The Next Generation of Inventory

Optimization has Arrived

Cutting-edge demand classification technology integrated with
network optimization and simulation enables cost reduction and
increased inventory availability

Executive Summary
Finding the balance between overstocks and lost sales is necessary for operational growth
and health. With myriad inventory applications available, why are inventory inefficiencies still
so prevalent? The answer is that existing inventory applications fall short in three key areas:
Examples of 10 demand patterns
1. They assume that all demand is smooth and normally distributed recognized by AI+IO
2. They only consider safety stock for the existing supply chain structure
3. They do not simulate real-world behavior or enable what-if analysis
Non-Intermittent
Breakthrough technology for inventory modeling and policy design is now available. LLamasoft®
Inventory Guru enables companies to analyze and properly categorize demand, factor all aspects
of inventory for both existing and new supply chain structures and simulate real-world behavior
Intermittent
to enable true what-if capabilities. The result is a prescription for the right levels of working capi-
tal across an ever-changing business.
Smooth (Fast)

Advantage 1: Understanding Demand

Simply stated, safety stock is your insurance against variability in the supply chain. One of the Erratic

biggest sources of variability in the supply chain is demand, and demand can be highly unpre-
dictable, occurring in patterns from fast to slow, smooth to erratic, intermittent to consistent. Slow

Despite the fact that there are many widely-varying demand patterns, most inventory opti-
mization tools assume that all demand is “normal”, leading to either too much inventory or
stock-outs and lost sales. This problem is further complicated when the supply chain has mul- Lumpy
tiple tiers, numerous sourcing possibilities, shared components and varying service commit-
ments. Planners must decide how much of each item to keep at each level, or echelon. This Clumped
is historically an arduous and inexact process, involving gathering statistics from historical
demand and determining how to classify outliers and extremely slow-moving demand.
Unit-Sized Demand

A Better Way to Understand Demand for Right-Sized Safety

Stock: Adaptive Intelligent Inventory Optimization (AI+IO) Low Variable

Intelligently adapting to widely-varying demand behaviors is the key to better safety stock
results, and LLamasoft Inventory Guru is the tool that helps companies do it. Inventory
Guru, a comprehensive multi-echelon inventory optimization software solution, acts as a
guard against inventory variability, enabling companies to save money while still meeting High Variable
service requirements.
 LLamasoft – The Next Generation of Inventory Optimization has Arrived

Inventory Guru is powered by Adaptive Intelligent Inventory Optimization (AI+IO) technology,

a breakthrough demand classification algorithm created by LLamasoft. The result of over 10
combined years of applied research, AI+IO combines advanced classification and segmenta-
tion of demand patterns with dynamic inventory target setting to help companies achieve the
lowest possible working capital to meet their target service levels.

Through a simple user interface, AI+IO thoroughly analyzes and automatically classifies the
underlying demand patterns into one of 10 demand categories. Once the demand patterns
are analyzed and classified, the AI+IO technology applies the appropriate inventory optimiza-
tion algorithm to set the proper reorder points and quantities that will be required to meet
the user-defined service targets.

Which Is the Better Fit? Inventory Guru vs. Other Tools

The better-fitting curves made possible by AI+IO technology result in right-sized inventory.
Figure: (Left) Actual Probability
Density Function (PDF) of a real
world demand pattern. (Middle)
PDF AI+IO applies when opti-
mizing safety stock. (Right) PDF
common inventory optimization
tools apply when optimizing
safety stock. (Effect) AI+IO accu-
rately represents actual demand
pattern and recommends closer
to optimal safety stock levels
compared to other tools for the
same service level.

Actual density Density created by AI+IO Density created by other inventory

optimization tools

Customer Demand Class Summary

Intermittency Variability Demand Class Clumpiness Baseline

Demand Class Details
Extremely Slow 0.06%
Erratic
Intermittent Slow Unit-Sized 1.87%
Extremely Slow
Highly Variable Slow 12.70%
Low Variable Lumpy 11.20% Lumpy

Slow 8.21% Slow

Clumped 37.07% Slow-Highly Variable
Non-Intermittent Erratic 16.57% Slow-Low Variable
Smooth 11.52% Smooth

0% 10% 20% 30% 40% 50%

Figure: (Above) Example of classification of varying demand patterns

Case Example: Demand Analysis and Safety Stock Optimization

A distributor of convenience store and food service products needed to reduce inventory holding cost and interface inventory opti-
mization with its SAP system for continual strategic inventory optimization. Using LLamasoft Inventory Guru, the company explored
trade-offs between cost and service time, replenishment frequency, order size and variability. With Inventory Guru’s ability to incorporate
bills of materials and solve multi-echelon safety stock optimization for all associated products in one run, results identified a 16 percent
reduction in holding costs through safety stock and cycle stock reductions, as well as savings found by postponing production in several
cases. The company continues to work with LLamasoft to set up a repeatable process for model inputs for a broader range of products,
and plans to implement the solutions in SAP for their global inventory planning.

