Inventory planning is a crucial aspect of supply chain planning, and inventory optimization software is a key element vital to both enhance and refine this process. This guide offers insights for a comprehensive understanding of the fundamental elements of inventory optimization, their significance in streamlining your organization's supply chain, and the substantial benefits of leveraging advanced software technology to improve decision-making and boost business performance.
The information below should serve as a valuable resource to help you navigate the complexities of inventory planning, advance your strategies to take on advanced multi-echelon inventory optimization (MEIO), and help align your supply chain operations with your broader business objectives.
If you can't find the answers to your specific questions, we encourage you to reach out to our team! We’re available to assist you via live chat on this page or via email, and will be happy to provide personalized guidance tailored to your unique inventory requirements.
What is Inventory Optimization in Supply Chain Planning?
Inventory is the common thread connecting demand streams, supply networks, manufacturing plants, and sales revenue. Inventory exists across all stages of the supply chain (such as raw materials, work in progress, finished goods), directly impacting efficiency and profitability. This is why it’s so important for businesses to find effective ways to optimize it. Inventory optimization is the process of efficiently managing and balancing the inventory levels of products or materials throughout the supply chain. The main goal is to ensure companies have enough inventory available to meet customer demand, while minimizing excess stock that could tie up capital (trapped working capital), increase carrying costs, and lead to obsolescence or waste.
Inventory optimization involves analyzing various factors, such as demand patterns, lead times, production schedules, supplier reliability, and customer service levels, to determine the right quantities to order and maintain at each stage of the supply chain.
Inventory optimization aims to minimize costs and maximize service levels. As such, it is a component of inventory planning, which is a comprehensive approach to managing inventory, aiming to ensure overall alignment of inventory with business goals and market demand.
How Does Inventory Optimization Software Help Improve Inventory Management?
A successful inventory strategy puts the right form of inventory in the right place at the right time. Advanced supply chain planning software focused on inventory planning empowers companies with the continuous intelligence they require to effectively manage and optimize inventory across the multi-enterprise value chain.
Inventory optimization software is equipped with algorithms and advanced analytics that allow managers to make better data-driven decisions and implement a winning strategy that strikes the right balance between maintaining optimal inventory levels and meeting customer demand, thereby leading to better financial performance and a competitive advantage in the market.
In our Pathways to Evolve, we highlight key steps that companies can take to continuously improve their practices and achieve inventory excellence, with technology playing a vital role in each stage of the journey to achieve higher levels of optimization and efficiency.
Start: Gain real-time visibility into inventory levels at all stages, from raw materials to finished goods, and optimize safety stocks by incorporating demand and supply risk and volatility into your inventory targets.
In this initial phase, companies aim to optimize safety stock levels to ensure they have enough buffer inventory to meet unexpected fluctuations in demand or supply. Technology helps by providing advanced analytics and demand forecasting tools that take into account various risk factors and volatility patterns. By analyzing historical data, market trends, and external factors, companies can use technology to identify potential risks and uncertainties that may impact inventory levels.
With improved visibility, companies can increase certainty that they have the right form of inventory available at the right place and time to meet customer demand promptly, prevent stockouts, and minimize waste associated with excess or obsolete inventory.
Evolve: Upgrade your static inventory target calculations to include multiple demand elements, inventory components, costs, dependencies, and more.
As companies mature in their inventory management practices, they move from static inventory target calculations to more dynamic and comprehensive approaches. Robust inventory optimization tools allow managers to incorporate various demand elements, such as seasonality, promotional events, and customer behavior, along with multiple inventory components, including cycle stock optimization and stock-out prevention.
Advanced inventory software helps factor in different costs associated with inventory, such as holding costs, ordering costs, and stock-out costs. By incorporating dependencies between different products or materials, companies can ensure that their inventory optimization strategies are well-aligned with their overall supply chain objectives.
Accelerate: Eliminate the costly whipsaw effect by applying machine learning to power advanced multi-echelon inventory optimization to your end-to-end supply chain network.
The final phase of the journey focuses on achieving advanced multi-echelon inventory optimization across the entire supply chain network, leveraging machine learning and advanced analytics to gather and process vast amounts of data from various sources, such as suppliers, distributors, and internal operations, in real-time.
Machine learning algorithms can analyze data and identify complex patterns and interdependencies across different echelons of the supply chain, providing valuable insights to make more informed and precise inventory decisions. By leveraging technology and machine learning, companies can achieve end-to-end visibility and optimization in their supply chain network. This leads to better inventory planning, reduced stockouts, minimized excess inventory, improved customer service, and ultimately, higher profitability.
What Are the Benefits of Using Inventory Optimization Software?
