Supply chain inventory optimization – Beyond the analytics

From designing, sourcing and manufacturing, to distribution and consumption, your supply chain is at the heart of your customer satisfaction levels. It has become a competitive weapon that could help you win the consumerism war. But the sheer complexity of supply chain networks, and the impact design decisions have on operational performance, makes supply chain inventory management aligning inventory investments with on-time customer delivery and margins a major challenge. The equivalent of 7% of America’s GDP is tied up in inventory, and accounts receivable and payable. That’s $1.1 trillion in cash according to a 2013 US Working Capital Survey. It’s no wonder that number is so high with a lot of companies still struggling with inventory optimization, trying desperately to find that sweet spot between supply volume and customer demand.

Implementing inventory optimization

The challenges of inventory optimization can be immense. The focus with Inventory optimization is often on analytics, but that’s just the beginning. You’ll need to overcome distributed data and inventory, navigate a complex network of locations and bills of materials (BOMs), and manage the configuration of thousands of parts. And if you’re still using dated technologies that don’t support robust and adaptive collaboration, you may even need to make critical decisions without the context of knowing their impact on corporate-wide metrics and objectives. It’s certainly no walk in the park. The first step in navigating these obstacles is integrating inventory management into the rest of your supply chain planning processes, and the technology solution(s) powering them. Why? Because inventory management will be the backbone of your inventory optimization processes, and has strong interdependencies with sales and operations planning (S&OP), master production schedule (MPS) and supply action management (SAM). This integration allows for the second step – cross-functional collaboration. Break down those departmental barriers and silos and work with other supply chain managers to find an ideal solution to inventory issues. The changes you make as an inventory manager have a ripple effect on other supply chain functions. It’s important everyone collaborates and agrees on any necessary trade-offs to prevent further conflict down the line. Integration and collaboration also provide much needed visibility across the end-to-end supply chain. That means you’ll be able to see all aspects of supply and demand, including things like the balance of inventory management levers.

Single vs. multi-echelon inventory optimization

There are several different schools of thought on inventory optimization best practices. Two of the most common are single-echelon inventory optimization (SEIO) and multi-echelon inventory optimization (MEIO). Which one you choose depends entirely on the nature of your business. If you’re building highly customized, one-off products, like ships, SEIO will likely suit your needs best. If you deal with large volumes of similar stock across multiple distribution nodes, like those in the consumer electronic space, MEIO is almost a must. SEIO balances inventory one part at a time, determining the necessary safety stock to overcome constraints like lead time variability and demand volatility. Location problems typically focus on either incoming material flow, or outgoing material flow – not both. It’s a sequential approach with forecast demand determining the required inventory for each level separately. MEIO takes a more holistic approach, looking at the entire value chain and determining the correct inventory levels across the network based on demand variability at various nodes and the performance at higher echelons. The focus is on minimizing inventory costs while maintaining a target service level. Location problems deal with both inbound and outbound material flow simultaneously. You need to factor in constraints related to both. For example, if a retailer receives a product from a distribution center, the distribution center represents one echelon of the supply chain, and the retailer another. The amount of stock the retailer needs is a function of the service it receives from the distribution center. The better the upstream service, the smaller the safety stock level needs to be at the retailer. The goal is to continually update and optimize inventory levels across all echelons.

Benefits of optimizing inventory

Optimizing inventory isn’t easy, but it can help you free up working capital in times of growth, and reduce costs and ensure liquidity in times of economic downturn. It’s also the key to meeting those all important customer satisfaction levels. It provides a systematic and statistical way to effectively cover supply chain risks. It provides the ability to make informed tradeoffs between service targets and inventory levels to maximize corporate performance. Ultimately, it leads to improved inventory turns, reduced inventory holding costs and higher customer service satisfaction levels. How have you optimized inventory in your supply chain? Let us know in the comments area below.

Additional Resources

• Inventory optimization frequently asked questions