Optimize your inventories to free cash reserves

During the coronavirus pandemic, companies were often unable to procure the necessary goods quickly enough due manifold supply chain disruptions. As a result of this experience and additional global uncertainties, not to mention a favorable interest rate environment, warehouses were subsequently filled.

Now, the increased inventories are having a significant negative impact on costs and liquidity within companies due to higher interest rates, higher wages and lower demand. Inventory optimization is a simple lever to freeing up cash.

Characteristics of a successful inventory optimization

Embedding inventory optimization into the core of the long-term supply chain strategy provides maximum leverage and ensures competitiveness. In the short term, improvements can be achieved through the differentiated optimization of individual inventory parameters such as target service levels for customers, batch sizes or reorder-points. Our approach to inventory optimization is divided into three stages, depending on the desired impact:

Strategic supply chain optimization is the most long-term view of the entire supply chain and the resulting inventories. The following considerations can be incorporated into the strategy:

• Strategic network alignment and design with regard to suppliers, production and storage facilities, distribution and customers
• Differentiation of the supply chain and service levels through segmentation (customer- and product-orientated)
• Establishing strategic partnerships with suppliers and customers
• Introduction of appropriate supply chain planning software.

Medium-term measures for material flow and inventory optimization include consideration of the following aspects:

• Ongoing cooperation to integrate suppliers, e.g. through consignment warehouses, Vendor Managed Inventory (VMI) or Collaborative Planning, Forecasting and Replenishment (CPFR)
• Optimized inventory allocation (central, regional, local)
• Improvement of demand forecasting and planning process (S&OP, S&OE)
• Local and dual sourcing to reduce delivery times and risks
• Lean management, just-in-time and other process optimization measures to shorten lead times
• Optimization of the push/pull or make-to-stock/make-to-order strategy
• Optimization of material flows between internal suppliers and customers.

Short-term optimization considers current business and market conditions to achieve an inventory reduction while maintaining a high product availability:

• Inventory analysis according to consumption, consistency and inventory type (spare parts, safety stock, semi-finished and finished products, products in transit)
• Re-evaluation of stock parameters (e.g. minimum/reportable stock, batch size, delivery time, etc.)
• Use of a KPI cockpit for ongoing inventory monitoring (usually in real time)
• Creation of responsibilities within the company for continuous inventory improvement
• Selection of suitable methods for demand forecasting
• Optimization of article-dependent procurement strategies (consumption or demand-driven).

Benefits of inventory optimization

More efficient material flows reduce throughput times and avoiding excess stock leads to a reduction in costs. Providing the right goods has a positive effect on the customer service level (OTIF: On Time In Full).

Companies are usually dependent on rapid improvement of their key performance indicators (KPIs). inloop implements short-term inventory reductions in its projects while improving or at least maintaining the same level of customer service. In projects for long-term strategic alignment, the supply chain is comprehensively analyzed and adapted, allowing even greater positive effects to be achieved.

Based on inloop's many years of experience, an average of 15 to 25 per cent stock reduction can be achieved - regardless of the industry - with a simultaneous increase in OTIF of 10 to 20 percentage points.

Overall, successful inventory optimization results in a shorter cash conversion cycle while at the same time improving customer satisfaction.

Further information: Matthias Payer, [email protected]