Variabilities are present in every step of the distribution chain, in supply, demand and companies internal processes. These variabilities can cause additional costs in the distribution chain by increasing capital, warehousing and stock-out costs. Usu-ally companies set safety stocks and manuUsu-ally adjust inventory control parameters in order to prepare for the variabilities. However, as the resource restrictions are tightening and service performance targets are continuously increasing, reactive pa-rameter adjustments offer only first-aid to overcome the real challenges. Hence, the efforts of the management should be focused on the identification and proactive elimination of the root causes of the variances in the modern inventory manage-ment. (Paakki et al. 2011, p. 164; Silver et al. 1998, p. 710.) Otherwise, inventory
management has to passively adapt to the constraints in the environment, as the variabilities are taken as givens. This in turn is a problematic situation as it allows other stakeholders of the supply chain determine the successfulness of the inventory management, and such reactive inventory management can become very expensive for the whole chain as the local optimization of a single stocking echelon in a large distribution network produces sub-optimal results for the whole supply chain. For example, if some stocking echelons sub-optimize their replenishment behavior so that demand types change from stable to unstable in the distribution center, it can decrease the whole chain’s performance. (Paakki et al. 2011, p. 166; Sunil & Cho-pra 2013, p. 264.) Hence, the reactive inventory management is not sufficient if there is a need to improve the performance of the whole distribution chain without generating excessive inventory and costs. In order to move towards more proactive inventory management, the scope of inventory management should be expanded to cover supplier and demand management aspects as well in addition to internal in-ventory control processes. In this way, the different aspects can be integrated to-gether as the distribution chain management becomes focused. (Paakki et al. 2011, p. 166.) This expanded role of inventory management is presented in the figure 13.
Figure 13. Inventory management's expanded role (Paakki et al. 2011, p. 166).
As noticed from the figure 13, the proactive role of inventory management is es-sential in reducing uncertainty of demand and replenishment lead-time as they have direct impact on the size of the safety stock as can be noticed from the equation 5
which was presented in the chapter 4.3.1. Thus, in order to reduce the inventory and make the supply chain more lean, the standard deviation of demand (𝜎𝐷) needs to be reduced by eliminating the demand variability. The demand variability can be eliminated through better planning and forecasting in order to increase the infor-mation sharing and transparency, and changing the ordering behavior of the cus-tomer in order to create smoother demand patterns. (Paakki et al. 2011, p. 167; Sunil
& Chopra 2013, p. 359; Vrat 2014, p. 166). Especially in the spare parts environ-ment, the demand variability can be reduced by changing the reactive ordering be-havior of the customer that is based on failure-based maintenance towards proactive ordering behavior that is based on preventive or predictive maintenance. One of the most important indirect benefits of preventive and predictive maintenance is the reduction of spare part inventories and inventory costs due the better transparency of maintenance needs that is achieved with the prognostic information. In this way, the component replacements can be anticipated and spare parts can be ordered just in time. (Van Horenbeek et al. 2013, p. 506.) The selling behavior of the company can also create unnecessary demand variability by manipulating the ordering be-havior of the customer. Especially if improperly structured sales incentives or pric-ing strategies such as quantity discounts and promotions are used which both tend to increase the demand variability by creating temporary customer order peaks.
Thus, sales incentives and pricing strategies should be designed in a way that they help to stabilize the orders and demand patterns. (Sunil & Chopra 2013, p. 266).
In addition to reducing the standard deviation of demand (𝜎𝐷), reducing the stand-ard deviation of replenishment lead-time (𝜎𝐿) by eliminating the supply variability through changing the ordering behavior of the company, monitoring and develop-ing the suppliers and utilizdevelop-ing reliable local source of supply are also vital for the inventory reduction. It is also important to avoid more service level than desired when choosing the safety factor (k) in the safety stock calculations as it increases nonlinearly and has direct impact on the size of the safety stock, as can be noticed from the equation 5 of the chapter 4.3.1. In order to avoid more service level than needed and make the inventory reduction possible, some item classification method such as ABC-analysis, VED-analysis or MCIC approach that were discussed in the
chapter 4.2 should be used to select reasonable service levels for the item groups.
(Paakki et al. 2011, p. 167; Sunil & Chopra 2013, p. 359; Vrat 2014, pp. 166-167.)
Inventory can be also reduced by simplifying the replenishment process in order to reduce the average replenishment lead-time (L) as it has direct influence on the size of the safety stock as can be noticed from the equation 5 of chapter 4.3.1. The av-erage replenishment lead-time (L) can be reduced by value stream mapping and eliminating the wastes from the process that were discussed in the chapter 3.2.2, utilizing local vendors, switching from periodic inventory review system to contin-uous inventory review system, and leveraging information technology in the supply chain by adopting e-procurement, e-governance and e-tendering systems. (Silver et al. 1998, p. 711; Sunil & Chopra 2013, p. 359; Vrat 2014, p. 167) In addition, im-plementing the practices of JIT replenishment into the replenishment process that were discussed in the chapter 4.3.2 or using inventory collaboration methods such as the VMI (vendor managed inventory) also helps to simplify the replenishment process and reduce the inventory. In the VMI, the replenishment responsibility and financial ownership of the inventory is transferred to the supplier which simplifies the replenishment and reduces the inventory costs for the buyer. (Vrat 2014, p. 168.)
In some circumstances, the excess variety of materials can also generate excess in-ventory which can be reduced through simplification and standardization of parts and machines. Especially the standardization of machines has direct impact on the variety of machine specific spare parts, and thus the size of the spare parts inven-tory. In addition, reducing the stocking echelon related variety by centralizing the inventory to a single stocking echelon, for example to the central warehouse or dis-tribution center, can also help to reduce the inventory. This type of inventory pool-ing is especially beneficial for slow-movpool-ing and expensive items or spare parts that are stocked in multiple locations. Hence, unnecessary large variety and availability of materials can also generate excess inventory like variability and they should be reduced if possible. (Sunil & Chopra 2013, p. 359; Vrat 2014, pp. 167-168.)
5 CASE: POWER AND AUTOMATION TECHNOLOGY COMPANY