2 © 2013 LLamasoft, Inc. All rights reserved.

 LLamasoft – The Next Generation of Inventory Optimization has Arrived

Example: How New Demand Classification Technology

Can Reduce Cost
Below is an example of a historical demand series that exhibits “lumpy” behavior during lead
time. AI+IO correctly identifies the pattern and applies the appropriate probability function for
calculating safety stock. Traditional tools, on the other hand, assume normal distribution and
thus overestimate the quantity of safety stock necessary to cover the variability.

In the example below, the target fill rate for this SKU was 95 percent. Using discrete event
simulation to test the results, we can see that AI+IO recommends nearly 30 percent lower in-
ventory while still achieving the target fill rate. Traditional tools that assume normal demand will
significantly over-stock this item, leading to increased inventory cost.

AI+IO Safety Stock Results Traditional Tool Safety Stock Results

Target Fill Rate = 95% Target Fill Rate = 95%

AI+IO Recommended Safety Stock 698 Recommended Safety Stock 984

Simulation – Average Inventory 702 Simulation – Average Inventory 986

Simulation – Average Backorders 3 Simulation – Average Backorders 1

Simulation – Service Achieved 95% Simulation – Service Achieved 99%

Case Example: Demand Analysis and Safety Stock Optimization

A global manufacturer of construction equipment needed to reduce inventory holding costs and improve response times for spare part
deliveries to customers. Using LLamasoft Inventory Guru to evaluate alternate supply base strategies and determine the optimal safety
stock placement, the company modeled sourcing strategies across its large component supply base. LLamasoft AI+IO technology was
used to evaluate daily order history and help the company better understand the relationships of demand variability in individual com-
ponents and groups of components that make up spare part kits. By modeling various scenarios with differentiated sourcing structures
the company was able to understand the trade-offs between inventory holding cost and service in the network. The company was also
able to determine the optimal safety stock targets for spare part components and component kits that are sold as finished goods to end
customers. In total the modeling effort was able to identify 12-15 percent of potential cost savings in the supply chain.

3 © 2013 LLamasoft, Inc. All rights reserved.

 LLamasoft – The Next Generation of Inventory Optimization has Arrived

Advantage 2: Covering all Aspects of Inventory for

Both Existing and New Supply Chain Structures
There are multiple types of inventory held throughout the supply chain,
including cycle stock, pre-build stock and work-in-progress (WIP), so why
do most inventory applications only focus on safety stock? And why can’t
most applications consider alternative supply chain structures?

Answer: Most inventory applications do not include network


optimization capabilities.

Network optimization is the technology required to consider the optimal

flow of products throughout the supply chain and inherent cycle stock
given the trade-offs between a host of variables including transportation Multi time-period network optimization
modes and facility locations. Multi time-period network optimization is
also the technology required to determine when products need to be
pre-positioned to accommodate seasonality or capacity constraints. LLa-
masoft offers both network and inventory optimization within the same
data model and user interface, enabling an evaluation of all aspects of
inventory including safety stock, cycle stock, pre-build stock and WIP.

This integration of network and inventory optimization also enables

analysts to consider completely new supply chain structures such as the
opening/closing of distribution centers or manufacturing locations, then
immediately evaluating the optimal inventory requirements for these new
As-is supply chain
potential networks.

Case Example: Using Network Optimization to

Reduce Risk
For a milk and dairy products producer, commodity price fluctuations are a
way of life. The company produces different products based on variable market
conditions and pricing. Recently, the company began expanding into new regions
and utilizing ocean carriers. The challenge was now pricing fluctuations as well as
New optimal structure
distribution variability. The ocean carrier could arrive at its destination in 45 days
but could take as many as 120 days. By building a multi-time period network opti-
mization model and testing different scenarios, the company was able to make
more accurate inventory stocking decisions based on unpredictability of new stock
arrivals, thus lowering its risk levels in the face of lead time variability.

