Control Inventory-Driven Costs with Inventory Optimization

The pressure to reduce inventory and inventory-driven costs is being felt by manufacturing companies across the globe.  Supply chains are becoming harder to manage, and the effects of globalization are being felt by both manufacturing and distribution companies alike. The pressure from consumers for companies to always have products in stock is beginning to take a heavy toll on manufacturing companies. Due to the increasing demand for product availability, manufacturers and distributors are upgrading their stock-keeping policies and rolling out new product introductions to keep up with the ever-increasing demand.  As a result, many companies are looking to implement inventory management strategies designed to reduce costs and improve inventory efficiency.

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The problem is, traditional inventory management strategies (even the most advanced inventory management techniques) are not meeting the expectations of manufacturers. Many companies are having difficulty reducing inventory with these strategies and are looking for new ways to reduce their inventory and cut costs. Many companies are now applying the latest techniques and technologies to their inventory management procedures in an effort to increase inventory visibility and improve management across the supply chain. This is called inventory optimization.

The Need for Inventory Optimization

Inventory optimization helps manufacturers control their inventory-driven costs, as well as addresses product demand volatility and supply chain complexity. Traditionally, manufacturing companies have kept their warehouses fully stocked to ensure that their customers are well served. This, however, results in overstock and is detrimental to the business. Excess stock generally leads to poor warehouse management due to large inventory levels, the need for more storage space, increased overheads, shelves stocked full of obsolete or expired goods, and a storehouse filled with what could otherwise be money in the bank.

Understocking, however, is just as detrimental – if not worse. Understocking can lead to poor service levels, low customer satisfaction rates, and greater expenses in part due to rushed delivery costs. Manufacturing companies rarely get a second chance with customers and end up losing crucial business opportunities.  Larger companies with complex and global supply chains often feel the impact more than smaller manufacturing companies. One small change in inventory levels can have an impact on the profit and loss of a large manufacturing company, and accurate forecasting becomes harder as supply chains grow more complex.

Inventory optimization can relieve the stress many manufacturing companies are currently under and help them maintain a fluid and profitable supply chain. Consider the following benefits of inventory optimization:

  • Reduces inventory related costs
  • Reduces inventory by 20 – 30 %
  • Improves supply chain performance
  • Greater visibility across the supply chain, leading to better decision-making
  • More accurate forecasting

Getting Started on Inventory Optimization

While the benefits of inventory optimization sound great, you are probably asking yourself the following question: How can I realistically optimize my inventory and gain all of these benefits?

Effective inventory optimization can be achieved by following the five strategies outlined below:

  1. Analyze your current inventory situation. Take a look at your current and past sales, volumes, and delivery performances. Create a spreadsheet or report detailing your situation as best as you can.
  2. Classify items into different categories. Create categories that make sense and can be handled with ease. Make sure that you define a strategy for each product segment.
  3. Calculate inventory forecasts according to each segment. Focus on each product segment and calculate your forecasts accordingly. At the end, you should have forecasts for each product category.
  4. Revisit replenishment policies. In order to optimize costs, you must optimize the replenishment of your products. Create different replenishment policies according to each item segment (or product categories).
  5. Collaborate with suppliers. Make sure that you work closely with your suppliers to create a plan that guarantees your items will be received in a timely fashion at as low-cost as possible. This eliminates the need for last-minute (often late) orders.

Inventory optimization is a continuous process that requires constant adjusting and revisiting. Make sure you go over this list periodically to fine-tune your inventory optimization efforts and analyze your company’s performance. Inventory optimization is not a one-time occurrence. In order to reap the benefits, you must continually look for areas of improvement and make the necessary changes.

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