Inventory optimisation – a key tool for supply chain success
Sales Manager | AEB (International) Ltd
In markets subject to globalisation, volatility, economic uncertainty, changes in demand channels and different distribution strategies, companies face tremendous challenges to match increasing supply volumes and product ranges to customer demand while keeping costs down at the same time. The amount of inventory a company holds can be a significant cost factor, based on the cost of the inventory itself and the cost of shipping, handling and storage. So naturally, most companies want to hold as little inventory as possible.
Inventory optimisation is ultimately aimed at achieving financial savings, improving operational efficiency, addressing demand volatility and supply variability, and increasing overall customer service levels. Successful inventory optimisation can have a staggering impact on supply chain dynamics and performance, resulting in the reduction of company cash in inventory, which affects the balance sheet and improves cash flow.
Choosing the right inventory optimisation strategy depends as much on the operations, warehousing and distribution strategy of a business, as on the type of company and its position within the overall supply chain, e.g. as 1st, 2nd or 3rd tier suppliers. No matter which approach is selected, however, a key factor to consider is having the right IT systems in place to support the operational side such as warehouse and transport management, as well as the strategic side with analyses, business intelligence (BI) and collaborative visibility tools.
Multiple objectives need to be balanced, including capital investment, cash flow, meeting customer demand, supplying the production line, and supporting demand fluctuations. In order to be able to react to market demand and to supply chain disruptions, and to proactively plan for resource deployment, expansions and daily business, companies require visibility of what has happened, what is happening now, what is going to or likely to happen, and what possible alternatives there are.
First steps towards optimising inventory levels include the recording and monitoring of data, such as demand across products ranges, seasonal fluctuations, supplier lead times, completion of supplier deliveries and changes in order volumes. This typically involves the implementation of a warehouse management system (WMS) to standardise, accelerate and automate processes. Integrated WMS streamline operations, increase efficiency and reduce error rates, giving control of the stock to the workforce. They provide full visibility of inventory levels (both in the warehouse and in transit), and can be used to notify suppliers and carriers when there is a demand for stock or services.
This helps to consolidate and time deliveries, and reduces inventory levels to hold only the minimum stock required, allowing both management and warehouse staff to focus on their core tasks. Such integrated systems also support strategies such as vendor management inventory (VMI), just-in-time refills and demand driven fulfilment, and are often accompanied by a visibility solution that captures the required data throughout the supply chain to analyse the inventory in real-time and determine what levels are appropriate to cater for current market demand. Resulting measures include the reduction of obsolete stock, stock subject to short lead times, and stock held to maintain operations for a specific time period.
Depending on the size of the company, the complexity of the supply chain and the range of products offered, the return on investments needs to be carefully evaluated before selecting a WMS. Most technologies available today are part of a solution suite that covers all areas of the supply chain, including the central WMS but also order, customs, transport and risk management. For comprehensive inventory optimisation it is important to closely integrate all areas of the supply chain and include data from all systems involved, both internal and external.
Visibility solutions provide tools to connect supply chain partners, analyse and categorise demand, allowing supply chain professionals to accurately simulate and model inventory plans and cater for various strategies, including optimal safety stock, promotional stock and seasonal variations. They use complex algorithms for assessment and forecasting, provide transparency on recommended stock levels for all areas of the supply chain, and determine what stock should be held and replenished when, where, how and by whom. Supply chain simulations help companies to validate any new strategies by predicting service rates, inventory levels and site capacity constraints for different supply chain structures prior to implementation.
Which technology is deployed to optimise inventory ultimately depends on a company’s individual requirements and goals – there is no ‘one-size-fits-all’ solution. That’s why it’s crucial that the solution provider offers a consultative approach and a comprehensive portfolio and understands the specific needs of each supply chain sector, operation and perspective. They should offer an outside view and ask the right questions, assisting in-house teams to design improved workflows, cut waste and increase efficiency.
Posted on: June 27th 2014