Inventory Optimization and the Supply Chain
It’s a given that maintaining inventory is costly on many levels, the least of which is the notion of stagnant inventory and/or raw materials becoming obsolete before your very eyes. In working inventory control, there is often a fine line that marks the threshold between having too much on-hand inventory and not having enough to ensure on-time delivery. In the modern supply chain, planning for sourcing issues and automated purchasing puts manufacturers on better terms when it comes to real-time inventory management.
However, as lead-times become increasingly reduced and demand levels usually unpredictable from one month to the next, inventory management is integrally connected to the notion of profit margin. What is necessary is to begin thinking of the “inventory area” as a potential profit center itself—to optimize inventory so it works for you, and not against you.
Inventory optimization uses data that is connected to key interrelated factors that influence the efficient management of inventory. The point of inventory optimization is to balance your supply to meet demand at the lowest possible investment in inventory, using the minimal amount of enterprise resources for any given service level, and for each item you introduce into the supply chain. Many manufacturing enterprise resource planning (ERP) software packages touch upon one or more of these variables, while the most robust of them take a multi-tier approach and include them all in a lean system operation.
Of all these inventory management variables, the forecasting of lead-time is, perhaps, most important. Indeed, supplier performance is vital to supply chain performance—each domino relying on the other to remain reliably predictable, upright and steadfast. As one falls, so too do all the others. Forecasting accurate supplier lead-time necessitates not just an averaging of past lead-times, but a sense of the general performance of the supplier as someone you reply upon. Without forecasting realistic lead-times for suppliers, the poor performance of a supplier on one end means the other end working harder to achieve on-time delivery.
At the same time, for inventory optimization it is important to have a good sense of what may be asked of you as either a supplier/vendor, or a point source distributor of your own catalog of finished goods. Demand planning and forecasting, when done thoroughly, keeps you on your toes about what to expect within any upcoming economic cycle, and to schedule production accordingly. Factors such as product seasonality, trends, seller promotional activity, and other events that could spike or deflate demand are considerations of demand forecasting.
ERP software enables accurate demand forecasting by going beyond simple sales averaging and takes into account all factors that could impact the production schedule in negative ways. Tied into demand forecasting is the idea of looking at the actual performance level of the inventory itself. That is to say, it is important to produce analyses of each item in inventory to see not only the history of demand for the product, but also the variability of that demand and the profit margin for the product.
Finally, any inventory optimization must include an introspective analysis of order frequency. All too often, purchasing agents order additional inventory due to some perceived cost benefit as provided by the supplier (e.g., free shipping, volume ordering break-points, etc.). ERP software that optimizes inventory will account for the economic trade-offs that exist between the lower cost benefit versus the maintenance of the additional inventory in terms of potential inventory turnover (as measured in time). Only then can you get a true sense of what is the real cost of having more inventory than you really need or can eliminate quickly. Most inventory optimization models suggest that order frequency analysis can reduce on-hand inventories by 10 to 15 percent.
Whatever your business, if you have needs for inventory maintenance, you also have the necessity of optimizing that inventory. Your position in the supply chain and the ability to make on-time delivery to the chain, means that you are no longer alone. To a large degree there is, in modern manufacturing particularly, a reciprocity like never before. The intimate relations that exist between supply and demand mean that while sourcing predictability is less certain, remedy can be found in the usefulness of ERP software systems.