Inventory Optimization Considerations

inventory optimization

In order to optimize inventory levels, it is necessary to understand that inventory is not one massive quantity. It can be broken into sections that exist for assignable reasons. Some of the most important categories of inventory include anticipatory stock, cycle stock, early arrival stock, marketing stock, obsolete stock, pipeline stock, prebuilt stock, and safety stock. As defined by logistics management cycle stock is the inventory due to production frequencies. Early arrival stock is due to uncertainties in coordinated delivery times. Marketing stock is additional inventory placed at customer locations to stimulate demand or satisfy retailer shelf-space requirements. Obsolete stock is inventory of unsalable product that is often left on the books for accounting and finance purposes. Pipeline stock is based on the lead times in the supply chain. Prebuild stock is inventory built ahead of demand due to capacity limitations.
There are several classes of safety stock each specific to a type of variability; be it forecast variability, supply variability, or manufacturing variability. Along with understanding the levels of stock there are, below is a list of a few best practices to follow:

1. Demand Forecasting

Outside conditions such as seasonal demand, market trends, economic conditions and other business trends can cause unpredictable demand variability. Automated demand forecasting can be used to take the guesswork out of how much inventory should be carried for a given period. Use of forecasting and statistical distributions are appropriate for a wide range of spares items including slow moving and lumpy demand.

2. Lead Time Forecasting

Forecast lead time is an important factor in determining safety stocks. Some things to consider are forecast average lead time using purchase order and receipts history,
filtering and clipping techniques to eliminate abnormal data and override lead times as required, and calculate lead time variance to assess expected service level.

3. Economic Modeling

Allows for “what-if” modeling of inventory trade-off decisions. These include inventory holding costs for different types of items, total replenishment costs for different purchasing methods, expediting or emergency freight costs, and stock-out costs, based on criticality and duration of stock-out.

4. Inventory Segmentation

This provides a management framework for inventory that recognizes that a number of different management techniques are required for various items. Segment the inventory based on characteristics such as usage or holding value, movement frequency and more. Also, apply structured policies or business rules to the management of each inventory segment.

5. Capture Information

Capturing organizational knowledge relating to inventory items is an important business process in preventing mistakes and re-investigation. Inventory optimization should include capture notes and commentary about inventory items, provide an audit trail for decisions, ensure high data quality for input parameters and classification codes and provide reminders when reviews are due.

Digital supply chain solutions help to inform optimal inventory strategies by providing organizations with a better understanding of current and predicted behavior. Behavior includes lead times, throughputs and variability across all of the best practices described above.

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