Investigate Inventory Modeling and Optimization


When it comes to dealing with inventory in your supply chain there is more to it than just straight inventory management and replenishment. To reach the highest service levels with the minimum amounts of inventory requires the use of an advanced technique known as inventory optimization.

What is Inventory Optimization?

Starting a number of years ago, this term has begun to emerge in the realm of Supply Chain Management (SCM): “So what exactly is Inventory Optimization?”.

One of the first and simplest definitions of “Inventory Optimization” is the following:

“Inventory optimization is an emerging practical approach to balancing investment and service-level goals over a very large assortment of stock-keeping units (SKUs)… In contrast to traditional “one-at-a-time” marginal stock level setting, inventory optimization simultaneously determines all SKU stock levels to fulfill total service and investment constraints or objectives.” (Frank Grange) –“Challenges in modeling demand for inventory optimization of slow-moving items”

Although not directly stated in the above definition, what is needed from “Inventory Optimization” today, is the ability to solve two different problems at the same time:

· The first problem, focuses on a single location at a time, trying to find the optimal balancing among the various SKUs stocked there (“optimal mix”)
· The second problem, consists in the optimal allocation of inventories, and service, along the various echelons of the supply chain (“optimal staging”)

Given the strong linkage between the two problems, the task of finding this global optimum state is not an easy task:

“Determining the right amount of inventory to hold in which locations – without excesses or shortages – has been an intractable supply-chain problem. Now new tools, based on breakthrough academic research, promise to reduce inventories across the chain with the same or better service.” (Jean V. Murphy – Global Logistics and Supply Chain Strategies)

How to efficiently and cost effectively implement Inventory Optimization

Now that you’ve grasped the concept of inventory optimization, how can you take action and implement it within your supply chain in an efficient, cost effective and most importantly a rapid fashion?

Well I’m happy to say some of the tools available for this purpose are very cost effective and designed to ‘bolt-on” and interact with the largest and most popular ERP systems out there. This makes the move to inventory optimization a relatively quick and painless process with some other side benefits as well.

In addition to this, prior to actually rolling out one of these systems, advance modeling can be carried out to actually show what impact having inventory optimization implemented would mean to your company dollar wise, based on your history, even before buying and implementing the solution.

And once implemented, the inventory optimization system will also allow you to “monitor” the performance of your inventory planners to correct any behavioral intervention issues that may be negatively impacting your company’s performance.

To learn more about Inventory Optimization and how your company can move forward with this important project, just ASK and we’ll be happy to discuss it with you further.


Jeff Ashcroft

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