Having some inventory on hand, even in the “leanest” of manufacturing operations, serves the valuable purpose of satisfying customer orders in a timely fashion and thereby helping a company maintain good customer relations. Indeed, inventory may be correctly viewed as the lifeblood of the company’s supply chain.
However, in today’s highly competitive, cost-conscious business environment, corporate management often finds itself trying to reconcile two seemingly competing goals: reduce inventory and increase customer service levels. The key to simultaneously achieving these goals and optimizing inventory is finding the inventory “sweet spot”the minimum amount of inventory required over a specified lead time to meet a desired service level.
Failure to find the sweet spot may lead to incorrectly balanced inventories, which can have significant negative effects on the economic health of an organization. The unfortunate results can include overstocking, which ties up cash in unneeded inventory and increases carrying costs; stockouts, which lead to lost sales, poor customer service, reduced competitiveness and increased transportation costs; inefficient allocation of production and financial assets; and eventually, lower profitability and shareholder value.
The Smart Solution
You can use SmartForecasts to zero in on your inventory sweet spot. First, its proven forecasting solutions accurately predict, for each product item, the most likely or expected value for demand over a given lead time. Then key information derived from the forecasting process provides a realistic, statistically-based estimate of the degree of uncertainty associated with that item’s expected demand forecast. This uncertainty estimate together with the item’s desired service level can pinpoint the right amount of safety stock to add to the forecast to hit the sweet spot.
|SmartForecasts’ Inventory Optimization Tools
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Each item you inventory and distribute has its own sweet spot, but SmartForecasts can quickly and automatically process hundreds of thousands of items to get you right on target across all your product lines, no matter how large the job. The safety stock recommendations and stocking level estimates that are generated are immediately available for use in other parts of your corporate planning system. In this way, you can obtain the critical inputs necessary to better manage your supply chain operations by optimizing inventory levels throughout your organization.
Everything that’s wrong with missing the sweet spot gets better when you hit it. In most cases, SmartForecasts is close to 100% accurate at estimating safety stock and inventory stocking level requirements for the lead times you face and the service levels you want to achieve. With SmartForecasts, you achieve the balance needed to have enough stock on hand to meet fluctuating demand without inefficient misallocation of capital across individual items, product lines, or distribution channels. Having the right amount of product in the right place at the right time improves customer satisfaction, market share, and your bottom line.
To learn more about the relationship between demand forecasting and setting optimal inventory stocking levels, please read the APICS Magazine article on finding the inventory sweet spot..
To see how one of our customers has used SmartForecasts to help optimize its inventories and achieve millions of dollars in inventory savings in just a few months, please read the Success Story on Creativity, Inc..