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What are some reasons to use inventory optimization software?

Knowing how much inventory to keep on hand can make or break your customer service. Here's a look at software that can help you get it right.

Inventory optimization software seeks to minimize the amount of inventory in the supply chain, while maintaining...

desired availability levels.

The main reason we have inventory in the supply chain is to provide products to the customer sooner. So the right amount of inventory at a given location is a function of demand: how much demand there is, how predictable or variable it is, and what risk of stock-out a company is willing to take.

Virtually all inventory management and planning systems, such as ERP, are inventory optimization systems at heart. The way the term is used today, however, refers to optimizing inventory levels across a network of warehouses in a supply chain.

This necessarily includes the trade-offs between holding less inventory at remote locations closer to customers and more inventory at feeder locations closer to the source, with the relative costs of storage and transportation. The resulting plan should be the lowest overall cost consistent with the desired service level. Inventory levels are optimum, meaning best, and not necessarily lowest, because these other costs are also considered.

A company can reduce the inventory to zero, but that will not support the customer service objective.

Inventory optimization is largely about cost in the form of capital allocation. Inventory ties up capital, so lower inventory reduces the amount of capital tied up. Keeping the customer service objective in the equation recognizes the practical limits of cost cutting; a company can reduce the inventory to zero, but that will not support the customer service objective. Anecdotal evidence dictates that inventory optimization can result in a 20% to 30% reduction in overall inventory investment (working capital) and a 10% to 15% improvement in customer service.

Inventory optimization software can also help companies plan the right postponement strategy. With many products, it is possible to complete a generic, almost complete version of the final product that can be customized or completed in the warehouse. Postponement enables a company to offer a variety of product variants to customers, with short lead times and lower overall inventory.

Pencils, for example, can be made and shipped to warehouses in bulk and packaged to order in a warehouse close to the customer for quick delivery as 12 packs, gross cases, 6-pencil blister packs, etc. They might even be custom printed in the warehouse with the customer's logo.

Inventory optimization software can help determine where this final manufacturing step should take place for the lowest overall cost consistent with the desired customer lead time.

Inventory optimization software is available from specialty software developers and as a module in many supply chain software suites. 

Next Steps

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This was last published in July 2017

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Which inventory optimization software vendors have you considered?
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Hi John,
Great article and very timely as we see enormous shifts across the supply chain in response to changing buyer behavior. Making a 20%-30% reduction in excess inventory and a 10%-15% improvement in customer service translates into a significant ROI. If you get a chance, take a look at what we are doing at NETSTOCK. We combine sales history from the ERP with a robust forecasting and classification engine to reduce excess inventory, limit stock-outs, and recommend what needs to be ordered to optimize inventory levels ... and I can attest after more than 1000 implementations, that the figures you speak of here are quite accurate and achievable. It's improvements like this that allow small and mid-market companies to compete head to head and realize exponential growth and efficiency. Thanks.
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