Removing the Two Barriers to Optimizing Inventory
Caught Between a Rock and a Hard Place
Supply chain leaders often find themselves in a difficult situation when it comes to the conflicting goals of improving customer service and minimizing inventory. The omni-channel world we live in has driven customer service to new heights. Companies that don’t prioritize providing what the customer wants when they want it will soon find themselves losing market-share. On the other hand, product lifecycles continue to accelerate and the penalty for carrying too much of the wrong items leads to high levels of obsolescence. This isn’t a new dilemma, the balancing act between inventory and service has been going on since the earliest days of commerce. However, the penalties for bad service and/or high inventory are growing more severe and the space “between a rock and a hard place” is continuing to shrink.
Because of variability in demand and supply, increasing customer service levels can lead to higher levels of safety stock. Improving cash flow by indiscriminately reducing working capital dollars can result in slashing the wrong inventory, resulting in lower customer service levels.
While some supply chain teams have conducted inventory optimization (IO) initiatives to raise service levels while lowering inventory cost, others worry that they won’t be successful in the effort.
There are two common barriers that can prevent an organization from reaping the benefits of inventory optimization efforts:
- Technology. IO success can be undermined by reliance on:
- Limited tools (such as modules built into, or bolted onto, existing ERP systems)
- Inadequate solutions (e.g. error-prone, hard-to maintain spreadsheets)
- Black-box systems (where calculations are difficult or impossible to validate)
- Complexity. An internal perception that understanding and implementing proven mathematical tools and business processes in order to streamline the creation of optimal inventory policies and targets is too difficult for the team to take on.
Overcoming these barriers is easier than you think and the benefits are too good to ignore. Companies that embrace Multi-echelon Inventory Optimization (MEIO) achieve, on average, a 28% increase in inventory turns.
A simple three-step approach can remove barriers to achieving a successful MEIO initiative.
- Understand your current state and lay the foundation for a solid business case. Assess your organization’s capabilities from the perspectives of:
- Inventory performance
- Business process and inventory management expertise
- Technology and organizational readiness.
- Create a future state inventory optimization capability—process, technology, organization—that provides your supply chain team with a roadmap to success.
- Continue to drive fundamental strategic changes that create greater resiliency and agility throughout the supply chain and establish a cycle of continuous improvement.
Can you overcome the two common barriers to implementing inventory optimization capabilities and get out of being Between a Rock and a Hard Place? Of course. We work with companies around the world who are driving significant value from their MEIO process.