Efficient inventory optimization starts with choosing the best software. It is important to note different terms that can often, mistakenly used interchangeably in conversation, yet have distinct meanings.
For example, Inventory optimization software is different from inventory control software. The latter is designed to help you track inventory levels and manage targets. These are crucial functions, but they’re not what we’ll be discussing in this article. With inventory optimization software, you can plan your entire inventory holistically. You work to gain a deep understanding of your key drivers so you can prioritize your areas for improvement in ways that align with your corporate strategy.
1. What is inventory optimization software?
Inventory optimization software enables you to navigate variances in supply and demand by creating and managing inventory policies that help ensure the availability of your products. It empowers your business to respond to changing customer needs and maintain a steady stream of revenue even in challenging market conditions.
A good inventory optimization solution will provide advanced tactical and strategic planning to help you manage your total inventory in ways that maximize availability and margins at a minimum cost. This optimization will answer two questions simultaneously:
- What’s the optimal mix and form of materials we need to keep at each location and in each time period?
- What are our optimal buffer locations of SKUs throughout our network, and what service commitments will we need to make in between the locations?
Your solution should provide holistic capabilities for setting the right inventory strategies and executing on them in an adaptive manner while constantly evaluating and measuring variabilities and other root causes. In other words, your software should help you manage your inventory rather than tactically planning it.
The best inventory optimization software will provide multi-echelon inventory optimization (MEIO) capabilities. With MEIO, you can take a holistic approach to optimize inventory levels across multiple levels or echelons within your supply chain network. These echelons can include suppliers, distribution centers, and retail locations. You determine the optimal allocation and replenishment policies for inventory at various stages of your supply chain based on demand variability, lead times, cost constraints, and other factors.
2. What are the benefits of inventory optimization software?
With inventory optimization software, you can quickly achieve a major improvement in your inventory costs. By using the right software, you can develop a resilient strategy to optimize your margin and working capital. Within a few months, you can optimize 70 to 80 percent of your inventory, leading to a 10 to 15 percent reduction in inventory costs and a 2 to 5 percent increase in fill rates.
It’s important to take a focused, staged approach to inventory optimization. Rather than trying to tackle the entire challenge at once, it’s best to optimize the areas that matter most to your company. Here are the steps to take:
- Understand where you have deficiencies. Inventory optimization isn’t just about reducing stock—it’s also about right-sizing your inventory to close gaps and avoid missing out on revenue.
- Gradually remove excess inventory from your system. You’ll need to be careful here because you don’t want to make any drastic moves that result in plants getting shut down. You’ll also need to keep in mind that some of your excess consists of low-demand items that you’ll nevertheless want to keep in stock.
- Evaluate alternate production and distribution scenarios, postponement and sourcing strategies, and segmented availability options. These tasks can help you customize your final product mix based on the changing demands of your market.
- Gain visibility into the root causes of your inventory requirements. Here, you can determine to what degree forecast inaccuracy and risks in your replenishment process are affecting your requirements.
- Make trade-offs between your key drivers so you can identify areas for further improvement.
3. Which companies should be using inventory optimization software?
Inventory optimization software is most appropriate for midsize and large enterprises that manage a finished goods inventory (FGI) across distribution centers and third-party logistics (3PL) provider facilities. Even businesses with a limited number of local distribution centers or 3PL facilities can benefit. In simpler networks, having the right inventory in the right place will be critical if service targets are high and demand and supply variabilities are significant. With no intermediate buffer, companies must plan carefully. Otherwise, a fire at a single distribution center could set back sales for months.
In more complex multi-echelon networks, your inventory optimization should also take into account the form and function of the inventory you’ll be holding. At each point in your network, the goal will be to hold inventory in the form that enables you to serve customers at the lowest cost and with the highest levels of availability. Achieving the optimal balance here will require many tradeoffs. You may need to shift inventory to upstream locations where the value-add and differentiation are less. You may decide to require smaller holdings in your FGI and more in your raw material and work-in-progress (WIP) inventories at the upstream echelons. There will also be opportunities to coordinate material availability in ways that address potential disruptions.
