What Do We Mean by “Inventory Optimization?”
Depends on Perception of the Scope of the Challenge, Complexity of your Network, and Even the Role of your ERP Systems
The term Inventory Optimization can mean several things, depending on how you perceive the scope of the challenge, complexity of your network, and even the role of your ERP system.
If your organization has dramatically slashed inventories “across the board,” you need to address potential new imbalances between supply and shifting demand. While excess buffer stock may have been eliminated, now the imperative is to meet demand fluctuations with scientifically derived inventory targets to avoid expediting and stock-outs.
What is the extent of your commitment to optimize? In a survey conducted by Logility and Consumer Goods Technology, more than 50 percent of companies claim they optimize inventory across several stages of their supply chain. But do they really? We find the majority of companies are at one of three levels of inventory optimization sophistication:
Bursa Says: |
 |
| To view inventory optimization at its fullest "multi-echelon extent," (it) is a mature supply chain discipline that frees up millions of dollars in working capital by reducing inventory end-to-end without negatively impacting service levels. |
|
What Do You Say?
|
|
|
|
|
1. Basic Math. Inventory targets are not managed. Instead, the supply chain team nets out all future demand and maintains stock for it. Here, “safety stock” is only the additional amount above what is in the plan beyond the next 18 months. This approach to inventory can only work when demand and supply are both deterministic: a highly unlikely prospect. |
|
2. Rule of Thumb. This is the oldest and most common method of setting inventory levels. Based on the forecast, a company will hold inventory sufficient to meet a specific number of forward weeks of supply. This approach neglects the primary drivers of excess inventory: demand uncertainty, lead-time variability and product velocity.
|
|
3. Single Stage Inventory Optimization. This is usually the first good step a company takes towards optimization. Single stage models are calculators, perhaps in the form of fancy spreadsheets. Localized optimization can improve service levels and free up working capital, but the single stage approach ignores the fact that excess inventory buffers are produced by interrelationships between stages. |
Do you treat inventory optimization holistically across your network? Multi-Echelon Inventory Optimization (MEIO) is a progression from the single stage model in which software models the inter-dependent, end-to-end supply chain and derives optimal inventory targets for the entire network. Extending optimization to multiple tiers of the supply chain produces significantly greater improvement. To do this, MEIO provides both tactical and strategic components:
|
