It’s a complex problem, but you can successfully optimize inventory levels with the right approach and technology.
With all of today’s supply chain disruptions, and new ones no doubt lurking around the corner, companies without optimized inventory are risking overpaying and underperforming. During the normal course of business, inventory managers face the challenge of managing potentially thousands of items. All of these have their own characteristics with their own complex calculations. The key to meeting today’s challenges is proactive, strategic inventory management.
Proactive inventory management is not possible without insight across the entire supply chain. You need not only a sound methodology but also a transparent look into the end-to-end supply chain. Otherwise, you risk not only quickly rising inventory levels but a shortage of spare parts.
Supply chain disruption is a complex issue. The big events – COVID, weather and climate events, and Russia’s invasion of Ukraine – dominate the news cycle. What’s under the surface is under-reported, including transportation bottlenecks, labor shortages, and vendors going out of business. These events have become more common, and to react to new disruptions, real-time adjustments are needed. Let’s look at how to optimize inventory levels in a time of seemingly never-ending supply chain disruption.
Start With the Customer Experience
There’s no doubt that the customer is king, whether it’s a company or a consumer. From raw materials to manufactured parts to final products, everything throughout the supply chain must be managed to get the customer what they want when they want it, and they often demand real-time tracking information.
What happens if there is no stock? Stock-outs don’t only damage your relationship with your customers, they damage your brand and label it unreliable. Not to mention that you’ve potentially just sent business to your competition.
This costs you, not the least when it comes to opportunity. You’ve lost not just one transaction but future transactions with that customer. An inventory management system that prevents stock-outs takes a lot of the uncertainty from inventory planning and helps you keep a healthier cash flow – it ensures you have the products in stock that have high customer demand.
Disruptions and other uncertainties in your supply chain will always present issues. How will your company manage the tradeoff between large inventory investment and controlling costs?
Inventory Optimization Challenges
The overarching challenge is to optimize inventory levels while at the same time improving and maintaining a great customer experience and reducing variable costs. Making the right decisions depends on your answers to these questions:
- To cushion against disruption, how do you set safety stock levels?
- Have you assessed the risk of your inventory turning out to be too expensive to carry or rendered obsolete?
- Are you willing to make trade-offs between service levels and safety stock, and what are they?
- Do you have enough demand predictability to make service level trade-offs? Do you want to fill orders regardless of your inventory costs?
To meet inventory optimization challenges, setting appropriate levels to absorb disruptions requires some tradeoffs.
Managing Safety Stock
In the last couple of years, you’ve likely noticed that demand can drastically change in the blink of an eye. This makes safety stock management incredibly important as a proactive approach to inventory management. It establishes the minimum amount of on-hand inventory that acts as a buffer for demand surges or shortages in supply.
Safety stock is a simple way to prevent lost orders, which reduces the risk of stock-outs and guarantees you can fulfill orders. But having too much inventory poses a financial risk, and reducing inventory is tricky – it requires a deep understanding of which drivers have the most effect on your supply chain, and then removing them in a way that improves overall efficiency.
It’s more important than ever to have enough stock for orders and to establish accurate levels for automated reordering.
The Value of Multi-Echelon Inventory Optimization
Multi-echelon inventory optimization (MEIO) goes beyond ordinary inventory optimization to optimize stock locations and amounts across all sites and nodes in your supply chain. The right MEIO approach automates stocking and replenishment and enables rich “what-if” scenario analysis to analyze tradeoffs between costs and service levels. Using machine learning, it also identifies stocking patterns for seasonal products or new product introductions. Through robust visualizations, MEIO dashboards and event-driven notifications help improve usability, user adoption, and user efficiency.
MEIO uses time-tested advanced mathematical algorithms to accurately model inventory flows through the interdependent stages and locations of a supply chain, and it analyzes historical behavior under all conditions. The model helps create an optimal configuration of inventory buffers and locations adequate to handle any degree of demand and supply uncertainty, seasonality, etc. while achieving desired service levels for minimum cost.
With MEIO and the right digital supply chain platform, you can realize the benefits of lower working capital, a reduction in the burden of logistical cost, savings from decreased obsolescence, and increased revenue because you’ll have fewer permanently lost sales orders. But how do you get there?
It Takes Real-Time Visibility to Optimize Inventory Levels
It doesn’t matter what industry you are in, real-time visibility over your inventory is more critical than ever. A robust inventory planning and optimization solution within your supply chain platform will give you the visibility you need across your entire supply chain, including facilities and goods in transit. You’ll get a crystal-clear picture of just how much stock you have and where it’s located, so you can make sound decisions about material movements and meet demand.
Combined with demand planning and supply planning systems, you’ll have better insight into both demand spikes and your ability to fulfill orders. With the right platform, you’ll get robust analytics that provide visibility into inbound inventory shipments and customer order status. If you’re a manufacturer, that means visibility into supplier orders, goods in transit, and if they will meet your production schedules. You’ll know in real time if you must source materials from a different supplier or reroute a shipment.
Building and maintaining a competitive advantage requires embracing innovation and technology. Without modern digital solutions and best practices, what’s left? Inefficient manual processes, standard ERP system functionality that doesn’t give you what you want, and spreadsheets. This isn’t going to get you where you need to go. The modern enterprise requires a modern solution. Inventory optimization is just good business. Wondering how to optimize inventory levels? It takes the right digital solutions.
Inventory Optimization Solutions That Meet Business Goals
Logility provides a digital platform with supply chain management solutions that allow you to trace your supply chain end to end. You get the visibility and data you need to optimize your inventory in a way that preserves and increases revenue and allows you to protect and deepen customer relationships. Our platform utilizes artificial intelligence, machine learning, and automation to help you easily track and analyze your supply chain, so you always have optimal performance and key insights. To make better decisions and more profits, contact us today.