Since the start of the pandemic, supply chain directors have been dealing with what may feel like their nightmare scenario, from factory shutdowns to disruptions in land and sea transport to store stockouts and growing consumer discontent. Their ultimate goal — to optimize inventory and ensure the continuous flow of products without overstocking – seems a bit harder to achieve.
But inventory optimization is all about finding the happy (and profitable) middle. And supply chain directors need to go on that Goldilocks journey of discovery to estimate what’s too much or too little to get the just-right mix.
Defining Inventory Optimization
Inventory optimization is the practice of ensuring the right inventory level to meet customer demand while avoiding surplus and keeping costs low. That means making your product available to customers when they need it, without suffering stockouts, overstocking, and backorders.
On paper, it seems simple enough, especially for products that have been around for a while. But with consumer trends changing so fast coupled with a volatile business environment, one can no longer do what they used to do and rely on manual processes. Managing inventory has become more complex, with multiple factors to consider.
Inventory optimization relies on four fundamental elements:
Demand forecasting is the foundation for inventory planning. It uses historical data to predict demand, plan the right inventory levels and optimize supply decisions. But recent experience has shown that historical data alone is inadequate when it comes to addressing risks and unexpected disruptions. The use of advanced analytics, however, has the ability to go beyond historical information because it can derive real time data from internal and external sources to provide important insights and alerts that can guide intelligent decisions.
Goods stocked on shelves need to be re-stocked at the appropriate time to avoid delayed deliveries and backorders. Failure to manage this aspect of the supply chain could mean lost opportunities and higher costs. Maintaining product availability keeps customers happy, but not having these products when needed could drive away customers.
Efficient and profitable companies are defined by a well-balanced and well-managed inventory flow. These companies maintain healthy margins because of their ability to manage their cash flow efficiently as well as optimize warehouse capacities. Matching stock levels with customer availability will always be a challenge. Too much or too little will result in added costs.
A cost-effective space in a central location to store goods ensures a steady supply of products at any time. For businesses selling physical goods, having a good storage strategy is a must-have as it allows you to meet customer expectations in a timely way.
Each of these four elements works together to form your optimization strategy, like pieces of a jigsaw puzzle. Demand forecasting influences your inventory levels, which in turn dictates your inventory replenishment level. The location and size of your storage will decide how much inventory you can keep and how often you will have to move your products.
Getting your act together: Inventory Optimization Strategies you can use now.
Fortunately, there are strategies and technology solutions that can facilitate inventory management and help you achieve optimization.
1. Enable real-time inventory visibility
Having an accurate view of inventory can be difficult to achieve when inventory is stored in several channels – such as warehouses, or in transit, or in partner locations – or if inventory levels change quickly such as in the case of fast-moving consumer goods. By having a real-time view of inventory and the ability to track changes across all points in the supply chain, you can schedule raw materials optimally, eliminating stockouts and excess inventory.
Gaining real-time, up-to-the-minute inventory visibility starts with collecting, cleansing, and integrating data across your supply chain. An analytics-enriched platform such as that provided by Algo provides this capability, enabling suppliers and retailers to collaborate and simulate efficient supply chain operations. The resulting data model is the single source of truth that generates rich, intuitive business intelligence.
All this business intelligence must also be user-friendly, meaning that it should be in a format that can be easy for your organization’s cross-functional teams to interpret and provide appropriate action. Algo’s virtual supply chain assistant provides context-aware answers to specific questions. You can also request summaries and details from a chatbot, saving you the trouble of having it physically retrieved for you.
The Algo dashboard is set up so that it makes it easy to navigate relevant reports while it updates inventory information in real-time, enabling you to act swiftly. Moreover, you can proactively track the cycle of your allocation and replenishment process with enterprise-wide visibility over your suppliers and resources. The dashboard allows you complete visibility over your stock levels from procurement to fulfillment. You will also receive automated material demand signals when inventory has reached replenishment levels .
2. Determine safety stock inventory
Safety stock is the extra product that you keep in anticipation of a potential emergency like a plant shutdown or a surge in demand. It ensures that you still have products to satisfy customer demand even if there’s a supply chain problem. Frequent changes in consumer trends and behavior have now made it difficult to determine the ideal safety stock. With advanced analytics, you can quickly determine the amount of inventory you need to keep. Algo uses machine learning to derive precise inventory from internal and external information that is driven by your replenishment and allocation rules. By blending the demand signals, advanced analytics boosts your ability to meet customer demand, and choose the right stock levels.
Achieving timely distribution and replenishment will always be an ongoing challenge in the face of volatile consumer trends. Using the power of automation, you can develop an end-to-end synergy between you and your stakeholders and attain the highest efficiency in your allocation and replenishment process.
3. Adopt an AI-powered machine learning technology
Many wrong decisions have been made because supply chains relied on legacy systems that failed to provide visibility and collaborative team interaction. By today’s reckoning, the haphazard outturn of legacy systems could become the most regrettable, expensive, and wasteful aspect of managing and optimizing your inventory. AI-powered technology will do what the old systems can’t. It will take the worry out of uncertainties by making sense of all data, convert these into insights that your team can collaborate and confidently address.
AI with deep learning capabilities will help you:
- Develop sophisticated forecast models
- Determine safety stock inventory
- Understand material demand signals
- Implement AI-driven predictive demand
- Reduce operational risks across all functions covered by your 6R’s
Inventory optimization, Algo-style, uses a two-edged approach. It provides AI-empowered machine learning that delivers on the one hand, a demand forecasting solution (Algo Demand Forecasting) that directly feeds into overall planning, which in turn, leads to an inventory execution solution (Algo Inventory Execution). Sometimes, it could feel like managing a supremely competent supply chain ensemble that can fix the nitty gritty bits and allow you to do the more important things.
Inventory management sounds dull and unexciting but when you get down to brass tacks, it is actually the nucleus of that network (or cell) that determines the competence of your supply chain. How strong that nucleus is will define your business failure or success. You spend a fortune on branding and hiring the best people for the job. You train them, give them incentives and all that. But to get your organization and the members of your team to be steady contributors to your business success, you need to be aware and alerted to the dangers and risks to your supply chain’s journey ahead. This is the only way you can keep these risks and potential problems in tow. This is how you can stay in control.
Achieving an optimized inventory level is the holy grail of inventory management. But with today’s intensive competition and highly volatile world, inventory optimization must also be backed by automation and enhanced analytics. AI-powered technology coupled with machine learning provides the insights that will form the basis for workable solutions amid all the confusing data.
Essentially, it’s all about taking all the worries and uncertainties about achieving the right mix in your inventory—not too little, not too much, but just right. Only after all the big data in all the channels have been intelligently sorted out and made useful for human professionals to act upon, can we truly act with confidence. And just like Goldilocks, we can at last say, “this porridge is just right!”
Algo, an omnichannel supply chain intelligence platform, can help you optimize your inventory levels..
About the author
Combining human centered AI with deep domain expertise, Algo’s analytics enriched supply chain intelligence platform helps suppliers and retailers plan, collaborate, simulate and execute a more efficient supply chain.