Inventory optimization software comes with numerous perks and allows companies to significantly impact their bottom line, customer satisfaction, and overall competitiveness.
Advanced technology solutions for effective inventory management are a critical element of your end-to-end supply chain planning strategy, enabling you to reap benefits such as:
- Improve Customer Service. By optimizing inventory levels, companies can ensure they have the right products available at the right place and time to meet customer demand – leading to improved customer service, reduced stockouts, and higher customer satisfaction.
- Save Costs. Inventory optimization helps strike a balance between maintaining sufficient stock levels and minimizing excess inventory. By avoiding overstocking and obsolescence and reducing carrying costs, businesses can significantly save costs.
- Free Up Working Capital. Optimized inventory management ensures that working capital is not tied up in excess inventory. This frees up capital that can be invested in other areas of the business.
- Mitigate Risk. Incorporating demand and supply risk into inventory targets helps companies anticipate and mitigate potential risks in their supply chain. By being better prepared for uncertainties, businesses can respond more effectively to market changes and disruptions.
- Increase Efficiency. Inventory optimization streamlines inventory management processes, reducing manual effort and errors associated with traditional methods. This leads to increased operational efficiency and productivity.
- Reduce Waste. Ensuring inventory levels are aligned with actual demand and production requirements helps avoid overstock of items that may become obsolete or expire before being sold. By optimizing inventory, companies can minimize the risk of holding excess stock that could potentially become waste, leading to cost savings and a more sustainable supply chain.
- Strategic Planning. The ability to perform "what-if" scenario analyses allows businesses to evaluate the impact of different inventory strategies under various conditions, enabling strategic planning to better adapt to changing market dynamics.
- Improve Collaboration. End-to-end supply chain planning software promotes collaboration between different departments and stakeholders. This alignment results in more cohesive and effective inventory management strategies.
- Gain a Competitive Advantage. Strategic inventory planning helps companies achieve better supply chain performance and increase agility, which turns into a competitive advantage that can lead to a stronger market position and increased market share.
What is Vendor-Managed Inventory (VMI)?
Vendor-Managed Inventory (VMI) is a supply chain management strategy where the supplier (vendor) is responsible for managing and replenishing inventory for the customer (usually a retailer or distributor). This arrangement shifts the responsibility of inventory management from the customer to the vendor, often resulting in more efficient inventory control and supply chain operations.
VMI offers numerous benefits that can have a significant impact on supply chain efficiency and customer satisfaction. By having a single point of control, VMI helps companies reduce inventory costs by ensuring that there is no excess or shortage of stock, while also improving forecasting accuracy thanks to the supplier's access to historical sales data and market intelligence. This close collaboration between buyer and seller fosters better communication and a stronger relationship, ultimately leading to increased efficiency through automated ordering processes and reduced administrative burdens.
With advanced VMI, suppliers gain a deeper understanding of customer consumption patterns, allowing them to make more informed decisions about production and inventory management, all while providing customers with the right products at the right time.
What is Single-Echelon Inventory Optimization (SEIO)?
Single-Echelon Inventory Optimization (SEIO) is a supply chain management strategy that focuses on optimizing inventory levels within a single stage or level of the supply chain. This approach involves calculating the optimal amount of inventory to hold at a specific point in the supply chain to balance costs and service levels effectively.
A key aspect of SEIO is that it targets a single point in the supply chain, such as a warehouse, distribution center, or retail store, without considering the interdependencies with other stages in the network. The primary goal is to determine the optimal inventory levels that balance the costs associated with holding inventory (e.g., storage costs, capital costs) and the costs of stockouts (e.g., lost sales, customer dissatisfaction).
While SEIO offers significant benefits in terms of cost reduction and improved service levels, it is important to be aware of its limitations (its focus on a single point in the network) and consider more comprehensive approaches like Multi-Echelon Inventory Optimization (MEIO) for holistic supply chain efficiency.
What is Multi-Echelon Inventory Optimization (MEIO)?
Multi-Echelon Inventory Optimization (MEIO) is an approach that combines efficiency and resiliency by optimizing stock levels across the entire value chain, at each location and form from raw materials (RM) to work-in-progress (WIP) to finished goods (FG). This approach ensures resilience across the distribution network or product lines while simultaneously reducing overall inventory levels because it optimizes both the form and function of inventory at each location.
Inventory optimization (IO) is designed to model demand, thus determine the appropriate inventory for individual echelons across the entire supply chain. Most inventory optimization solutions manage stock at each stage separately, for example, optimizing supply at the warehouse level separately from the factory level. MEIO takes managing inventory to the next level by optimizing stock levels across the entire value chain. The primary focus of inventory optimization is on getting individual stock levels right at separate stages of the value chain.
