Benefits of Inventory Optimization
Contribution by Tracy Roche – Director Service Delivery at Barloworld Supply Chain Software
Benefits are derived from four sources:
- Improved Inventory Turns: Reduced inventory holding results in the reduction of working capital required to support inventory.
- Improved Availability: An improvement in availability resulting in increased sales and gross margin.
- Improved Variable Supply Chain Costs: A reduction in variable Supply Chain spend such as emergency shipping, storage, insurance, ordering etc.
- Improved Inventory Shrinkage: A reduction in write-offs and depreciation.
As much as reduced inventory levels contribute to improved profitability through reduced carrying costs and a better return on asset ratios for your company, the impact of improved availability on bottom-line profitability should never be under-estimated.
The danger always exists that too much focus on reducing inventory investment levels at the expense of efficiency and availability can have a detrimental effect on bottom-line profitability. The challenge is clearly to reduce inventory levels as much as possible while improving or at least maintaining availability and, more importantly, implementing changes at the SKU level to optimize the whole.
Certainly, wasteful investment must be eliminated and it is essential to have the tools to identify which elements of the inventory investment are not “working for” the company. At the same time, it is important to understand and identify how unbalanced inventory can be re-deployed to maximize contributions and efficiency improvements.
[blockquote style=”2″]To assist with this process we introduce a concept called a “Lost Sales Multiplier – LSM” which, essentially, determines the probability of losing a sale when stock-outs occur and inventory is not available to the customer’s “want” date. The margins or contributions that would be lost are also factored into the process in order to quantify the cost to the company of stock-outs. Without a process to quantify the value to the company of improved availability, it is difficult to maximize the return on inventory investment, or even to know where to re-deploy investment for improved availability.[/blockquote]
[blockquote style=”2″]Using sufficient customer fill rate performance history and comparing it to demand history, the relationship between availability and additional sales is not a “straight line”; it is more of an exponential curve – the rate of lost sale reduction is large when low availability improvements are realized, and the rate of LSM % change slows down as the fill rate reaches into the high fill rate zone.[/blockquote]
The benefit from fewer supply chain disruptions with improved availability may be harder to quantify and will vary greatly from company to company, but can be significant nonetheless and can include:
[list][item icon=”fa-check” ]Lower freight costs resulting from fewer freight emergencies[/item][/list]
[list][item icon=”fa-check” ]Fewer set-ups in manufacturing, cutting or fabricating[/item][/list]
[list][item icon=”fa-check” ]A reduced amount of exceptions to be handled by the planners[/item][/list]
More ways to realized Inventory Optimization
[list][item icon=”fa-check” ]Create visibility of inventory deployment with exception management (shortfalls, excesses, order pipeline management);[/item][/list]
[list][item icon=”fa-check” ]Develop a structure and platform for the introduction and maintenance of best practices in the management of inventory;[/item]
[list][item icon=”fa-check” ]Find modeling and a ‘what-if’ analysis toolsets, allowing corporate goals and targets to be tested and assessed before being applied in practice;[/item][/list]
[list][item icon=”fa-check” ]Simplify and restructure ordering policy, at the line item level, when there are changes to market conditions or corporate objectives;[/item][/list]
[list][item icon=”fa-check” ]Give executive management the ability to direct stock and availability targets, and obtain the commitment and cross functional integration to achieve their goals;[/item][/list]
[list][item icon=”fa-check” ]Provide operations with line item modeling and projection toolsets to test individual replenishment decisions;[/item][/list]
[list][item icon=”fa-check” ]Focus on the forecasting process and create quantitative measurements of the impact to inventory investment linked to forecast accuracy improvements;[/item][/list]
[list][item icon=”fa-check” ]Provide senior management with the most effective platform for analyzing and interpreting market trends and their impact on inventory planning;[/item][/list]
[list][item icon=”fa-check” ]Model the financial implications of short term (three to twelve months) forecasts using the current stockholding information, to quantify what the month-by-month closing stock will be and what needs to be produced or bought.[/item][/list]
A high level of energy, motivation, focus and knowledge is essential to the function of managing inventory. The introduction of excellence in inventory management can set new standards in the company and provide a bench mark of performance against which to measure many other activities.