Inventory continues to create headaches for supply chain teams around the world, putting companies in a tough position and hurting their bottom line. Hyper-volatile demand and major disruptions causing shortages, uncertain supply, and many other issues have made it incredibly challenging for organizations to keep healthy inventories, ending with too much of what they don’t need and too little of what they do.
Balancing inventory – which accounts for the value of goods in transit as well as those in stock – has taken on additional urgency, as signals continue to point towards a softening economy.
A recent survey cited that as many as 66% of large enterprises globally are holding more inventory now than in the pre-pandemic times, with 1 in 5 companies holding significantly more stock, trapping a significant amount of working capital. Many of you likely read how big organizations like Walmart and Target struggled with too much inventory as they over bought items that were once in high demand but no longer are as sought after. This was caused in part by changing customers buying habits as well as the onset of rising inflation . Recently, we saw retailers release huge discounts and rollbacks to quickly turn inventory at a significant cost to margin. As we start 2023, companies continue to be under pressure to clear out inventory and bring balance back to their operations.
Traditional single node, tactical inventory approaches simply won’t cut it. These are no longer efficient in this highly challenging environment. This is something we discussed earlier this year in our webinar: How to Improve Inventory Decisions in Uncertain Times to Balance Opportunity and Risk.
With disruptions and challenges unlikely to subside in the near future, and in the face of growing uncertainty, a more strategic approach to inventory optimization is now more essential than ever.
Here are 5 steps to optimize inventory and reach more mature levels of inventory management to handle increased complexity:
1- Stop Using Spreadsheets or ERPs
It’s like a broken record. Over and over, the smart move is to stop relying on spreadsheets or ERP systems to manage inventory. Yet this seems to be an incredibly difficult habit to break. For many companies, the first step towards more effective inventory management is to leave ERPs and spreadsheets behind. These basic business tools are not designed to manage complexity across different stages and nodes of the network. In the era of across-the-board digitalization, sticking to old tools for inventory management means lagging behind your competitors.
To adopt a more holistic inventory strategy that goes beyond demand and takes into account risks, constraints, and volatility – look to evolve your capabilities with advanced inventory management software to optimize inventory at each stage of the process, from raw materials to finished goods.
2- Increase visibility of inventory at all stages
When you make the transition from basic tools to a well-designed inventory application that is part of a complete supply chain planning software solution, you’ll be able to gain overall visibility into inventory levels at all stages, and consider different factors including geography, customer, product or channel.
Enhanced visibility is critical to get a better understanding of the intricacies of inventory that are specific to your company and your industry.
3- Optimize safety stocks
A fresh approach to safety stock analysis is an important step towards inventory optimization. Storing safety stock is a vastly popular strategy, helping prepare the business for unforeseen circumstances. But while traditional formulas for calculating inventory levels typically use rigid variables, the supply chain environment has only become more complex. Instead of covering risks by increasing safety stock uniformly, which often leads to overstocking, companies must embrace technologies that use more advanced formulas that consider all the variables.
To keep inventory levels under control and avoid having too much safety stock, look for an advanced inventory management application that allows you to optimize safety stocks incorporating demand and supply risk as well as volatility into your inventory targets.
The best solutions will allow you to leverage the latest technologies such as machine learning, to move beyond static inventory target calculations and calculate optimal safety stock, combined with a recommended course of action for best results.
4- Balance Service and Cost
A big challenge to effective inventory management is considering aspects such as cost, service levels, and segmentations, and assessing how these factors influence the outcome. This is when a strong inventory application makes all the difference, as it allows you to evaluate complex cost-to-serve scenarios and trade-offs.
The ability to perform cost-to-serve analyses – for example using logic to determine the best service level versus working capital – helps you better understand the impact of decisions ahead of time and ensures these decisions are more data-driven to remove bias and ‘gut feel’.
5- Perform Multi-echelon Inventory Optimization (MEIO)
As you reach more advanced levels of maturity in the way you handle inventory, you can take a broader approach for your decision-making and perform Multi-echelon Inventory Optimization (MEIO).
While IO (Inventory Optimization) is designed to determine the right inventory for individual echelons (e.g. nodes) across the supply chain at separate stages of the value chain, MEIO focuses on optimizing stock levels across the entire value chain – both in form and function. MEIO provides a solution for complex supply chains that require orchestration across the ecosystem, suggesting the right inventory at each stage.
Businesses that use a MEIO approach can make the most of a comprehensive view of the entire supply chain, balancing demand and supply while ensuring the right form and function of inventory is placed at the right locations to maximize service levels while significantly reducing costs.
Paving The Way to Smarter Inventory Management
Effectively managing inventory is a powerful lever to boost supply chain performance and drive business results. It’s time to take a more strategic approach to inventory and use it to your advantage to maximize value and minimize risk.
At John Galt Solutions, we help companies to take control of their inventory and embrace a more holistic, nuanced approach. Discover the advanced capabilities offered by our market-leading Atlas Planning Platform to successfully navigate the complex market challenges, and model your inventory network in real-time for continuous inventory optimization.
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