The Efficient Frontier Awaits
Whenever you set a goal, your natural inclination is to achieve it; swipe a line through it, and be done. Supply chain management is full of goals such as mounting pressure from the top to get costs down quickly. We tend to grab this bull by the horns with the intent of showing demonstrable results. But, sometimes grabbing the bull may be short-sighted, and to really achieve the goal we might need to first step back.
I am going to use the “efficient frontier” concept in inventory optimization as an example.
By adjusting stock buffers and inventory targets around the supply chain (driven by an analysis of the company’s actual supply and demand history) managers can create significant reductions in the overall amount of inventory required to meet current service levels. This can free up millions in working capital that has been trapped in excess stock and carrying costs.
There is a natural trade-off between service level and inventory cost. The trade-off relationship, which is a fundamental law of nature for supply chains—can be drawn as a curve, often called the Efficiency Frontier, showing how much more it will cost to achieve higher service levels for any given status quo.
But what if we make our goal to change the status quo itself? Create a new curve that delivers any desired service level at less cost than the current state of affairs allows. A full Multi-Echelon Inventory Optimization (MEIO) initiative can do this.
We can outline this as a three-step process that moves from where you are right now through better and better efficiency curves, to an optimized inventory strategy. A strategy that works across the company and across all levels of the supply chain, from raw materials to finished goods.
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