Inventory control is the element of your inventory management system that involves what’s currently in stock. Inventory control requires being aware of the state and placement of all the items to maximize the merchandising process. With the correct technology in place, it is possible to monitor items more effectively, organize things better, generate accurate data and reports, optimize inventory spaces, and reduce overstocking and stockouts —all leading to increased revenue.
For a more efficient inventory setup, consider these best practices:
- Develop a well-organized floor layout. The warehouse must be ordered logically.
- Use clear signs and labels. Relevant labeling expedites delivery. Label racks, containers, and items clearly.
- Apply cycle counting. Cycle counting involves numbering tiny pieces across cycles.
- Using inventory optimization software helps you identify the least-cost service level based on your targeted stockout risk with minimal inventory carrying cost.
- Use warehouse management systems. Inventory control systems and Warehouse management systems streamline item tracking and decrease human error.
Assessing How Suppliers Influence Your Inventory Costs
Software for inventory optimization is most often used to crank out the analytical results you need to run your day-to-day business, such as Reorder Points (also known as Mins) and Order Quantities. This specialized software helps you find the sweet spot that balances inventory costs against item availability during routine operations.
Four Ways to Optimize Inventory
Inventory optimization has become an even higher priority in recent months for many of our customers. Some are finding their products in vastly greater demand; more have the opposite problem. In either case, events like the Covid19 pandemic are forcing a reexamination of standard operating conditions, such as choices of reorder points and order quantities.
TOP 3 COMMON INVENTORY POLICIES
In this Video Dr. Thomas Willemain, co–Founder and SVP Research, defines and compares the three most used inventory control policies. These policies are divided into two groups, periodic review and continuous review. There is also a fourth policy called MRP logic or forecast based inventory planning which is the subject of a separate video blog that you can see here. These videos explain each policy, how they are used in practice and the pros and cons of each approach.
Backing into Safety Stock is the Safe Play
Safety stock is a critical component in any system of inventory management. Indeed, some inventory software treats safety stock as the key decision variable in the quest to balance inventory cost against item availability. Unfortunately, that approach is not the best way to strike the balance.
FORECAST DRIVEN INVENTORY MANAGEMENT
Forecast-based inventory management policy, also known as MRP logic, is the fourth in our series on major approaches to managing inventory. We begin by looking at some very simple and then more robust models of inventory dynamics that help us determine how much to order or manufacture and when. We then consider how to calculate lead time and account for lead time variability. Tom concludes by describing the importance of safety stock, it’s role in properly buffering against demand and supply uncertainty, and how best to calculate it.
How do you know Min/Max policy is working well for you?
The Min/Max inventory policy is one of three available in SIO. When the inventory level drops to or below the Min, a replenishment order is generated. The reorder quantity is the number of units needed to raise the stock up to the Max.
Recent Posts
Daily Demand ScenariosIn this Videoblog, we will explain how time series forecasting has emerged as a pivotal tool, particularly at the daily level, which Smart Software has been pioneering since its inception over forty years ago. The evolution of business practices from annual to more refined temporal increments like monthly and now daily data analysis illustrates a significant shift in operational strategies. […]
The Cost of Spreadsheet PlanningCompanies that depend on spreadsheets for demand planning, forecasting, and inventory management are often constrained by the spreadsheet’s inherent limitations. This post examines the drawbacks of traditional inventory management approaches caused by spreadsheets and their associated costs, contrasting these with the significant benefits gained from embracing state-of-the-art planning technologies. […]
Learning from Inventory ModelsIn this video blog, the spotlight is on a critical aspect of inventory management: the analysis and interpretation of inventory data. The focus is specifically on a dataset from a public transit agency detailing spare parts for buses. […]
The Methods of ForecastingDemand planning and statistical forecasting software play a pivotal role in effective business management by incorporating features that significantly enhance forecasting accuracy. One key aspect involves the utilization of smoothing-based or extrapolative models, enabling businesses to quickly make predictions based solely on historical data. This foundation rooted in past performance is crucial for understanding trends and patterns, especially in variables like sales or product demand. Forecasting software goes beyond mere data analysis by allowing the blending of professional judgment with statistical forecasts, recognizing that forecasting is not a one-size-fits-all process. This flexibility enables businesses to incorporate human insights and industry knowledge into the forecasting model, ensuring a more nuanced and accurate prediction. […]
Smart Software to Present at Epicor Insights 2024Smart Software will present at this year's Epicor Insights event in Nashville. If you plan to attend this year, please join us at booth #13 or #501, and learn more about Epicor Smart Inventory Planning and Optimization. . […]
Inventory Optimization for Manufacturers, Distributors, and MRO
Why MRO Businesses Need Add-on Service Parts Planning & Inventory SoftwareMRO organizations exist in a wide range of industries, including public transit, electrical utilities, wastewater, hydro power, aviation, and mining. To get their work done, MRO professionals use Enterprise Asset Management (EAM) and Enterprise Resource Planning (ERP) systems. These systems are designed to do a lot of jobs. Given their features, cost, and extensive implementation requirements, there is an assumption that EAM and ERP systems can do it all. In this post, we summarize the need for add-on software that addresses specialized analytics for inventory optimization, forecasting, and service parts planning. […]
The Forecast Matters, but Maybe Not the Way You ThinkTrue or false: The forecast doesn't matter to spare parts inventory management. At first glance, this statement seems obviously false. After all, forecasts are crucial for planning stock levels, right? It depends on what you mean by a “forecast”. If you mean an old-school single-number forecast (“demand for item CX218b will be 3 units next week and 6 units the week after”), then no. If you broaden the meaning of forecast to include a probability distribution taking account of uncertainties in both demand and supply, then yes. […]
