It is an essential requirement for almost every company to be able to meet customers' requested service levels with a minimum amount of inventory. This means having the right products in stock and virtually nothing else. Excess stock means excess capital outlay, which has a massive impact on bottom line profitability. However, this aim has to be balanced against the potential damage of having insufficient stock leading to lost sales, lost customers and a negative impact on bottom line profitability.
In theory, it all sounds rather simple, but in reality of course, it is rather trickier. With the diversity of products held in many inventories and across different industries, each with different needs and potential, allied to changing market conditions and customer demand, inventory management is a complex and potentially expensive function. At the same time, there are also internal challenges - even differing priorities - within the organisation.
CEOs want to improve customer service, sales want more products to sell, and CFOs want to reduce inventory. Surprisingly, while this is the area where most ERP software implementations normally get their highest and fastest return on investment, it is also true that many companies that have implemented ERP have not yet added a dedicated inventory optimisation module. There is huge potential for companies to maximize the value of their IT investment for a relatively small incremental expense. The benefits of inventory optimisation are felt throughout the organisation - in the warehouse, in sales and marketing and in the finance office:
- Enhanced customer service through increased competitiveness, improved fill rates, fewer shortages, and on-time deliveries;
- Reduced working capital requirements through reduced amount of stock and less obsolete stock;
- Lower transaction costs through more efficient processes.
To optimise inventory - to have the right item at the right time - is a constant balancing act that consists of five different steps:
- Analyse the current situation, see what items are selling and assess delivery performance;
- Classify items into different categories that can be handled with ease, and define the strategy per product segment that prioritises to maximum effectiveness and efficiency;
- Calculate as good a forecast as possible, adopting different but relevant policies on different segments;
- Control costs by optimising replenishment, adopting different replenishment policies on different item segments; and
- Replenish with the best possible collaboration with suppliers.
Inventory optimisation is no longer optional but an economic and logistics necessity. It offers the potential to save on space, time and costs, as well as freeing up working capital that could be more effectively used for other projects and activities. The objective of any inventory management system is to provide the best possible customer service within the restraint of the lowest practical inventory costs. Inventory optimisation offers the tools to help you achieve those aims. This is the Executive Summary of a 5-part series of "How To" guides on Inventory Optimisation.
Step 1: The case for inventory optimisation - How to balance your inventory levels and maintain costs
- Meeting your customers' service level expectations
- Minimising stock holdings
Step 2: How to analyse your inventory performance
- Measuring your sales, volumes and delivery performance
- Measuring your supplier performance, fill rates and times
Step 3: How to classify your products and define your strategy
- Segmenting products according to value, movement and lead times
- Strategising each product segment for optimal service levels
- Applying different rules for different segments
Step 4: How to calculate your product forecast
- Detecting repeatable demand patterns for accurate statistical forecasting
- Demand planning to meet sales and marketing initiatives
Step 5: How to optimise your product replenishment
- Streamlining collaboration with suppliers
- Increasing supply chain efficiencies
Author Resource:-
Peter Clarke, CTO, IBS Australia specialises in Supply Chain and ERP Systems implementations. Peter will present on inventory optimisation at the GS1 Impetus Conference on October 23, 24 2008 in Sydney. Visit http://www.supplychainsecrets.com.au.
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