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Is Inventory Optimization an Unending Pursuit? (Part 1)

Inventory management can have an enormous impact on the overall health of a business in today’s volatile markets and fast-changing economic climates. Today, strategic inventory management requires a deep understanding of how the end-to-end supply chain is actually managed. From intelligently micro-segmenting their products to creating continuous inventory process improvements, advanced enterprise software systems—ERP systems with strong Supply Chain Management functionality-- have the capabilities and foresight to transform an organization’s inventory into a competitive advantage.

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Is Inventory Optimization an Unending Pursuit? (Part 1)

In recent years, the topic of inventory optimization has taken center stage in the supply chain industry, but often for the wrong reasons. A great deal of attention has been focused on identifying the best algorithms or statistical models to solve the inventory problem and deliver quick returns in the form of freed-up working capital and other short-term improvements. Inventory optimization, however, should not be treated as a short-term problem that requires a one-time fix. It is a process-based discipline that helps companies continuously manage their increasingly complex, end-to-end global supply chains in the face of constantly changing market conditions, business objectives, risks and constraints. Just as every company has its own unique long-term corporate strategy for navigating today’s complex business environment, every enterprise must also have a unique inventory management strategy that supports that top-level vision.

Instead of focusing on short-term results, a number of leading companies have been working to create and leverage a long-term, sustainable competitive edge by aligning their day-to-day inventory plans with their top-level goals on an ongoing basis — and turning this component of their supply chains into a powerful strategic advantage in a challenging economic climate.

Companies in pursuit of inventory optimization need to start by developing inventory strategies. While inventory management is just one component of the global supply chain, it has a profound impact on overall business performance. How a company positions inventory across the supply chain defines an overall “supply chain strategy” that determines its ability to profitably and effectively meet demand in a dynamic marketplace.

Inventory policies and processes, working together across the global supply chain, define the overall supply chain strategy— and also determine how the business will respond to changes in market and supply conditions.

It would be easier if there were a single strategy that could be applied to all companies, at all times. Every business, however, delivers unique products to unique market segments. Within these segments are individual customers with different needs in terms of service levels, lead times, demand sensitivity, ability to absorb demand spikes, tolerance for excess stock and other characteristics — each of which impacts the inventory policies used to serve them. The overall supply chain posture must be flexible enough to meet these individual customer needs. It must also be very specific, defining what inventories to carry, where, in what form, and how much, taking into consideration the entire global procurement, manufacturing and distribution network.

It is critical that the supply chain posture supports the long-term health and profitability of the business, reflecting top-level strategic goals. Whatever the unique selling proposition of the company, the supply chain posture — and associated inventory policies — must reflect it.

Continued in Part 2


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