The bottom line is that for midsize and large enterprises, inventory optimization right-sizes stock levels in all forms while making the supply chain even more responsive.
4. Checklist of the must-have features and capabilities of an inventory optimization software provider
Now that we’ve explored the high-level goals and benefits of inventory optimization software, let’s run down the features your software should provide. Make sure your solution enables you to:
- Generate consistent, robust results that account for all your business policies. There are many details in your supply chain plan, and when you run them through your inventory optimization software, you shouldn’t experience major surprises. The results may vary somewhat, but they should be easy for you to explain in a boardroom meeting.
- Create exception-based flows. Across businesses that produce products, planning is becoming more centralized. Organizations must stay on top of the changes despite having fewer resources for the task. Using an exception-based flow enables you to concentrate on unexpected results in the areas that matter most. You can then trust your software to handle the more routine tasks.
- Perform MEIO calculations across your entire network. You’ll need this feature to help you optimize your levels of raw materials, WIP, and FGI.
- Perform what-if analysis, simulations, and scenarios. The ever-changing nature of the supply chain requires you to be able to plot several potential paths through the future and prepare for each one.
- Create time-phased stocks and seasonal profiles. Most inventory optimization software can’t help you optimize service levels with respect to seasonality. Look for a solution that can.
- Optimize service levels and use guaranteed service. Your software should do the calculations to ensure you’ll meet your service levels for customers.
- Go live quickly and integrate with other solutions easily. Every day of delay represents a day of lost productivity.
- Support comprehensive analytics. Your software should serve as a starting point for deep analysis by feeding your analytical systems.
- Support postponement policies and optimize safety stock positions. As we described above, your solution should give you precise control over when you finish your products and where you pool inventory.
- Tie network design to inventory planning and optimization. The best inventory optimization software will provide a network design tool that helps you decide where to put your warehouses and plants, what kinds of transportation you’ll need to run to support them, and how all of this ties back to your inventory policies—and overall costs.
- Consider campaign production and other operational constraints.
- Deal with long-tail items and intermittent demand by using artificial intelligence (AI) and machine learning (ML) to make better decisions.
- Account for shelf life while planning for targets. Especially if you’re in the food and beverage or life sciences industries, you’ll want a solution that understands how the shelf life of your products will be consumed and how your inventory policies should reflect this reality.
- Support lot sizing, economic order quantity (EOQ), lot size increments, and minimum and maximum inventory levels.
5. Questions to ask a potential inventory optimization software provider
As you research inventory optimization software, don’t just rely on the marketing materials vendors provide. Be prepared to ask potential providers highly specific questions about the capabilities of their platforms and the results customers have achieved with them. Here are the questions we recommend:
- What is your typical time to value? Can you provide a fast prescriptive outcome?
Your software provider should be able to make you a promise of helping a specific part of your business achieve a specific result within a definite time frame. They should also embrace agile techniques to get your first module live as quickly as possible. Do not accept proposals from vendors that claim their customers’ results vary too widely to make any specific estimates. Your provider should take the time to understand your business well enough to promise specific results.
- Can you provide visibility into inventory causes?
Your solution should help you understand and identify the factors that impact your inventory levels. These factors can include demand variability, forecast accuracy, supply variability, order management and fulfillment, seasonal or promotional activities, and production and manufacturing efficiency.
- Do you provide extensive sensitivity analysis and what-ifs to help shrink analysis lead time?
Sensitivity analysis will help you gauge how much your variables are affecting the output of your inventory scenarios. After identifying the most critical variables that are influencing your results, you can focus your efforts on managing and controlling these efforts more effectively.
- How easy is it to set a postponement scenario?
Postponement scenarios can be complex to understand, but your software should make it easy to set them up once you’ve determined them.
- How can we set up service levels for FGI, WIP, and raw materials?
Setting service levels is one of the most common—and most critical—tasks you’ll need to perform in your inventory optimization software. Be sure your provider offers a simple, intuitive workflow.
- What happens with segmented policies on customer-facing nodes?
