Human Intelligence applied to Supply Chain Variability, Uncertainty, Complexity and Ambiguity (VUCA)

In today’s competitive business environment, inventory optimisation is a strategic lever for accelerating enterprise value and enhancing shareholder returns. Top-performing organisations recognise that minimising excess inventory while improving service levels translates directly into improved cash flow, reduced operational risk, and increased profitability. 

When looking at manufacturing, distribution, and retail companies, few realise the importance of inventory valuation and its proportion to sales when assessing a company’s operational and financial health. Leading organisations typically aim for inventory-to-sales ratios of 10% to 15% and maintain average inventory coverage of 1.5 to 2.5 months, depending on industry and product characteristics. In contrast, average performers may carry three to six months’ worth of inventory, tying up significantly more working capital than necessary. The stresses from demand variability, uncertainty, supply complexity, and ambiguity lead us to overprotect our stocks. However, the additional working capital required to increase inventory strains cash flow and reduces both financial and operational capabilities.

Everyone assumes that reducing inventory will decrease our capacity to respond to changes in demand. The key is to use the correct approach to improve customer service while simultaneously reducing inventory and lead times. The solution begins by running analytics on historical operational data to understand what really happened in the recent times. By learning from these historical behaviours, we can identify optimal parameters for procurement, manufacturing, and distribution decisions.

This counterintuitive approach addresses what has actually happened, accounting for VUCA conditions. In contrast, legacy MRP and ERP systems rely on stable, predictable demand and production schedules. As a result, striving for “just in time” often leads to keeping inventory “just in case.”

The Supply Chain Net Flow model succeeds by establishing inventory buffers at key manufacturing stages. These buffers distribute fulfilment stress as appropriate at specific points. For example, consider a consumer electronics manufacturer with a complex bill of materials across multiple assembly stages. Instead of holding large amounts of finished goods, the company places inventory buffers at the subassembly and component stages. If a critical component faces unexpected delivery delays, the buffer ensures that subassemblies can continue without disruption, maintaining production flow and meeting customer orders. The model is more effective when used with bills of materials with five to nine levels, or more, compared to traditional flattened three-level BOMs.

Once the buffered items are defined, we can proceed to data analysis. The key inputs for supply-side analytics processing are Procurement Orders, Manufacturing Orders, Inventory Receptions, Transfers, and actual elapsed time from order placement to fulfilment. On the consumption side, we analyse Sales Orders, Manufacturing Order Component Consumption, Internal Consumption Orders, and Inventory Transfers, and you can incorporate sales forecasts to include expected future demand behaviour.

The operational phase requires all open procurement, manufacturing, sales, manufacturing consumption, and internal consumption orders. It also requires inventory transfers, current bills of materials, process routes, and on-hand inventory. The Supply Planning dashboard highlights orders requiring immediate action, which may seem overwhelming initially. Once the Procurement and Manufacturing teams have placed these orders and scheduled fulfilment, operations stabilise, and stress decreases. This buffer system helps improve customer service and maintain optimal inventory levels.

The Excess Inventory report shows all items and storehouses with levels above requirements. These items should not be procured until their levels reach the reorder range. This is the source of inventory reduction without jeopardising fulfilment capabilities.

We have seen simultaneous inventory reductions of 26% to 70%, lead-time reductions of 22% to 85%, and improvements in customer service of 13% to 54%. For example, we helped a food and beverages company with an annual turnover of 120 million reduce its average inventory from 20 million (four months at a 50% gross margin) to 10 million. This improved customer service to 98.3% of sales orders delivered complete and on time. The deployment process took four weeks. Three months later, the company had recovered 10 million in cash. At a 16% annual weighted cost of capital, this represents additional net profits of 1.6 million per year.

Integrating Supply Chain Net Flow technology with your legacy MRP/ERP system is a structured process designed to operate without disruption and deliver value rapidly. The following executive-level phases help ensure a clear pathway to success and take between 2 and 4 weeks.

The first step is an assessment with your COO, Supply Chain Lead and your CEO, to understand the strategic relevance of Supply Chain Net Flow for your organisation. Once we understand the needs, problems, implications and current situation, we work with your teams to help them prepare the templates to gather the data to be shared, which is a straightforward process.

Then, using this data, we configure a LOVIS Flow instance to process it and prepare the initial configuration for you. After running the analytics, you will be able to visualise the initial results and identify early improvement opportunities. Complete integration using LOVIS Flow APIs or via export/import interfaces, and go-live allows you to process millions of transactions for thousands of items and facilities every day.

Our team of experts in Supply Chain Net Flow will accompany your Supply Chain team to make the most of this very advanced technology and help you stay the course when the temptation to return to old MRP/ERP practices pulls you back strongly. We understand that adopting new processes and changing established routines can be challenging. That is why we provide comprehensive change management support throughout the transition, including interactive training, hands-on workshops, and ongoing coaching for your teams. We work closely with key stakeholders at all levels to communicate the benefits, address concerns, and ensure everyone is engaged in the process.

Key success factors include executive sponsorship, commitment from your Supply Chain team, and readiness to act on insights delivered by the system. With a collaborative approach, these steps allow for a smooth, effective transition and rapid value capture.

Use LOVIS Flow within LOVIS EOS or add it to your current Enterprise Software Platform with our APIs. The choice is yours.