MEIO solutions apply to inventory optimization for complex supply chains with a need for overall orchestration, aligning inventory targets with specific channels, service, and investment goals.
For more information about MEIO strategy, including key questions to consider when implementing this approach, read our blog: Multi Echelon Inventory Optimization (MEIO): Why inventory optimization isn’t always enough.
What Are Some Examples of Successful Inventory Optimization?
Organizations can achieve greater efficiency, resilience, and flexibility in their supply chains through effective inventory optimization and planning strategies. Some examples include:
- Achieve greater precision, granularity and control through the implementation of strategic business rules that consider resource availability, capacity, work in progress, or planned work as well as the multiple steps in the production process.
- Improve product availability and optimizing fulfillment through VMI.
- Reduce inventory levels by leveraging a clear view of demand and forecasting and replenishment capabilities.
- Implement MEIO at advanced levels of supply chain maturity to control inventory across all echelons of the supply chain at advanced levels of supply chain maturity, and optimize stock levels throughout the network.
Case Study: Randa Optimizes Customers’ Inventory
After gaining greater visibility and control over inventory across its five business units by implementing John Galt Solutions’ Atlas Planning Platform, major global fashion manufacturer Randa Apparel & Accessories began providing the benefits of unified, end-to-end supply chain planning as a service to its retail customers. Randa’s VMI system links directly to customers’ ERP systems, giving the manufacturer visibility into store-level sales and near real-time insight into where and when stock is needed so it can ensure product availability while lowering costs.
How Can Companies Evolve Their Inventory Strategy for Maximum Value?
As companies mature in their inventory management practices, evolving their inventory strategy for maximum value involves adopting a holistic and comprehensive approach. This digital transformation entails strategically positioning buffer stock, and balancing the inventory levels of finished goods, raw materials, and semi-finished goods.
Some key steps to consider:
Implement Multi-Echelon Inventory Optimization (MEIO)
A critical component of this evolution is the adoption of MEIO to go beyond a single points across the end-to-end network and include a holistic view of the entire supply chain and the relationships between each node. Companies can optimize inventory across all stages, factoring in cost, service levels, and segmentation. This enables them to evaluate complex cost-to-serve scenarios and make informed trade-offs to achieve the optimal balance between service level and working capital.
Use Automation
Automation plays a significant role in enhancing inventory management efficiency. Automating routine tasks and processes helps increase operational efficiency, allowing for the automatic identification of inventory discrepancies and sending alerts for corrective actions. This automation also augments decision-making processes, ensuring timely and accurate responses to inventory challenges as well as the ability to quickly take advantage of new opportunities as they arise.
Leverage Artificial Intelligence (AI) and Machine Learning
Machine learning allows companies to move beyond static inventory target calculations to determine optimal safety stock levels and provide actionable recommendations and alerts. Advanced analytics can automatically identify root causes of inventory issues, generate alerts, and support decision-making with real-time data and predictive insights.
Implement Advanced Vendor-Managed Inventory (VMI) Strategies
Creating virtual inventories based on different channels facilitates seamless end-to-end collaboration with suppliers and customers. Providing higher service levels through advanced VMI deepens trust with suppliers and customers, often leading to preferential treatment in future transactions and creating a competitive advantage.
Experiment with a Digital Twin
Experimentation and innovation are crucial for continuous improvement in inventory planning. Using digital twins, companies can simulate and identify process inefficiencies within their inventory management processes. This virtual representation of the supply chain allows for experimenting and discovering new ways to leverage inventory for competitive advantage.
At John Galt Solutions, we have worked closely with customers across industries to enhance their inventory planning strategies, guiding them in the evolution of their digital supply chain strategies.
John Galt Solutions' Atlas Inventory Planning application is instrumental in advancing companies’ inventory strategies by providing a comprehensive, end-to-end supply chain planning platform. This robust application allows you to test and measure the impact and risk of specific inventory policies and decisions, ensuring informed strategic planning. It synchronizes strategy and execution, enhancing supply chain visibility and fostering greater efficiency, collaboration, and long-term insight into manufacturing, purchasing, and inventory needs.
Leveraging AI and machine learning, Atlas Inventory segments and optimizes inventory levels and policies, facilitating multi-echelon inventory optimization and offering automatic suggestions for lean stocking strategies such as SKU rationalization and postponement. Discover the power of experimentation with alternate distribution models, and manage the trade-offs between operating costs and working capital. By incorporating these advanced capabilities, John Galt’s Atlas Inventory empowers you to elevate service levels, free up working capital, and maximize the value derived from your inventory.
For more information to identify gaps and opportunities, and develop your inventory strategy with advanced capabilities, read our white paper: Time to Drive Greater Value From Your Inventory.
