Retailers' main aim is to improve forecast accuracy and customer service by optimizing the supply chain's inventory.
The system may assist manufacturers by eliminating warehouse and inventory management issues. Inventory optimization, when done correctly, is driven by the latest developing technologies, such as data analytics, artificial intelligence, and cloud computing while leveraging proven inventory management, supply chain architecture, and planning methods.
What exactly does inventory optimization entail?
Inventory optimization is having just enough inventory to meet service levels while spending as little as possible on inventory. That means you'll know exactly how much and when each SKU needs to be ordered so you can always service your customers. Seasonality and campaigns, as well as supply dates and timetables, are all factors in inventory optimization. You'll always have the correct products in the proper warehouse without investing too much money in inventory.
According to studies, almost 65% of damaged stocks are due to the wrong method of packaging, storage, or securing in freight containers.
Inventory optimization can significantly assist you in avoiding these issues.
Inventory optimization is more critical than ever before. On the one hand, customers expect things to be available when they need them.
On the other hand, supply chain disruptions have become prevalent across industries, exacerbated by the ongoing COVID-19 epidemic and resulting in delays due to supply constraints.
Inventory Optimization's Benefits in the Supply Chain
- DEMAND FORECASTING
Supply chain inventory optimization solutions must include accurate demand forecasting. Depending on the type of product or service, the product's life cycle, and the industry for which it is intended, demand and supply chain forecasting can be done in various methods. One technique is to use demand numbers from the previous year or the past and estimates for specific requests from sales teams. To effectively estimate demand and figure out where these SKUs are in the life cycle, manufacturers must have complete knowledge of a given stock level and product life cycle. They must also keep an eye on seasonality trends and new product introductions that may impact demand projections.
- IMPROVED DELIVERY TIMES
With a better understanding of inventory, you may better distribute products to warehouses to shorten delivery times, improve service levels, save shipping costs, and boost sales/revenue by increasing inventory availability.
- REDUCED INVENTORY COSTS
Overhead and operational costs are reduced by lowering the cost of warehousing, storage, and maintenance of excess inventory.
- STRATEGY FOR INVENTORY
It's also crucial to know what products need to be supplied, quantities, and intervals. ABC analysis is an excellent method for determining the number of SKUs because it divides the SKUs based on their annual consumption. It also assists you in comprehending safety stock estimates to manage unforeseen demand changes, supplier discrepancies, or other disruptions. To maximize the distribution of merchandise to your outlets in the appropriate quantity, at the right time, and in the right place, you must also consider the number of warehouses you have.
Components of Inventory Optimization
Warehouse and supply chain managers consider inventory optimization the next level of inventory management. As a result, producers can accomplish comprehensive inventory optimization by accounting for supply and demand variations and reducing excess inventory.
What does it consist of?
- End-to-end supply chain design: Cycle stock, safety stock, WIP, and transit stock modeling to get a complete understanding of your inventory.
- Multilayer Inventory Optimization: Identifying and optimizing opportunities for system-wide inventory reduction.
- Optimization of service levels to reduce expenses, enhance earnings, and stay within your inventory budget.
- Inventory Simulation: Using simulation to test the effectiveness of the recommended inventory policy and determine operational feasibility.
- Scenario Analysis: Enables planners to set inventory targets and quickly run «what-if» scenarios to understand better the factors that affect inventory.
The Future of Inventory Optimization
Those who consider the uncertainty in their supply chain will always stay one step ahead of their competitors and are better prepared to meet customer demand.
Big companies like Amazon and Target already have advanced supply chain optimizationл systems, allowing them to source goods from all over the world and have them delivered to their customers, sometimes within hours. But this is far from reality for many SMBs who struggle to calculate order quantities, safety stock, and reorder points in Excel. Manual supply chain management leads to rough inventory estimates and excess inventory (which becomes obsolete) or low customer service.
Manufacturers usually have a significant capital investment associated with the inventory they hold. Research shows the inventory represents $1.1 trillion in cash (including accounts receivable and accounts payable) — that's 7% of the US GDP.
AI has the potential to create much value out of that cash; that's the good news. With this technology, retailers will no longer have to guess when forecasting product demand. They will combine datasets to make accurate predictions for the future. That will enable them to make informed business decisions.
By using the right technology to optimize inventory, your organization will see positive results across the business. An inventory solution can assist businesses in a number of ways, including the following:
- Assess suppliers, order fulfillment, shipping, and other aspects of the supply chain.
- Maintain a margin of safety for each product so that nothing runs out at a critical moment.
Monitor seasonal demand trends to adjust stock levels for specific items at different times of the year.