Efficient supply chain and inventory management are crucial for achieving operational efficiency and customer satisfaction. This blog aims to address some frequently asked questions from our Smart IP&O users, providing clear and actionable insights to tackle common challenges and improve inventory management practices. By focusing on these key areas, we help turn complex inventory problems into strategic, manageable actions that reduce costs and boost overall performance using Smart IP&O solutions.

1. What is lead time demand?
The lead time demand represents the anticipated demand over the replenishment lead time. It is calculated using Smart's advanced forecasting methods.

2. What is the Min, and how is it calculated?
The Min is shown in the drivers section of SIO. It serves as the reorder point and is the sum of the lead time demand and the safety stock. When on-hand inventory drops below the minimum due to demand, you will need to place another order. Additionally, SIO has 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 calculated?
The Max is the largest quantity of inventory that will be on the shelf if you follow the ordering policy. It is the sum of the Min (reorder point) plus the defined OQ.

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

5. What is the Economic Order Quantity?
It is the order quantity that minimizes the total costs, taking into account both holding and ordering inventory costs.

6. What is the "recommended OQ" that Smart computes?
It is the economic order quantity with an additional adjustment to ensure that the order size is greater than or equal to the demand over lead time.

7. Why is the system predicting a low service level?
Smart predicts the service level based on the specified inventory policy (Min/Max or Reorder Point/Order Quantity), assuming adherence to that policy. A low predicted service level can mean that the expected demand over the lead time is greater than the reorder point (Min). When demand exceeds the reorder point during the replenishment lead time, the probability of stockouts increases, leading to a lower service level. It could also indicate inaccurately entered lead times. If the lead time entered is longer than the actual lead time, the reorder point may not adequately cover the demand over the lead time. Please double-check your lead time entries.

8. Why is the service level showing as zero when the reorder point (or min) is not zero?
Smart predicts the service level based on the specified inventory policy (Min/Max or Reorder Point/Order Quantity), assuming adherence to that policy. A zero service level indicates that the expected demand over the lead time is significantly greater than the reorder point (Min), making stockouts almost certain. When demand exceeds the reorder point during the lead time, the probability of stockouts rises, resulting in a zero service level. Inaccurate lead time entries could also be the cause. If the entered lead time is longer than the actual lead time, the reorder point may fail to cover the demand over the lead time. Please verify your lead time inputs.

9. But my actual service levels aren’t as low as Smart is predicting, why?
This could be because Smart predicts the service level assuming strict adherence to the policy. It's possible you're not strictly following the policy the service level prediction is based on. For instance, if your on-hand inventory exceeds the Max quantity, you're not adhering to the policy. Check your lead time input assumptions. Your actual lead times might be much shorter than what you've entered, leading to a lower predicted service level than expected.

10. Smart seems to be recommending too much inventory, or at least more than I'd expect, why?
Consider evaluating your inputs, such as service level and lead times. Maybe your actual lead times aren't as long as the lead times Smart is using. Sometimes, suppliers intentionally inflate their quoted lead times to ensure timely delivery. If you use that inflated lead time when calculating safety stocks, you'll end up with excess inventory. Review your historical lead time data (Smart provides a supplier performance report for this) to get a clearer picture of the actual lead times and adjust accordingly. Alternatively, it's possible you're aiming for a very high service level, which, combined with a highly volatile item with significant demand spikes, can lead to stocking policies that cover even large fluctuations. Using a high service level target (98%+) for items with fluctuating demand will result in higher inventory levels. Try a lower service level target or reduce the lead time (if the specified lead time is no longer realistic) to decrease inventory levels significantly.

11. Smart is considering spikes in demand I don't want it to consider, and it's inflating inventory, how can I fix this?
If you're confident that the spike won't happen again, you can remove it from the historical data using an override in Smart Demand Planner. Open the forecast project containing that item, adjust the history, and save the adjusted history. Contact tech support to assist with this setup. If the spikes are part of normal random variation, it's best to leave them. Instead, consider a lower service level target. A lower target means the reorder points don't need to cover extreme values as often, resulting in reduced inventory.

12. When I change the Order Quantity or Max, my cycle service levels don't change, why?
Smart reports on "cycle service level" and "service level." Changing your order quantities and Max quantities won't impact the "cycle service level" because cycle service levels measure performance during the replenishment period only. After an order is placed, you must wait for the order to arrive, so the reorder point or Min is the only factor protecting you from stockouts. Modifying the order quantity or Max on hand (up to levels) won't affect your cycle service levels. Cycle service level is influenced only by the size of the reorder points and the amount of safety stock being added. However, Smart's "service level" will change when you modify both reorder points and order quantities.

13. My forecast looks inaccurate. It’s not showing any of the ups and downs observed in history, why?
A good forecast is the single number that is closest to the actual compared to other potential predictions. When historical fluctuations don't occur predictably, the best forecast is often one that averages or smooths through those historical variations. A forecast predicting future fluctuations that aren't evident in historical data is more likely to be less accurate than one predicting a straight or trend line.

14. What is optimization? How does it work?
Optimization is an option for setting stocking policies where the software selects the policy that yields the lowest total operating costs. For example, if an item is costly to hold, a policy with more stockouts but less inventory might yield lower total costs than a policy with fewer stockouts and more inventory. Conversely, if the item has a high stockout cost, a policy yielding fewer stockouts but requiring more inventory might yield greater financial benefits than a policy with less inventory but more stockouts. When using the optimization feature, the user must specify the service level floor (minimum service level). The software will then decide whether a higher service level will yield better results. If it does, the reordering policies will aim for the higher service level. If it doesn't, the policies will default to the user-defined service level floor. This webinar provides more details and explanations on the math behind optimization: https://www.screencast.com/t/3CfKJoMe2Uj

15. What is a what-if scenario?
What-if scenarios allow you to experiment with different user-defined inventory policies and test their predicted impacts on metrics like service levels, fill rates, and inventory value. To explore these scenarios, click on the Drivers tab, either at the summary level or the "Items" level, and enter the desired adjustments. You can then recalculate to see how these changes would affect your overall inventory performance. This enables you to compare various strategies and choose the most cost-effective and efficient approach for your supply chain.

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