Inventory Optimization will make you more competitive! Probably for this year could be too late but you can start thinking about next year!
Today, inventory optimization has become vital for the survival of an organization.
If you don’t have good control over your inventory, the day is not far when you will lose control of your profits. Don’t let inventory excess or shortages decide your future.
Optimal inventory level means matching the highest perfect fulfillment of sales with the lowest possible cost of inventory process and management. Effective inventory optimization ensures that there is enough supply available to cover variations in demand and supply availability to enhance competitive advantages on “Cash Flow Generation”
It is crucial for an organization to achieve both efficient and fast operations at a proper cost.
As stated in my before September’s article, companies are procuring materials at global level, from different vendors, to supply raw materials to their factories located in different continents: managing and developing effective inventory strategies and policies is more difficult as companies expand their operations globally.
If this process is not well and functionally organized, the result will be increased costs in working capital and service level issues.
But those who take care of all the uncertainties of their supply chain will be one step ahead versus their competitors and more prepared to meet market demand.
What does it mean to optimize inventory for companies?
It means them to determine exactly how much they need to have on stock in respect to market requirements.
Inventory Optimization Drivers
There are some drivers and critical elements to take into consideration to define optimal quantity.
First of all, it’s a must to state that Inventory Optimization is a cross-functional process that goes through each function, discussing and finalizing service levels, production efficiency and other key performance indicators to work as one Team, having one strategy and with same final goals to achieve in mind.
Some of the drivers that can help you achieve optimized inventor are listed below:
- Inventory Management.
- Demand Planning and Forecast Accuracy.
- Operations Management
- Key Performance Indicators
- Sales and Operations Plan
Inventory management is all about knowing what you have on stock, where you have the product, tracking the flow to get this product: it is the key driver of inventory optimization.
Specialist in inventory management take care also in controlling costs associated with the inventory.
Define a clear inventory strategy
Map your process and create proper documentation illustrating current inventory processes.
Because of the interaction between systems and processes, mapping can support identifying potential gaps in the flow process in terms of data and timing.
Create a future process map.
Rule n.1: Which are the aspects to take into consideration to balance various elements of inventory management? Accuracy, lead times, inventory turns, return policies, split of your inventory (safety stock, pre-built stock, marketing stock, promotional stock, slow and non-mover stock, etc…)
Demand Planning and Forecasting Process
Accurate demand and forecast plans are one of the most important components of an effective supply chain and inventory optimization. It means to have a set of business processes and procedures that define future demand, in order to align all the chain and functions, from procurement to distribution, to meet market requirements (forecasting).
Rule n.2: Which are the best practices in delivering real-time demand vs proper and functional supply process?
Collaboration, flexibility, integrated cross-functional business planning, communication, mentoring, setting up clear processes and procedures.
Effective sourcing, procurement, and production processes mean to have faster replenishment, a clear production schedule plan, having then the opportunity to keep right inventory in the warehouse.
This also means that you will be able to keep lower safety stock levels, increasing your inv turn and reducing overall inventory.
Rule n.3: Which are the best practices in delivering an efficient production plan?
Quality management standards and systems, stock control, delivery and supply chain management, purchasing and ordering, information management
Key Performance Indicators
If you don’t measure, you cannot know where you are, how you are performing and basically where you should be!
For this reason, it’s extremely important to define the critical success factors, based on your corporate goals and strategy.
You can develop a set of key performance indicators (KPIs) that will:
- Set up a proper supply chain KPI’s dashboard
- Measure critical factors you have indicated
- Measure progress vs business and operative strategy
Rule n.4: Measure!
Sales and Operations Planning (S&OP)
Combining demand planning and sales and operations planning into an integrated approach and process means giving the opportunity to the management team to strategically direct business, with the aim of achieving competitive advantage through a real integration between commercial plans and management of the entire supply chain.
Rule n. 5: Integration between sales and operations is required!
And something more…
Rule n.6: Additional key success factors you can think to get inventory optimization
- Clearly set up master data process management
- Effective use of process and procedure to create reliable forecast as Input
- Re-evaluating distribution network.
- Provide communication & training to all stakeholders
- Customer order fulfillment
- Returns processing
- Inventory adjustments
- Inventory KPI reporting is important to allow progress in improving inventory to be tracked. KPI reporting should include:
Rule n.7: In the meantime, you can identify reduction opportunities
- You can start analyzing of Product portfolio by mapping profitability and frequency of usages in order to improve product profitability, cash position, and service level for internal and external customers
- Provide ABC/XYZ Analysis based on the frequency of your inv turn from one side and frequency of your sales from other side
- Provide MRP/ERP/Integrated System Optimization
- SNM and Obsolete items decreasing
- Forecasting accuracy improvement
- Warehouse and Distribution Optimization
And at the end: have a good Inventory counting at the end of this year!