Inventory Management Optimization

As global supply chains are devising ways and means to respond to unpredictable customer demand and increased competition, one of the greatest challenges they face is achieving inventory optimization while maintaining high customer service levels and reduced variable costs. Inventory optimization is the process of scientifically determining the right inventory levels across the supply chain and this has never been easy.

Managing inventory can be a daunting task for an enterprise with tens of thousands of products that are located in hundreds of locations. The challenge is even greater when the locations are situated in different tiers or echelons of the enterprise’s distribution network.

But advanced tools now available are enabling companies to do the job faster, and more accurately. Every company requires a unique plan that can cover individual business needs. Most standard systems are not customizable and do not effectively optimize inventory management. A solution to this problem is to integrate an inventory management solution with your back-office and accounting systems. This will ensure that your inventory is properly managed and your asset value on financial reports matches what is physically in stock. To achieve maximum benefits, your integrated solution must be in real-time, flexible, transparent to users, compatible and scalable. It is important to assess your needs today and your plans for future growth.

Inventory managers are faced with the challenge of managing tens or hundreds of thousands of items, each with their own characteristics, requiring complex and time-consuming calculations. Without a structured methodology and powerful analytical tools, the proactive management of large inventories becomes an impossible task, resulting in rapidly increasing inventory levels combined with critical shortages. Today, organizations without optimized inventory run the risk of overpaying and underperforming. An optimized inventory builds a continuous improvement loop that produces tangible, sustainable results over time – driving asset performance, competitive advantage and positive bottom line results.

Three key benefits to integrating your inventory management software with your accounting and back-office systems are:

1. Optimizing inventory to meet product availability and ROI goals – Having the right amount of inventory on hand is vital to both customer and stakeholders’ satisfaction. Customers want new product on demand, and stakeholders’ would prefer no working capital tied up in inventory. In addition, having excess inventory costs money and can result in a loss.
2. Providing inventory visibility to supply chain partners – Many companies use supply chain partners to manage inventory levels and customer shipments. This means, the inventory system must be integrated not only with the company’s back-office systems, but also with supplier and third-party logistics, systems.
3. Stating inventory accurately in financial reports – Ensuring your annual reports and tax returns are accurate is critical for your investors. Inventory value recorded in your books must match the physical value in your warehouse.

The complexities of managing inventory increase significantly for a multi-echelon distribution network with multiple tiers of locations (e.g., a network comprising a central warehouse and downstream customer-facing locations). All locations are under the internal control of a single enterprise. Instead of simply replenishing the warehouse or the DCs that sit between your supplier and your end customers, as in the single echelon situation, you also need to contend with the problems of replenishing another distribution point between your supplier and your DCs.

Managing inventory in a multi-echelon network vs. a single-echelon network presents major pitfalls. One is the failure to achieve true network inventory optimization, because replenishment strategies are applied to one echelon without regard to its impact on the other echelons. A network view of inventory usage up and down the demand chain is absent when you are only dealing with a single echelon of locations. Another pitfall is to base upper-echelon replenishment decisions on specious demand forecasts. These pitfalls can create substantial negative consequences, including the following:

• The network carries excess inventory in the form of redundant safety stock.
• End customer service failures occur even when adequate inventory exists in the network.
• Customer-facing locations experience undesirable stock-outs, while service between echelons is more than acceptable.
• External suppliers deliver unreliable performance, because they have received unsatisfactory demand projections.
• Shortsighted internal allocation decisions are made for products with limited availability.

By modeling the end-to-end supply chain, from raw materials through manufacturing to finished goods and distribution, multi-echelon inventory optimization software creates "what-if" scenarios that explore alternate configurations of suppliers, transportation links, lead times, locations and amounts of buffer stock, as well as cost-effective postponement strategies, time-phased demand signals, SKU rationalization, and more.

Multi-echelon inventory optimization gives supply chain teams confidence in achieving service level goals with the minimum level of inventory, expediting, stock-outs and obsolescence.

Whether your supply chain is simple or complex, local or global, consumer or industrial, Inventory Optimization dramatically improves your organization's bottom line. Multi-echelon inventory capabilities enable you to:

• Minimize supply chain costs while achieving optimal service levels
• Incorporate uncertainty and volatility into strategic inventory plans
• Optimize interdependencies between all locations and stages of the multi-echelon supply chain network
• Understand causes of inventory and cost fluctuations in the supply chain
• Model tradeoffs between cost, service performance, and risk
• Improve productivity of inventory planners
• Free up working capital confined in excess inventory
• Unite stakeholders around one accurate view of the total supply chain

Given the complicated nature of inventory management, it is key to find the right software provider who understands all aspects of your business and your specific supply chain needs. When evaluating software providers, look for these features:

• Experience working with organizations similar to yours.
• A Software-as-a-Service delivery model, which is scalable and cost-effective.
• Strategic partnerships with carriers and integrators that can link mission-critical supply chain applications.
• A platform- and device-inclusive solution. These products can work on any mobile phone or computer and seamlessly integrate into your existing business environment.
• Accelerated implementation that has the system running in fewer than 30 days.
• Superior training and support, which results in faster employee adoption.
• Rapid return on investment, which will please upper management.

The easiest way to achieve the integration objectives and criteria is to find an ERP system with an inventory system that best fits your needs. Achieving and maintaining inventory optimization is complicated and challenging. But, it’s also transformative. Investing in technologies that provide detailed inventory visibility are a vital step in achieving optimized inventory management. When inventory is optimized through the application of better technology and advanced processes, businesses can drive down costs, leverage market opportunities, and improve customer loyalty.

Fully optimizing inventory management requires systems that not only provide operational control but also provide accurate inventory data to a company’s enterprise-wide planning systems. Three of the most common challenges are:

1. Ineffective Master Data Management
2. Individual goals not aligned to overall objectives
3. Lack of communication and collaboration

Inventory optimization begins with knowing what you have and managing it well. Many businesses spend money to expand without upgrading seemingly innocuous procedures, such as effectively managing inventory. Attention is focused on the challenges of day-to-day business—without much thought given to seemingly mundane tasks. More than likely, management has investigated implementing an automated inventory management system but hasn’t made it a priority; that is until the cost of inefficiency becomes glaringly and sometimes punishingly obvious.

Inventory control processes that use programs like Excel or Access are typically used to record items on hand, and counting of inventory is done manually. Unfortunately, items can easily be miscounted and data entry mistakes are just as easy to make. This incorrect data, if captured by a company’s systems, can cascade throughout the supply chain management and accounting programs; wreaking havoc with inventory forecasting, audit reporting, and customer service. Once in the system, these errors are hard to detect and harder to remove.

Sometimes there may be unsuccessful attempts to shoehorn inventory control into a corporate information system (CSI) inappropriate to the task, such as enterprise-wide resource planning software from SAP or Oracle. Often, companies experience all of these frustrating aspects of unsuccessful inventory management before seeking out solutions designed specifically to track and manage stock.

With the right tools and technology, supported with the right integration processes and best practices, successful companies are making that transformation and reaping substantial rewards. For today’s asset intensive companies, competitive advantage requires a positive mindset towards innovation and technology.

Without technology solutions and best practices, companies are left to struggle with manual processes, standard ERP system functionality, and ad hoc databases or spreadsheets. These manually intensive approaches are prone to error and impossible to sustain on a repetitive basis.

Achieving and maintaining inventory optimization is possible and profitable, with the right tools and the right type of help.