4 © 2013 LLamasoft, Inc. All rights reserved.

 LLamasoft – The Next Generation of Inventory Optimization has Arrived

Advantage 3: The Power of Adding Simulation to

Inventory Optimization
Inventory Guru’s optimization capabilities can identify millions of dollars in annual cost savings
through right-sizing inventory levels. However, optimization technologies have limitations to
how well they can predict operational performance under the stress of real-world day-to-day
variability such as transportation delays, production lead times and demand.

The only way to truly test the effects of these multiple levels of variability is to use discrete
event simulation. Simulation can digitally “run the clock” to fill each order and schedule each
shipment to provide detailed performance metrics such as on-time deliveries, stock-outs or
capacity bottlenecks.

Once an inventory strategy has

been chosen using optimiza-
tion, simulation is an excellent
method to test it further,
providing validation that the
new inventory policies work as
intended.

LLamasoft’s SimServer engine

is integrated as part of the Sup-
ply Chain Guru modeling and
design software platform. Sup-
ply Chain Guru is the industry’s
only supply chain and inventory
optimization solution with an
integrated, enterprise-scale
simulation engine. This unique Historical inventory pattern Simulated new inventory pattern
integration of optimization and
simulation technologies provide a level of confidence not available in typical inventory optimiza-
tion technologies.

Case Example: Using Simulation to Smooth Production Planning and Order Variance
A consumer goods company wanted to get better performance out of their manufacturing plant. Instability in ordering patterns com-
bined with ad-hoc scheduling led to inefficient use of machines in the plant. Managers thought efficiency could be improved by segment-
ing fast and slow moving inventory and initiating regular schedules for their manufacture. They wanted to use simulation to test out the
improvements from this strategy before implementing them. The simulation suggested that these strategies could result in a 40 percent
improvement in stock levels together with dramatic improvements in workcenter change-overs and adherence to production plan.

5 © 2013 LLamasoft, Inc. All rights reserved.

 LLamasoft – The Next Generation of Inventory Optimization has Arrived

Case Example: Inventory Optimization Validated with Simulation

A global healthcare and consumer goods company needed to better understand their customer demand patterns, improve customer
service and identify more effective postponement and risk-pooling strategies to enable overall reductions in working capital. SAP (in-
cluding nine levels of BOMs) and forecast data were entered into Inventory Guru, generating a clear picture of demand product classes
and associated customer/product demand patterns. Multi-echelon safety stock targets for finished goods, WIP and raw materials were
generated providing actionable data well beyond their single echelon finished good safety stock targets. These insights, validated with
simulation, showed the company’s current safety stock methods were generating significant excess inventory or missing their service
metrics for most products. Furthermore, the Inventory Guru model was able to show the network-wide view of cycle stock, WIP, in-tran-
sit and safety stock inventories—identifying a $2 million potential opportunity for inventory reduction.

Simulation graph of on-hand inventory

Conclusion
Businesses striving for supply chain excellence and the evasive and ever-changing key to
customer loyalty must find the balance between overstocks and lost sales. Now, through
game-changing inventory modeling technology from LLamasoft, businesses can save money
and increase inventory availability while still meeting service requirements and saving customer
sales. By demystifying the classification of varying demand patterns driving safety stock levels,
LLamasoft enables companies to finally conquer the inventory challenge and achieve a healthier
overall business.

For more information, visit www.llamasoft.com/inventory-guru

About LLamasoft, Inc

LLamasoft supply chain design software helps organizations worldwide design and improve their
supply chain operations. LLamasoft solutions enable companies across a wide range of industries
to model, optimize and simulate their supply chain network, leading to major improvements in
cost, service, sustainability and risk mitigation. Headquartered in Ann Arbor, Michigan, LLamasoft
is a leader in supply chain excellence and innovation, advancing technology focused on continuous
improvement of enterprise supply chains for the world’s largest organizations.

LLamasoft, Inc.
201 South Main Street, Suite 400
Ann Arbor, Michigan 48104, USA
Phone: +1 866.598.9831
LLamasoft.com
© 2013 LLamasoft, Inc. All rights reserved. v.10292013
Info@LLamasoft.com

6 © 2013 LLamasoft, Inc. All rights reserved.