Inventory optimization is a supply-chain management method that attempts to eliminate having excess inventory while maintaining the right amount of inventory at the right places to meet consumer demand and revenue goals.
Today, inventory optimization is considered a core competency for mid-sized and large corporations, with the potential to save millions of dollars in working capital by reducing inventory without damaging operations and sales.
Unlike traditional “binge-and-purge” inventory cycles, which involves over-purchasing to accommodate potentially large demand spikes, and then throwing away the extra product or selling them at a loss. Inventory optimization thus attempts to minimize the amount of product needed, which extends vertically along the supply chain.
Components of Inventory Optimization
Assess the business:
In order to understand why inventory is not already optimized, it is important to understand the Order-to-Delivery process, or how inventory is processed and ordered throughout the company.
Collecting data on inventory and consumer trends in previous years, defining inventory maximization goals, and identifying the people or businesses responsible for different tasks along the inventory process will be crucial to effectively and efficiently changing the inventory supply chain process.
Demand should be characterized and forecasted to the best of abilities, and the inventory timeline (including lead-times, delivery times, holding value, and movement frequency) and service level target should be determined.
Develop an inventory plan:
Having clear operational definitions will aid in standardizing an inventory process, and improving certain areas.Inventory should be separated into three categories: raw materials, in-process, and finished goods.
Calculating minimum and safety stock to developing quantities that are appropriate for the business and developing goals that reflect interpretations from quality and accurate data will be crucial for an effective inventory plan.
Measure inventory performance:
Establishing key metrics and standards for which inventory performances can be compared to will be important to see how effective an inventory plan is working, or if goals are being met.
By directly comparing inventory efficiencies and optimization between different periods of time, a business can also infer what factors contribute to more optimized inventory, and which contribute to less.
While consumer demands are often volatile and unpredictable, having determined a plan, methods to measure success, and an accurate assessment of the business’ situation and needs will help create significant change in the business’ inventory system and efficiency level.
Periodic reviews should be conducted, and continuous improvements should be made to optimize the inventory process and system.
However, inventory optimization is an effective tool and a strategic investment so that not only can a company save perhaps millions of dollars and maximize profits, but they also decrease excess waste and increase efficiency, not only in product but also human resources and time.
- Iyer, Mani. “Inventory Optimization: Five Steps to Improve Process Effectiveness.” Industry Week. Penton, 24 July 2012. Web. 12 Apr. 2017.
- Willems, Sean P. “How Inventory Optimization Opens Pathways to Profitability.” Logistics Management. Peerless Media LLC, 17 Oct. 2014. Web. 12 Apr. 2017.