Your business may face stringent fill rate requirements with some of your larger customers, while other customers may have lower standards. Your inventory optimization software should enable you to segment your FGI to ensure you’ll have the inventory you need to meet the requirements of your most important customers. There is a temporal aspect to segmentation as well: you may also be thinking about having higher availability during the high season.
- Can we time-phase the network and automatically propagate demand?
To time-phase your network, you’ll need to align the timing of your supply chain activities and processes to ensure smooth, efficient operations. Make sure your software allows you to coordinate procurement, production, inventory management, transportation, and order fulfillment in ways that help you meet customer demand while minimizing your costs and lead times.
To propagate demand, you’ll need to distribute or allocate demand signals across the various stages of a supply chain network through lead times. Your software should serve as a hub that disseminates information about customer demand from the point of sale or customer order entry to the different levels of your supply chain, including suppliers, manufacturers, distributors, and retailers. When you propagate demand automatically, each entity in your supply chain will have visibility into demand requirements and will be able to plan and execute their operations accordingly.
- Can they optimize around the working capital budgets? What about inventory positions?
Your solution should help you achieve time and cost reductions while staying within the working capital budgets and inventory positions you’ve provided.
6. Tips for using inventory optimization software effectively
Any inventory optimization software implementation should begin with strong alignment between corporate objectives and inventory policies. For example, suppose you have a corporate objective of expanding market share. You’ll need to have high product availability, which means you’ll end up with a large inventory and the high working capital that goes along with it. You also won’t be able to take much advantage of postponement because you’ll be under constant pressure to have finished products ready for customers.
Or suppose your corporate objective is market protection. You’ll need to have short lead times so you can easily replenish products. You may also work with 3PL companies to handle postponement. Once again, your working capital will be high, but your customer service levels won’t need to be as high as in the previous scenario because you’re not trying to break into a new market.
As you begin optimizing your inventory, strive to:
- Assign a strong project leader who has authority and extensive business and technical expertise.
- Build an in-depth business case that lays out the many benefits of MEIO.
- Gain cross-functional executive approval by aligning your project with corporate objectives.
- Develop a change management program to gain buy-in from all levels of the organization.
Starting just before the implementation and continuing through the project:
- Educate your team on how MEIO works and what benefits you expect it to deliver.
- Communicate openly about change. For example, if you’ll need to reduce factory utilization because you have too much inventory in the system, make this clear to people up front.
- Encourage feedback on how to improve MEIO capabilities.
- Align your performance incentives to support system-wide inventory improvements. Make these incentives available not only to deployment personnel, but also to transportation, factory procurement, and anyone else who has control over working capital.
- Define and staff new roles to achieve full value from the new MEIO process and solution.
To create value throughout the project:
- Create a culture for data-driven decisions rather than gut-feels. Get out of the mentality that “you need X amount of inventory to service” and let the data speak for itself.
- Build confidence by ensuring the accuracy of your data. Have a relentless commitment to accuracy and validation from day one, and set expectations accordingly.
- Manage change effectively. Over-communicate, get closer to your users, and keep the door open to criticism. Give people time to digest and allow them to buy in. Your critics may become your biggest proponents.
7. Why use Logility’s inventory optimization software?
As you research inventory optimization software, consider what Logility has to offer. Logility is one of the creators of the inventory optimization field with research dating back to the late 1990s at the Massachusetts Institute of Technology (MIT). Over the years, Logility has developed a successful, no-risk, outcomes-first methodology to maximize benefits while staying on top of the risks. After decades of finding out what works and what doesn’t in the field of inventory optimization, we have continuously built out our solutions using AI and ML to bring crucial innovation to the supply chain planning industry.
Unlike most inventory optimization software, Logility is both strategic and tactical. On one hand, Logility helps you determine the best deployment for your inventory and gives you an optimum set of policies from a cost and availability perspective. But the solution also executes on those policies, using changing data, changing demand variability, and other master data changes. With Logility, you can stay on top of supply chain dynamics as you create and manage your inventory policies. This can translate to greater availability, faster responses to customer needs, steadier revenues, and more consistent margins.