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We’ve all heard some form of the story: “We once had a problem with not having enough______, and we had to ______, in order to recover. So we decided that we’ll never be put in that position again, and to make sure, we always keep ___ number of weeks/month’s supply on hand to ensure it never happens again.”

Sound familiar?

Those that have endured the emotional experience may still be paying the price in carrying and obsolescence costs while working capital is tied up in inventory. Therein lies the dilemma of “having enough but not too much” which we covered in our research paper, “Inventory Optimization: Balancing the Equation for “Enough but not too Much.”

There is a rational approach to resolving this dilemma using an inventory optimization solution. Rightsize the inventory to balance the tradeoffs between service level and inventory investment. As the Best-in-Class performance indicates — it’s possible to have both — better service level and lower inventory.

To understand the capability benefits that inventory optimization provides, the survey data was divided into two groups, those using an inventory optimization tool, and those who are not. A quick observation highlights the significant gaps between IO Users and Non-users. The very first capability, to determine safety stock targets for critical nodes in the supply chain, gets us right to the core of an IO solution, and the IO Users are 70% more likely to have this in place.

Inventory-Process-Figure2

Most IO software solutions operate at the SKU level by determining the variability of the demand, and depending on the desired service level, it calculates a safety stock for that SKU that will meet the service level based on variability. It will examine the supply side visibility as well, but in virtually all cases, the greater variability comes from the demand side.

Being able to see the impact on service at the planning level moves the decision even further upstream in the supply chain process. “What if” scenarios can be run to see alternatives to mitigating an issue or modifying a predictive outcome. This is the level at which you want to enable your supply chain leaders to be making decisions — before execution even begins, so that the impact is determined in advance at the predictive level and the solution, as a result of analysis and “what if” scenarios, becomes prescriptive in nature.

Inventory-Process-Figure4

As with the capabilities, the gaps between the Users and the Non-Users for the enablers are quite significant. Having a segmentation tool in place provides tremendous visibility in a market climate that is seeing significant disruption in traditional demand channels. At a minimum, there is a shift from traditional B2B and/or bulk shipments to stores, to parcel shipments from all levels in the supply chain going direct to customers. Having solutions that provide segmentation capabilities is becoming critical to success.

When it comes to inventory management and optimization, the days of “shoot from the hip” and anecdotal policies, have given way to the use of fact-based solutions such as inventory optimization to make informed decisions about managing tradeoffs between service level and inventory stocking models. For a complete view of inventory optimization, read the full report.

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