Inventory management is something you're familiar with. You probably have inventory management practices in place within your supply chain. But What is inventory optimization? Wikipedia defines inventory optimization as: "a method of balancing capital investment constraints or objectives and service-level goals over a large assortment of stock-keeping units (SKUs) while taking demand and supply volatility into account."
Inventory optimization, in simple terms, is the art of having enough inventory to provide the service you need while keeping your capital low. You must account for both supply volatility and demand volatility to achieve this. MRO Inventory optimization is the next step in inventory management for warehouse managers, supply chain managers, and buyers.
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The world is experiencing multiple revolutions at once. Digitalization, globalization, and security threats are just some of the macro trends that impact companies and supply chains around the globe. While consumer habits and behaviours are changing faster than ever before, new technology allows for cheaper and better products to be sourced from around the globe. Complex global supply chains mean that every link can be a potential for problems. However, those who are able to account for the uncertainties in their supply chains will be one step ahead and better equipped to meet customer demands.
Enterprise-sized businesses already have sophisticated systems for optimizing their supply chain. They can source products from around the globe and ship to customers within hours. Many small and medium-sized businesses (SMBs), however, are struggling to figure out how to calculate order quantities, safety stock, and reorder points in Excel. The supply chain management manual results in rough estimates of inventory quantities, which can lead to excessive inventory that will eventually become obsolete or poor customer service. It might have been acceptable to ask your customer for a few weeks before you had the product in stock. But today, you will likely lose that customer to another vendor. Your competitor is only a click away.
Optimizing your inventory will allow you to determine how many of each SKU you should order and when to order them to ensure that your customers are always satisfied. Inventory optimization considers seasonality, campaigns, as well as lead times, and schedules of suppliers. You will have the right products/stocks at the right warehouse, without having to hold onto too much inventory capital. This blog will briefly outline the key elements of optimizing inventory. It will also link to resources that provide more information about each concept.
Forecasting the demand
Policy on inventory
Forecasting demand can be done in many ways. You can look at the demand for last year or last period or ask your sales team to provide forecasts. While this can be useful for certain SKUs, it can lead to a completely different outcome with other items.
Each product has a lifecycle. It will have no historical demand when it is introduced to the marketplace. It will then likely become a positive trend, where demand keeps growing until it is a stable and moving SKU. It could become more irregular, then fall into a declining trend and eventually become an obsolete or dying product. You need to understand where your SKUs are in their product life cycles and how they progress through it. This will allow you to accurately forecast your SKUs.
Seasonality is another thing to be aware of. It is impossible to forecast the demand for a product that sells only in summer (e.g. sunscreen) based on last quarter's sales. Forecasting demand can be complicated by new product launches. A product that was introduced last year cannot be predicted based on the previous year's demand.
Next, you need to decide your inventory policy. This means that you will determine which products and how many units to keep.
One common way to sort SKUs is to use ABC, FMSN, or XYZ analysis. These are all methods that allow you to control inventory based on annual consumption. The ABC classification is not covered in this blog, but you can find all the details in our Material Criticality Analysis. This analysis will help you to improve process control, determine criticality, consumption rate, stock price, lead time, price per unit, frequency, and consumption value.
Next, you will need to calculate how much safety stock you should keep in order for you to meet sudden demand spikes, supplier disruptions, and other unforeseen interruptions. Our blog has more information about safety stock calculations.
It doesn't matter how many items you have if they are stored in the wrong locations. If you have multiple warehouses, optimize your inventory so that the items are distributed in the correct quantities to each location at the right times and places. If you don't have enough demand in a particular area for an item, but there is enough worldwide demand, you will need to locate the best warehouse to store it so that you can ship it to your destination as fast and economically as possible.
Stock replenishment is the last but not least. This involves calculating reorder points, order quantities, and turning them into actual orders.
To optimize your purchase, here are some things to keep in mind:
1. Reliability on the supplier
The lead time of suppliers can have a significant impact on stock availability and service level. You need to know the opening hours and production cycles of your products, in addition to the lead times. Many Chinese manufacturers have stopped production, which is a surprise to western distributors. Some products can take several months to arrive. This is another common problem. If you don't order enough quantities, and if a fast-moving item has a long lead time, your customers can expect delivery in a hurry.
2. Goods in Transit
It is not enough to have information about what stock you have to place an order. It is also important to know what your suppliers have on their way into your warehouses. Although this may seem obvious, most ERPs and other systems do not have this information.
These elements are essential to ensure the stock is in the correct places at the right times. They are also the basis of inventory optimization. These calculations can be done in Excel and then manually entered your ERP. However, if there are more than 100 items in your inventory, it is almost impossible to do these calculations. It's nearly impossible to accurately track everything manually.
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