historical lead time data (Smart provides a supplier performance report) to adjust accordingly. Alternatively, consider lowering your service level target or revising the lead time if it’s no longer realistic.

11. Smart is considering spikes in demand I don’t want it to, and it’s inflating inventory—how can I fix this?
If you're confident the spike won't recur, you can remove it from historical data using Smart Demand Planner. Open the relevant forecast project, adjust the history, and save the updated data. Tech support can assist with this process. If the spikes are part of normal variability, consider lowering your service level target instead. A lower target reduces the need to cover extreme demand fluctuations, thereby decreasing inventory levels.

12. When I change the Order Quantity or Max, my cycle service levels don’t change—why?
Smart distinguishes between "cycle service level" and "service level." Adjusting order quantities or Max levels affects only the "service level," not the "cycle service level," because cycle service levels focus on performance during the replenishment period. After an order is placed, the reorder point (Min) is the sole protection against stockouts until the order arrives. Hence, changing the order quantity or Max won't impact cycle service levels. Only the reorder point and safety stock influence cycle service levels.

13. My forecast looks inaccurate—it doesn’t show the same ups and downs as history—why?
A good forecast isn’t about perfectly replicating past fluctuations. Instead, it’s the single number that best aligns with actual outcomes. When historical ups and downs occur unpredictably, averaging or smoothing them often produces the most accurate forecast. Predicting erratic historical patterns can lead to less reliable forecasts compared to simpler trends.

14. What is optimization? How does it work?
Optimization is an option that selects the inventory policy yielding the lowest total operating costs. For instance, if holding costs are high, a policy with more stockouts but less inventory may result in lower overall costs than one with fewer stockouts and more inventory. Conversely, if stockout costs are high, a policy with fewer stockouts but more inventory will yield greater financial benefits. When using optimization, users must specify a minimum service level. The software then evaluates whether a higher service level improves returns. If so, it adjusts policies accordingly; otherwise, it defaults to the user-defined floor. For more details, refer to this webinar: https://www.screencast.com/t/3CfKJoMe2Uj.

15. What is a what-if scenario?
What-if scenarios allow you to experiment with different inventory policies and assess their impact on metrics like service levels, fill rates, and inventory value. To explore these scenarios, navigate to the Drivers tab at the summary or item level, input adjustments, and recalculate to observe changes. This enables you to compare strategies and choose the most cost-effective approach for your supply chain.

By addressing common questions and challenges, we’ve provided actionable insights to help you refine your inventory management practices. With Smart IP&O, you have the tools to make informed decisions, reduce costs, and enhance overall performance.