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The Most Valuable Inventory Optimization Solutions

December 23, 2015 | By River Logic

Optimizing inventory is an important, cost-saving measure for any enterprise. The goal of using an inventory optimization solution is to develop the ideal state where there is just enough supply to meet consumer demands and expectations. In this ideal state, variations in demand and supply are covered sufficiently while inventory levels are kept to an appropriate minimum.

Without that excess inventory, millions in excess capital can be freed. Through a combination of analytics, forecasting, and proper management inventory optimization is an achievable goal. Here are several inventory optimization solutions:

SKU Rationalization

On the SKU level, inventory optimization can help determine the best places to hold inventory. Because of the increase in SKUs due to higher levels of consumerism (which also brings the demand for mass customization), many manufacturers have been burdened with the higher storage costs for products that can go unsold in periods of low demand.

SKU rationalization provides a way for enterprises to figure out which products to carry more of and which to scale back on. In addition to cutting excess inventory, SKU rationalization improves product availability which in turn leads to higher overall customer satisfaction.

Study Inventory Drivers

Another inventory optimization solution that enterprises might consider is the analysis of inventory drivers. Studying inventory drivers requires an understanding of what drives both the safety stock and the cycle stock. Cycle stock is designed to be used to directly to satisfy demand and is driven by both demand and replenishment cycles. Cycle stock is reduced through the reduction in the replenishment cycles.

Safety stock serves as buffer inventory and is driven by variability in demand. The key to managing safety stock (and, likewise, reducing inventory levels) is reducing demand variability. Other inventory drivers include constraints in raw materials, industry and seasonal factors.

Inventory KPIs

Inventory KPIs (key performance indicators) are a measure of how well an existing supply chain is performing and studying these indicators can show managers where they need to concentrate their improvement efforts.

For example, if a study of KPI finds that inventory turnover is low, one can see a place where their supply chain is failing. KPIs can assist managers in determing what is working in regards to inventory and what still needs work. An inventory that does not require unneeded maintenance and storage costs and still has high tunrover rates is a healthy inventory.

Example Inventory Optimization Tools

Two of the tools to use for employing an inventory optimization solution are multi-echelon inventory optimization (MEIO) and single echelon inventory planning (SEIP). Both tools have similar objectives (lowering inventory levels) but each tool goes about it in different ways.

An SEIP solution operates under the premise that there is one distribution center or node that connects inventory suppliers with consumer outlets. In single echelon, calculations are made based on safety stock and individual echelons of the supply chain are treated as separate with little regard to how it impacts the others.

However, MEIO is designed to handle the realities of a large enterprise. MEIO is designed to be holistic as it balances tradeoffs between service levels and inventory. As an end to end optimization solution, it is designed take into account every level of the enterprise.

It factors in variables such as lead time, interdependence between departments, suppliers and all the others factors that make up the full supply chain. MEIO allows enterprises to develop a more accurate assessment of its supply chain and to have enough supply to satisfy customer demand with lowered inventory in general.

Conclusion

Controlling and optimizing inventory through the use of a inventory optimization solution has widespread benefits that extend beyond the initial savings in inventory reduction. With stable and well managed inventory levels, customer satisfaction is improved as consumers receive their products. Labor costs decrease as the need for employees to manage inventory is lowered. Enterprises that employ inventory optimization are able to continue to stay competitive while achieving greater efficiency.

Case Study: River Logic Cox Wood

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