Supply Chain Digest's venerable Dan Gilmore contemplates the meaning of Inventory Optimization in his First Thoughts piece today. As usual it is a thoughtful treatise, and he concisely captures the obective of optimization:
The ultimate goal: having the right amount of inventory, in just the right places, to meet customer service and revenue goals - but no more than that.
We certainly concur.
Dan also captures some of the anecdotes and market forces that impact issues such as 'safety stock' that orbit around optimization concepts like:
- There is strong anecdotal and quantifiable evidence that the rise in offshoring is adding to overall inventory levels.
- The rise in transportation costs inevitably leads to decisions that increase inventory to reduce logistics spend in that trade-off equation.
- The rise we’ve seen in commodity prices can also cause companies to “stock up” to avoid for awhile future price increases.
- The so-called “Long Tail” phenomenon, under which the power of the Internet (Amazon.com) and/or increasingly narrowcast market segments (e.g., something like Caffeine Free Diet Coke with Lime) are causing a greater percentage of total sales for many companies to come from products with low total sales velocity – a very tough inventory management challenge.
You can read our take on market forces that impact inventory levels (among a number of distribution operational characteristics) here.
There's also some discussion about the objectives of Optimization Software systems that target the challenges in meeting optimization objectives.
Unfortunately, and we certainly hope this isn't colored by the fact that SC Digest is replete with advertising on behalf of suppliers of optimization software, a central - and probably the most important factor - about inventory - isn't addressed: that is inventory accuracy.
This is understandable, given that inventory optimization software can't actually do anything about inventory accuracy - yet it is completely dependent on it. It is unfortunate that a good deal of analyst and vendor attention has shifted to optimization strategies over the last few years - when inventory accuracy has continued to languish.
When I speak to user groups of ERP partners and I talk about the objective of 100% inventory accuracy - I'm guaranteed to get a forlorn belly laugh. Rather than seeking to meet this most important objective, it seems that most companies just accept an unacceptable level of inaccuracy.
Here's what conditions like that create: If you have as small as 2% error in inventory it will easily be multiplied to a 10% error rate by the application of stochastic software analysis that attempts to optimized against data that is incorrect. If you have inventory accuracies less than 95% it is almost entirely hopeless to achieve anything meaningful because of the same old 'garbage-in-garbage-out' characteristic of any data manipulation system.
Our point here is, that before contemplating the implementation of an inventory optimization system, make every effort to achieve extreme inventory accuracy first. That's the only way that forecasting demand, calculating safety stock levels, and making other time dependent calculations will have any hope of assisting the efficiency of your enterprise.
