Tips for Optimizing Inventory Levels

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Too much drives up costs. Too little leads to stock-outs. Inventory levels can make or break a supply chain. A successfully implemented inventory optimization (IO) process is a key driver for many industry executives. By optimizing inventory levels it can increase cost savings and improve customer service.

Figure 1 shows the before and after of a new multi-echelon implementation process with a liquid makeup line by P&G. It provides an overview of the change in safety stock in days on hand across materials, work-in-process, and finished goods in the U.S. and Canadian distribution center.

Safety stock days significantly decreased in materials and finished goods, and increased in work-in-process. This led to a 17% reduction in total investment in safety stock for the supply chain: a 5% total inventory reduction for the product family’s supply chain. With results like this, you should consider an updated MEIO process for your company.

Employee buy-in

Nothing changes until everyone is on board and clearly understands the direction the company is taking in the short- and long-term. Once a shared understanding of the supply chain has been established, the true benefits of an IO program can start to take place.

Becoming more educated on IO and its role in optimizing the overall supply chain benefits the supply chain team. By optimizing inventory levels seriously, it eliminates a possible weakness for competitors to exploit. At the same time, learning more about IO provides insights into how competitors run their supply chains, pinpointing their strong and weak points.

When implementing a solution, consider the mindset of global supply and demand, as customers expect instant gratification. Rule out those that have not successfully managed this 21st-century expectation. A potential solution should also be able to manage uncertainty from the demand side, and volatility on the supply side. This is what sets IO solutions apart from ERP and advanced planning and scheduling (APS) products.

Planning/solution compatibility

The second key factor is the compatibility between the solution and the current planning process. Every company has its own planning process, which includes the following:

  1. Plans to take action on a chosen strategy
  2. Tactics used to carry those plans out
  3. The actual execution process

Each step focuses on a detailed plan for each product in respect to the overarching goals of the company. To select the best solution, you must learn as much as you can about how your organization manages each step of this process. This will help you gain a greater understanding of what each role needs to successfully and efficiently complete their tasks.

Ease of integration

It would be safe to assume that all organizations run on more than one software or solution. Even if there is one standardized platform, each department configures the tool to fit their needs, ultimately creating a separate system.

The IT department needs the flexibility to import and export data across multiple systems. The process should be seamless. There should also be transparency between what is achievable with the system and what is not to set expectations appropriately.

Daily forecaster’s insight

While this may seem obvious, often decision-makers don’t ask those actually using the solution to provide input. Planners have the most intimate knowledge of the data andprocess and are most qualified to judge whether the results are acceptable or not. To improve current and future forecasts, have the team using the software familiarize themselves with why and how supply chain information is represented, analyzed, and converted into actionable tasks to create optimal results for the company.

Getting the team engaged early in the process gives them time to familiarize themselves with the solution and to visualize how their daily work will be simplified using the new solution. When planners get comfortable with the results of optimization recommendations, they take ownership of the projected numbers, which leads to trust in the software. This eliminates the chances of reverting back to the old spreadsheet days.

Multi-dimensional thinking

Your supply chain is a multi-dimensional, international network of connectors and creators. This web of processes contains moving variables that shift and change with each consolidation, collaboration, evolution, and newly established relationships. Factor in the effects of this type of globalization to efficiently manage inventory.

With the help of powerful predictive analytics, companies can rely on solutions to reduce end-to-end inventories across locations and functionalities. Successful corporations implement best-in-class solutions to not only improve the accuracy of their existing forecasts but also to gain the lead against competitors.

Efficient implementation

Implementation projects cause many to be hesitant to take the first step. While change is inevitable, it doesn’t have to be a nightmare. Ensure that the implementation team has industry knowledge and business understanding of what the company is trying to achieve to establish trust.

The ultimate goal with IO projects is to reach a new level of organization and optimally utilize all resources to maintain efficient yet minimal inventory levels.

Figure 2 shows the final outcome of a simplified MEIO model for a liquid makeup line at P&G. This type of organization may not be for every company, but it represents how clearly processes can be mapped out with an efficient IO solution in place.

In Conclusion

Inventory optimization is the lifeline of a company; it is the most expensive to maintain and also the most damaging in terms of stock-outs. Many companies have taken the initiative in implementing inventory optimization solutions to gain, or maintain, their competitive edge in their respective industries. With successful implementations, companies have freed up working capital by decreasing labor hours, improving service levels, and increasing accuracy in forecasts, to name a few.

The benefits and advantages of optimizing inventory levels outweigh the costs. In fact, many have seen their ROI cover the initial cost of the software in the first quarter.