Five elements of inventory optimisation

Inventory turnover benchmarking is used to drive efficiency and increase business performance

Today’s consumers, driven by the Amazon effect, now demand convenience, immediacy, transparency, and personalisation. As a result, organisations must deliver choice, clarity, and transparency on delivery updates, surfacing when out-of-stock items are back in stock, if items are low quantity or even store locations for online purchases.

This requires a different level of inventory optimisation. Inventory management being the process of tracking and monitoring the stock of an organisation’s inventory to ensure that it’s in the right location, quality and quantity including order management, storage of both raw materials and finished goods.

Inventory includes finished goods, that are packaged and in stock with the intent to sell as well as raw materials, work in progress, maintenance, repair, and operating supplies. For global, complex organisations could be tens of thousands or even millions of SKUs to be tracked at an individual level.

Without proper inventory accuracy and management, organisations face critical challenges in both operational efficiency as well as meeting consumer demands. Additionally, they have a goal of maximising profit and driving growth.

For global companies, the challenge of inventory management is effective, sustainable administration of stock at multiple global locations, from many suppliers valuing into 100’s of millions of pounds or euros. The art comes in delivering customer delight for the minimum possible investment.

Here are 5 fundamental elements of inventory optimisation required to both maximise cash flow and satisfy customers.

1. Strategy

Clear direction on product strategy is an essential foundation to an efficient supply chain. It is important to consider several factors such as where to locate production facility or facilities, the number of locations to hold inventory, where to source supply, how many inbound/outbound lines to expect, warehouse size, product availability targets and product line configurations are all factors to analyse and define the framework for operating the supply chain.

However, in ever changing global markets, the ideal network solution today is unlikely to remain optimised forever and strategy needs agility and flexibility to respond efficiently when the time comes for change.

Decision makers should perform a combination of network study and inventory planning simulations to identify the total cost of business for all conceivable scenarios prior to execution.

Beginning with a network study, analysing customer and supplier data helps determine optimal locations for parts warehouses. Depending on the strategy and variable factors, it may be more efficient to have multiple facilities close to customers, or a more centralised approach with a primary facility receiving stock from all suppliers and distributing across multiple regions. With so many variables, the outcome might not be an obvious single solution but several feasible different scenarios.

2. Execution: Technology

The ability to track inventory in real-time is critical for business success, allowing decision-makers to respond and solve inventory issues more quickly. Inventory management systems assist with tracking every product that enters and exits the company during manufacturing, storage, and distribution.

Firstly, the planning system needs to predict the demand using advanced forecasting techniques. This may require several models within any single business to predict all possible demand patterns such as, seasonal, slow-moving, lumpy/erratic, growth, decline, etc.

The system then needs to translate forecasts into a plan for every single SKU creating a safety stock, Min, EOQ, Max and stocking indicator to determine which parts to hold in each location and the required amount of each of those parts to satisfy customer demands.

A best of breed system utilises rules-based decision making to determine the most efficient quantities and routes whilst managing the balance between logistics cost and customer need.

And, applying advanced analytics allows decision-makers to leverage the data find opportunities, mitigates risks, increases product or service innovation, and improve operational effectiveness through use of sophisticated quantitative methods (e.g., statistics, descriptive and predictive data mining, simulation, and optimisation of prescriptive solutions).

3. Execution: Process

Automation within a planning system allows decision-makers to optimise their time and manage the inventory process by exception. Periodic systematic processes such as DRP, pre-forecast review, post-forecast review and deployment all have user-defined rules and dials allowing automation to work effectively in most cases.

Having clearly defined and standardised processes around each element of the system with rules on how to review the outputs at both a summary and detail level helps to manage “exceptional” circumstances.

Each should provide an indication of the health of the system dials, but equally as important is identifying individual anomalies that if unattended can steadily erode performance levels.

For example, a non-recurring spike in customer demand can push up the forecast, increase planning requirements, and replenish to higher levels of inventory. If not corrected, this inventory potentially becomes excess and obsolete, takes up valuable warehouse space and is eventually scrapped.

4. Execution: People

The supply chain feels the impact of bad inventory planning, causing inflated costs at every touch point. Investment in quality people is essential to supporting large inventories and minimizing cost across the supply chain.

The skillset required for the IM function covers data analysis, high levels of numeracy, accuracy, systems knowledge, and supply chain awareness. It also requires an eye for detail to deliver results. More advanced organizations might be involved in coding, system changes, simulation, and cross-functional projects.

As such, the IM function requires highly skilled individuals to optimise, maintain and manage large inventories, but with the right people in place the benefits can be felt more widely within the overall supply chain than just the headline IM metrics.

5. Performance Monitoring

Inventory planning has two headline metrics that outline the health of the business; availability and inventory turns. The first measures customer service level while the second demonstrates the degree of efficiency with which the company delivers the service level.

It is essential these metrics are measured frequently with many more KPI’s, reports and targets underlying these measures that keep the business on course through constant monitoring and incremental adjustment.

Inventory segmentation is an important starting point by categorising and managing parts at a group level. Examples might include ABC analysis, active inventory, obsolete material, part class, critical parts, non-stocked parts, campaigns, NPI, superseded items, etc.

Tracking of changes, highlighting exceptions, and alerts are part of the day-to-day reporting through standard Business Intelligence (BI) and inform the analysts when changes at both a macro and micro level require redialling parameters and optimising new baselines.

Conclusion

To meet the expectations of today’s omnichannel shopping patterns, unprecedented accuracy is required to track supply, demand, and availability in real-time. Not to mention, dealing with delivery delays, rampant inflation, and many other business disruptions.

The art of inventory management requires definition and control of all five of these elements to achieve the highest levels of maturity where inventory and the supply chain are optimised, planned, and controlled.

A disciplined combination of the elements and built-in agility to quickly reorganise and re-optimise following change delivers customer loyalty, sales growth and potentially huge cash flow benefits from reduced inventory and processing across the entire supply chain. By having a single, real-time view, an organisation will never miss a sales opportunity because of hidden inventory or overpromise on stock that is not available.