Inventory optimization is the method and process of determining the appropriate inventory levels across an entire supply chain-has never been a simple problem ,but the emergence of new tools is allowing companies to get this essential job done faster ,with higher accuracy and greater impact on their buisness.Many Industry leaders have discovered that inventory optimization(IO) can result in higher profits due to lower inventories ,improved fill rates,and more satisfied customers.
Over the past decade,IO has moved from a classroom-only excersise to a usable nd practical tool which greatly improves corporate profit margins.Many companieswhich implement IO instigate a reduction in their inventory ,but the underlying drivers of supply and demand are common to all supply chain situations which means IO is applicable to every industry on the planet.
Inventory optimization started as an advanced mathematical approach to the process of understanding and quantifying supply and demand patterns across a supply chain with multiple levels.Today,IO is considered a "core competency" for both moderately sized and large companies across an enormous range of industries.Inventory Optimizationis actually a sustainable process in its own right,as it frees up countless millions of capital by reducing stock inventory without impacting negativelyon service levels .This makes it far superior to more old fashioned "binge and purge" cycles of overproduction chased by a brute-force style inventory reduction.Properly implemented inventory optimization allows companies to save money and increase the turns on their inventory whilst stilldriving more profit overall.
Over the last few years,there have been some contributuing factors to the growth in populartity of inventory optimization .The first is the success of improvement plans which are focussed on business operations .IO is built on solid foundations established by process re-engeneering for buisness such as lean maufacturing and six sigma projects,which also establish a firm relationship between the inputs and outputs of supply chain as well as giving a good basis for accelerating the potential benefits of inventory optimization.
Secondly,many companies are working imensly hard to remove the often very large imbalance between projected supply and perceived demand .Forcing capacity levels and the purchasr plans for materials to match demand projection gives a far greater need to set proper inventory targets.Recent financial problems across the world have resulted in a drastic reduction of inventory across all industries,which means there is no longer an existing excess of production capacity or stockpiles of leftover inventory ehich can step in to satisfy sudden change in product demand .All such fluctuationsnow have to be dealt with using scientifically-derived inventory targets,which means proper inventory optimization software is needed in order to manage the supply chain from end to end.
Thirdly,there has been a significant adoption of a key performance indicator metrics such as service levels or cash -to-cash cycle time.These metrics require a supply chain orientation for proper evaluation and can only really be improved with dedicated tools such as formal inventory optimization algorithms.
Finally, established and proven software whic is able to solve complex inventory optimization problems across global supply chain networks is now commercially available rather tahn being reliant on in-house customized development.While other techniques such as advanced planning and scheduling.or APS,make use of deterministic optimization methods ,inventory optimizationinvolves the use of tools that are not industry specific menaing the same software can be deployed easily across a variety of industries in oredre to set up and manage inventories.
In under a decade,inventory optimization has moved from an emerging idea to a proven technology which can be sued to sharply reduce total inventory levels whilst still maintaining or improving the level of customer service .These two competing objectives can be easily satisfied by using inventory optimization software across the entire supply chain and building up a virtuous inventory optimization cycle which operates at both the short term and long term strategic levels.
Although originally created as an advance algorith designed to understand and quantify the pattern of supply demand uncertainties in multi-level supply chains,inventory optimization is now recognized by many leading businesses throughtouth the world as a core competency which is absolutely critical to their overall success.