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Benefits of inventory optimization software can be “huge,” says analyst

Inventory optimization software can balance inventory levels and help with everything from postponement to customer service, according to Altimeter Group’s Lora Cecere.

Manufacturers are looking to inventory optimization software at a time when many are short on working capital, and efficient supply chains are more important than ever. To shed some light on this trend, spoke with Lora Cecere, an expert in supply chain management (SCM) and partner with Altimeter Group, a consulting firm based in San Mateo, Calif.  

What is inventory optimization, and how can it be accomplished through the use of software applications?

Lora Cecere: Inventory optimization is essentially the use of algorithms to determine a good level of inventory.

Software for inventory optimization comes in two types. One helps you with what is the right level of inventory. Basically, it applies optimization to look at demand variability and supply variability, and be able to address what’s the right level of inventory -- how much and where.

The second type helps you with the form and function of inventory. Form is raw materials, semifinished goods and finished goods. Function is cycle stocks, safety stocks and seasonal stock.

Who’s doing it, and how widespread is it among manufacturers?

Cecere: If you go with my definition -- the goal of optimization is to determine inventory -- 90% [of manufacturers] are doing it because DRP [distribution requirements planning] would fall within that definition. Inventory optimization, which layers on top of DRP, is deeper optimization. That’s being used by about 35% of manufacturers.

Does inventory optimization lend itself to certain types of manufacturers?

Cecere: Yes, companies that have expensive inventory, or perishable inventory, short lifecycles --anything that causes inventory pain. Companies that are sophisticated enough to be sensitive to working capital.

What are the various types of inventory management problems that can be addressed or solved through inventory optimization?

Cecere: Postponement -- where is the right place for me to postpone? Postponement is where I’m going to hold something as an intermediate. My favorite example of postponement is a paint store, where they hold everything as like white paint, and then they add colors at the counter. That’s postponement. People that can do postponement -- hold things as an intermediate --  and add the flavors, the colors, at the last minute get flexibility.  So, inventory optimization helps with postponement: What should I postpone? How should I postpone? These are long supply chains, so they could postpone at many points on the supply chain, or they could not postpone at all.  They could postpone in some factories and not in others. It also helps with multiple-company decisions -- who should hold inventory and where.

If it’s done right, what are the benefits of using inventory optimization software?

Cecere: Let’s talk about ”done right.” It requires a fairly sophisticated user, and it requires an organization that cares about cash flow. But if it’s done right, the impacts are huge -- 20-30% reduction in [use of] working capital, 10-15% improvement in customer service.  

What kinds of solutions are out there, and are they sold as standalone products or embedded with other tools like demand planning suites, etc.?

Cecere: They come in all different flavors. Although most of them are standalone solutions, some of them have started to become parts of suites as they’ve been purchased by other companies. 

What features should potential users be looking for?

Cecere: [Companies] should be looking at the depth of postponement and the model’s ability to handle manufacturing versus distribution.

What are the biggest organizational or technical challenges that manufacturers should know about before implementing inventory optimization software?

Cecere: They’ve got to have planners that know how to use it. The biggest barrier is planning expertise. The second barrier is the ability for the management team to focus on working capital. Data quality can be another, but the more important issues are the change-management issues. It takes a pretty sophisticated company to be fixated on working capital. Most companies are focused on vertical orientation, reduction of costs, asset utilization. The best supply chains have a balance between working capital and asset utilization. A very vertical orientation will get you out of balance.

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