Maximize the value of the IT investment by reducing overall inventory levels while ensuring customer satisfaction.
Written by International Business Systems US
Editor's Note: This article is an extract of the white paper "Less Stock, More Profit: Inventory Optimization" available for free download from the MC White Paper Center.
Inventory Optimization is the area where most ERP software implementations normally get the highest and fastest return on investment. It is therefore quite surprising that many companies that have implemented ERP have not yet added a dedicated inventory optimization module. It is a huge potential for companies to maximize the value of their IT investment for a relatively small incremental cost.
To ensure the customer is well-served, most companies fill up the warehouse. This practice results in overstock, which can have devastating effects on a business. With excess stock, companies become more difficult to manage and steer.
Unfortunately, under-stocking is potentially worse. This practice results in low service levels, disappointed customers, and greater expenses due to rush delivery charges.
Each industry has its own unique and diverse requirements and challenges that it needs to meet. Along with the considerable challenges facing businesses from the outside, there are many internal challenges that need to be addressed.
Effective inventory optimization can be achieved by continually carrying out the following five activities.
- Analyze the current situation—sales, volumes, delivery performance, etc.
- Classify items into different categories that can be handled with ease, and define a strategy for each product segment
- Calculate forecasts by focusing on each segment
- To optimize cost, optimize the replenishment. Adopt different replenishment policies on different item segments
- Ensure close collaboration with suppliers for optimum replenishment costs and timing
The purpose of analyzing performance is to see how the business is doing and what can be done to improve it. It is key to measure service levels and focus on delivery performance to customers, fill rates, and order fulfillment times.
Another key area to measure is the stock level. Establish stock turnover, and then measure the external elements that affect this turnover, such as safety stock or seasonal demand. Then measure the delivery performance of suppliers, as well as their fill rates and order fulfillment times.
During these processes, companies must keep in mind the core objective of decreasing stock while increasing customer service level. The primary goal is to maximize investment in inventory by reducing overall inventory while maintaining the same level of high service or improving customer service levels without increasing investment in total inventory.
However, more interesting would be to compare these figures with competitors. To do that requires a common reference model for Key Performance Indicators (KPIs) regarding inventory value and service levels. Such figures would give an idea of the potential performance and indicate how much could be achieved in terms of reducing stock and increasing customer service. With these figures, it would also be easy to build an ROI within the inventory optimization area.
The good news is that a common reference model does exist in the form of a supply-chain operation reference model called SCOR. This model has been developed by the Supply Chain Council, a global, not-for-profit trade association open to all types of organizations, that it is dedicated to improving supply chain efficiency. The Supply Chain Council is supported by more than 1,000 corporate members.
To learn more, download the white paper "Less Stock, More Profit: Inventory Optimization" available for free download from the MC White Paper Center.
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