Inventory Optimization (Policy)
Overview
Customer service levels, along with a company’s sales revenue, are negatively affected by inventory shortages or stock-outs. Yet, purchasing and maintaining too much inventory can significantly tie up working capital and reduce overall profit margins. In order to profitably satisfy customer demand companies must have adequate inventory at the right location at the right time to manage demand and supply uncertainly. Knowing “How” much inventory to maintain and “Where” to stock it to best satisfy customer service targets is fundamental to inventory policy optimization.
Business Problem
Are you experiencing these business challenges? Do these questions sound familiar?
Common Business Challenges
• Increasing competitive customer service level requirements
• Pressure to decrease costs and inventory investment
• Increasing expedited transportation and delivery costs
• Highly volatile demand or seasonality
• Erratic fluctuations in inventory levels
• Inconsistent or low fill rates and increasing stock-outs
• Growing inventory levels and decreasing inventory turns
• Diverse customer base and product mix (SKU proliferation) requiring different service levels
• Creeping excess and obsolete inventory
• Extended and variable supplier lead times
Key Questions for Consideration
• Is my inventory over-stocked or under-stocked to meet given customer service levels?
• What service level can be achieved provided an inventory funding constraint?
• How is demand variability impacting my inventory levels? What if forecast error or demand uncertainty was reduced?
• What impact does duration and variability of supplier lead-times have on my inventory levels?
• What are the required safety stock and cycle stock inventory levels by customer, by product, by location?
• How should we adjust inventory levels to accommodate for product seasonality, promotions, forward-buying or capacity constraints?
• How often should I evaluate and change my inventory targets?
Service Solution
Supply Chain Acuity’s Inventory Policy Optimization services helps our clients set the optimal inventory levels, re-order quantities, and replenishment policies for each product by location across the supply chain network to minimize inventory investment and working capital to meet a desired customer service level. We are experienced in using a number of advanced multi-echelon inventory optimization tools to evaluate and determine the optimal safety stock and inventory policies. These tools enable us to take a highly analytical approach to inventory policy optimization by utilizing multiple probabilistic distributions for incorporating demand and supply uncertainty, linking their dependencies across the supply chain network, while respecting cost or service-level constraints.
As part of our analysis, we identify key supply chain parameters and drivers that influence inventory levels and service performance including:
• Demand volume and variability
• Supplier lead time and variability
• In-transit lead-time and variability
• Inventory investment or funding
• Product target group and target service level assignment
• Safety stock level to protect against demand and supply variability
• Reorder point for effective replenishment
• Reorder quantity and frequency of replenishment
• Pipeline inventory, or maximum stocking level, accounting for in-transit and work-in-process inventory across the network
• Cycle stock to manage average inventory levels and transportation
• Frequency of reviewing inventory levels
Delivered Benefits and Desired Outcomes
• The power to holistically understand the impact of inventory policies and key drivers on inventory levels across a multi-echelon supply chain network and identify improvement opportunities
• Ability to model and quickly run “What-If” scenarios to understand key inventory drivers and evaluate trade-
offs between customer service level and inventory investment to plan for changing business requirements
offs between customer service level and inventory investment to plan for changing business requirements
• Target and improve customer service levels and fill rates
• Set the optimal safety stock level given demand and supply uncertainty
• Reduce finished goods, work-in-process, and raw materials inventory levels and working capital requirements
• Segment and establish specific inventory policies by customer, supplier, product, and/or location
• Adjust levels according to seasonality, promotions, forward-buying, production or supplier constraints