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Which companies could use inventory optimization software?

Inventory -- although necessary -- is expensive to keep and needs fine-tuned management. Here's a look at why inventory optimization software can help.

Inventory optimization software determines the right amount of inventory needed at each location in the supply...

chain to maintain the desired customer service level.

Companies implement and use inventory optimization software because they realize that inventory, although necessary, ties up a considerable amount of the company's working capital. It makes good business sense to minimize that inventory investment. Inventory optimization software is designed to do just that.

As to which kinds of companies benefit the most from inventory optimization software, the easy answer is most because most companies have more inventory than they really need. Nevertheless, even companies with too much inventory experience shortages and unsatisfactory customer service performance sometimes.

So inventory optimization software can generate a benefit in the form of improved service levels, even if the overall level of inventory is not significantly reduced. Rather than an overall reduction, the software may recommend a redeployment to put the right items at the right places and times to serve demand.

Narrowing it down a bit, inventory optimization can offer the most benefit to companies with a lot of inventory in a lot of places -- as in a complex, multi-tiered distribution network. Companies with expensive inventory surely have more potential for savings by deploying that inventory effectively.

As with any other software product, the results are only as good as the data they are based on.

Inventory optimization can also be an important tool for managing perishable inventory. Products that become obsolete or unusable while in storage should obviously be managed more closely, and the amount of inventory in storage should be carefully limited to only what can be moved or sold quickly. This not only includes food and pharmaceuticals, but also fashion and electronics that have a notoriously short lifecycle.

Inventory optimization software is quite sophisticated and requires smart, well-trained planners that understand how it works and how to use it. And, as with any other software product, the results are only as good as the data they are based on, so inventory records, bills of material, shelf life and quality data, costs, and other data must be up to date and as accurate as possible.

It also helps to have a savvy executive management team that understands working capital and that will support the recommended actions needed to lower and redeploy the inventory.

Next Steps

Why the CFO should care about inventory turns

Here's a look at some SAP inventory software

A look at SAP's purchase of an inventory optimization company

This was last published in September 2017

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