Why MRO Businesses Should Care About Excess InventoryDo MRO companies genuinely prioritize reducing excess spare parts inventory? From an organizational standpoint, our experience suggests not necessarily. Boardroom discussions typically revolve around expanding fleets, acquiring new customers, meeting service level agreements (SLAs), modernizing infrastructure, and maximizing uptime. In industries where assets supported by spare parts cost hundreds of millions or generate significant revenue (e.g., mining or oil & gas), the value of the inventory just doesn’t raise any eyebrows, and organizations tend to overlook massive amounts of excessive inventory. […]
Top Differences Between Inventory Planning for Finished Goods and for MRO and Spare PartsIn today’s competitive business landscape, companies are constantly seeking ways to improve their operational efficiency and drive increased revenue. Optimizing service parts management is an often-overlooked aspect that can have a significant financial impact. Companies can improve overall efficiency and generate significant financial returns by effectively managing spare parts inventory. This article will explore the economic implications of optimized service parts management and how investing in Inventory Optimization and Demand Planning Software can provide a competitive advantage. […]
Challenges: Addressing the Root Causes of Inventory Pain
Intermittent Demand
Highly variable & intermittent demands make consistently accurate projections all but impossible. Countless hours are spent trying to anticipate what will come next rather than calibrating the organization’s risk tolerance and harnessing that information to determine required levels of supply. Intermittent demand – also known as lumpy, volatile, variable or unpredictable demand – have many zero or low volume values interspersed with random spikes of demand that are often many times larger than the average. Intermittent demand makes it difficult to accurately forecast demand and inventory requirements because there aren’t any inherent patterns. And any patterns that may exist are overwhelmed by the random spikes in demand. Many companies make the mistake of “chasing the forecast” insisting that sales or technicians provide better estimates of demand or turn to unreliable forecasting techniques in a quest to predict the next spike. Many resort to forecasting inventory requirements such as Min/Max levels and Reorder Points relying primarily on subjective business knowledge and simple “rule of thumb” estimates. The result is that millions of dollars are wasted every year because of either excess inventory costs or poor customer service due to stock-outs
Ad Hoc Process
The failure to establish common metrics makes it difficult to adjudicate conflicting priorities. For example, Finance may prefer to conserve cash, while Sales and Maintenance insist that they never stock out. The result is often a test of wills with forecast and inventory planners caught in the middle. This often results in decision making based on a pain avoidance response. For example, order quantities will often go up immediately following a stockout to ensure the outage never recurs. This tends to be a one-way ratchet until inventory carrying costs become an obvious drain of much needed cash. When inventory is out of balance, finger pointing often results. Operations is often stuck in the middle between sales and finance. Without a clear direction from the executive team on service goals, inventory budgets, and an insistence that sales and finance come to the table knowing that tradeoffs will have to be made, the planning team becomes disempowered and the cycle continues. An objective, quantifiable performance measure such as service level changes the discussion, putting a dollar valued on a negotiable level of service.
Rule of Thumb
Safety stock levels, reorder points, lead times, and order quantity directly influence the service vs. cost relationship. Every day, the ERP system makes purchase order suggestions and manufacturing orders based on these drivers. Ensuring that these inputs are understood and optimized will generate better returns on inventory assets. Organizations that are able to do so will see improvements in service and reductions in inventory costs. Unfortunately, the specific inventory policy being utilized is often unclear to many management teams. In absence of a clearly defined and communicated policy, planners are forced to develop their own unique approaches. These self-developed approaches are most often a combination of simple rules of thumb and institutional knowledge. Inventory executives are simply ill equipped to shape inventory according to the changing needs and priorities of the business. Inventory costs balloon and service performance suffers when unable to answer questions such as: “What is my current reorder point and reorder quantity policy, what level of service and inventory cost will this policy yield in the future, and how will performance and costs be influenced by specific changes to the policy.” Rule of thumb approaches don’t answer these questions. In fact, they ignore the critical role of of demand and supply uncertainty. This results in excess inventory for predictable items and more frequent stock outs on less predictable items.
SKU Proliferation
Whether ordering a commonly demanded, inexpensive item of an expensive intermittently demanded item, today’s customers expect high customer service levels. This means 100% of what is ordered must be shipped from stock or within a few days. Quoting a delivery time of more than few days may result in a cancelled order and/or violation of service level agreement costing thousands and jeopardizing customer relationships. To remain competitive, companies often must maintain a very large catalog of items all with potentially different demand patterns and volumes. Thousands of parts potentially stocked at dozens of locations means planners don’t have the bandwidth to proactively review inventory drivers. This results in outdated reorder points, order quantities, min/max levels, and safety stocks that trigger replenishment at the wrong time for the wrong amount ensuring poor allocation of inventory investments and low planner productivity
Smart Inventory Optimization
Who is Inventory Optimization for?
Smart Inventory Optimization is for executives and business savvy planners who seek to:
- Yield maximum returns from inventory assets.
- Address the problem of highly variable or intermittent demand.
- Broker the service vs. cost tradeoffs between different departments.
- Develop a repeatable and efficient inventory planning process.
- Empower the team to ensure operational plan is aligned with strategic plan.
What questions can Inventory Optimization answer?
- What is the best service level achievable with the inventory budget?
- What service levels will yield the maximum return?
- If lead times increased, what would it cost to maintain service?
- If I reduce inventory, what will the impact on service be?
- If order quantity increases, what will the impact on service and costs be?
- What is the order quantity that balances holding and ordering costs?
Inventory forecasting for the inventory executive
Smart Inventory Optimization empowers you to:
- Predict service performance and inventory costs.
- Assess business impact of “what-if” inventory policies.
- Align inventory policy with corporate strategy.
- Establish an operational framework that guides the planning team.
- Reduce inventory and improve service.