The Adoption of Inventory Optimisation

Inventory OptimisationInventory optimisation – the method and process of determining the appropriate inventory levels across an entire supply chain – has never been a simple problem, but the emergence of new tools is allowing companies to get this essential job done faster, with higher accuracy and greater impact on their business. Many industry leaders have discovered that inventory optimisation (often abbreviated to IO) can result in higher profits due to lower inventories, improved fill rates and more satisfied customers.

Over the past ten years, IO has moved from a classroom-only exercise to a usable and practical tool which greatly improves corporate profit margins. Many companies which implement IO instigate a 10-30% total inventory reduction, but the underlying drivers of supply and demand are common to all supply chain management situations which means IO is applicable to every industry on the planet.

Inventory analysis and optimisation started as an advanced mathematical approach to the process of understanding and quantifying supply and demand patterns across a supply chain with multiple levels. Today, IO is considered a “core competency” for both moderately sized and Fortune-500 companies across an enormous range of industries. Inventory optimisation is actually a sustainable process in its own right, as it frees up countless millions of capital by reducing stock inventory without impacting negatively on service levels. This makes it far superior to more old-fashioned “binge and purge” cycles of overproduction chased by a brute-force style inventory reduction. Properly implemented inventory optimisation allows companies to save money and increase the turns on their inventory whilst still driving more profit overall.

Over the last few years there have been four contributing factors to the growth in popularity of inventory optimisation. The first is the success of improvement plans which are focused around business operations. IO is built on solid foundations established by process re-engineering for businesses such as lean manufacturing and six sigma projects, which also establish a firm relationship between the inputs and outputs of supply chains as well as giving a good basis for accelerating the potential benefits of inventory optimisation.

Secondly, many companies are working immensely hard to remove the often very large imbalance between projected supply and perceived demand. Forcing capacity levels and the purchase plans for materials to match demand projections gives a far greater need to set proper inventory targets. Recent financial problems across the world has resulted in a drastic reduction of inventory across all industries, which means there is no longer an existing excess of production capacity or stockpiles of leftover inventory which can step in to satisfy sudden changed in product demand. All such fluctuations now have to be dealt with using scientifically-derived inventory targets, which means proper warehouse inventory optimisation software is needed in order to manage the supply chain from end to end.

Thirdly, there has been a significant adoption of key performance indication metrics such as service levels or cash-to-cash cycle time. These metrics require a supply chain orientation for proper evaluation and can only really be improved with dedicated tools such as formal inventory optimisation algorithms.

Finally, established and proven software which is able to solve complex inventory optimisation problems across global supply chain networks is now commercially available rather than being reliant on in-house customised development. While other techniques such as advanced planning and scheduling, or APS, make use of deterministic optimisation methods, inventory optimisation requires stochastic and nonlinear integer solution mathematics at its core. IO maths is thus different from APS maths but is not industry specific, which means the same software can be deployed easily across a variety of industries in order to set up and manage inventories.

In under a decade, inventory optimisation has moved from an emerging idea to a proven technology which can be used to sharply reduce total inventory levels whilst still maintaining or improving the level of customer service. These two competing objectives can be easily satisfied by using the mathematical method of accounting for variable status across the entire supply chain and building up a virtuous inventory optimisation cycle which operates at both the short-term local and long-term strategic levels. Although originally created as an advanced algorithm designed to understand and quantify the pattern of supply-demand uncertainties in multi-level supply chains, inventory optimisation is now recognised by many leading businesses throughout the world as a core competency which is absolutely critical to their overall success.

Read more on inventory optimisation and find consultants suitable for your business at Gideon Hillman Consulting.