Inventory Optimization Best Practices

Smart Software

Inventory managers have the problem of handling tens or even hundreds of thousands of products, each with unique properties, demanding sophisticated and time-consuming calculations. The proactive management of big inventories becomes unfeasible in the absence of a systematic approach and effective analytic tools.

Without inventory optimization, businesses run the risk of overpaying and underperforming. Manufacturers, distributors, and MRO inventory managers frequently err on the side of caution when setting stocking levels to prevent expensive shortages. Establishing the ideal stock levels for manufacturers, distributors, and MRO should be a science, not an art.

Learn industry best practices on how to optimize inventory to save on costs, meet demand, and streamline your supply chain below.

The Supply Chain Blame Game:  Top 3 Excuses for Inventory Shortage and Excess

The Supply Chain Blame Game: Top 3 Excuses for Inventory Shortage and Excess

The supply chain has become the blame game for almost any industrial or retail problem. Shortages on lead time variability, bad forecasts, and problems with bad data are facts of life, yet inventory-carrying organizations are often caught by surprise when any of these difficulties arise. So, again, who is to blame for the supply chain chaos? Keep reading this blog and we will try to show you how to prevent product shortages and overstocking.

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Managing Inventory amid Regime Change

Managing Inventory amid Regime Change

If you hear the phrase “regime change” on the news, you immediately think of some fraught geopolitical event. Statisticians use the phrase differently, in a way that has high relevance for demand planning and inventory optimization. This blog is about “regime change” in the statistical sense, meaning a major change in the character of the demand for an inventory item.

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Goldilocks Inventory Levels

Goldilocks Inventory Levels

You may remember the story of Goldilocks from your long-ago youth. Sometimes the porridge was too hot, sometimes it was too cold, but just once it was just right. Now that we are adults, we can translate that fairy tale into a professional principle for inventory planning: There can be too little or too much inventory, and there is some Goldilocks level that is “just right.” This blog is about finding that sweet spot.

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Inventory Planning Becomes More Interesting

Inventory Planning Becomes More Interesting

Just-In-Time (JIT) ensures that a manufacturer produces only the necessary amount, and many companies ignore the risks inherent in reducing inventories. Combined with increased globalization and new risks of supply interruption, stock-outs have abounded. So how can you execute a real-world plan for JIT inventory amidst all this risk and uncertainty? The foundation of your response is your corporate data. Uncertainty has two sources: supply and demand. You need the facts for both.

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    When deciding on the right stocking parameters for spare and replacement parts, it is important to distinguish between consumable and repairable parts. These differences are often overlooked by inventory planning software and can result in incorrect estimates of what to stock. Different approaches are required when planning for consumables vs. repairables. […]
  • Four Common Mistakes when Planning Replenishment TargetsFour Common Mistakes when Planning Replenishment Targets
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    Inventory Optimization for Manufacturers, Distributors, and MRO

    • Blanket Orders Smart Software Demand and Inventory Planning HDBlanket Orders
      Our customers are great teachers who have always helped us bridge the gap between textbook theory and practical application. A prime example happened over twenty years ago, when we were introduced to the phenomenon of intermittent demand, which is common among spare parts but rare among the finished goods managed by our original customers working in sales and marketing. This revelation soon led to our preeminent position as vendors of software for managing inventories of spare parts. Our latest bit of schooling concerns “blanket orders.” […]
    • Hand placing pieces to build an arrowProbabilistic Forecasting for Intermittent Demand
      The New Forecasting Technology derives from Probabilistic Forecasting, a statistical method that accurately forecasts both average product demand per period and customer service level inventory requirements. […]
    • Engineering to Order at Kratos Space – Making Parts Availability a Strategic Advantage
      The Kratos Space group within National Security technology innovator Kratos Defense & Security Solutions, Inc., produces COTS s software and component products for space communications - Making Parts Availability a Strategic Advantage […]
    • wooden-figures-of-people-and-a-magnet-team-management-warehouse inventoryManaging the Inventory of Promoted Items
      In a previous post, I discussed one of the thornier problems demand planners sometimes face: working with product demand data characterized by what statisticians call skewness—a situation that can necessitate costly inventory investments. This sort of problematic data is found in several different scenarios. In at least one, the combination of intermittent demand and very effective sales promotions, the problem lends itself to an effective solution. […]

      Keeping inventory investments in check while maintaining high customer service levels is a constant balancing act.  Without proper controls, excess inventory grows throughout your supply chain, locking up vital working capital that constrains your company’s growth.  Every day, the ERP system makes purchase order suggestions and manufacturing orders based on planning drivers such as safety stock, reorder points, and Min/Max levels. Ensuring that these inputs are understood and continually optimized will generate substantially better returns on your inventory assets.  Unfortunately, many organizations rely on rule of thumb logic,  institutional knowledge, and “one-size-fits all” forecasting logic that assigns all items within a particular group the same service level target. These approaches yield suboptimal policies that cause inventory costs to balloon and service performance to suffer. Compounding the problem is the sheer volume of data – thousands of items stocked at multiple locations means planners don’t have the bandwidth to proactively review these inventory drivers on a regular basis.  This results in outdated reorder points, safety stocks, order quantities, and Min/Max settings that further contribute to the problem.


      Smart Inventory Optimization (SIO™) is available on Smart’s Inventory Planning and Optimization Platform, Smart IP&O.  It delivers inventory policy decision support and the means to share, collaborate, and track the impact of your inventory planning policy. This can help realize millions in savings by improving customer service and reducing excess stock. You can forecast metrics such as service level, fill rate, holding costs, ordering costs, and stock out costs. Users can identify overstocks and understocks, adjust stocking policies when demand changes, share proposed policies with other stakeholders, collect feedback, and establish a consensus inventory plan.  And unlike traditional inventory planning systems that rely on rule of thumb approaches or require the user to arbitrarily set suboptimal service level targets, Smart Inventory Optimization prescribes the optimal service levels for you.  Users can optionally assign service level constraints to ensure the optimization engine respects business rules. SIO provides the required inventory planning parameters for a variety of replenishment policies such as Reorder Point/Order Quantity, Min/Max, Safety Stock Planning, and Order Up to levels.

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        With Smart Inventory Optimization you can:
        • Identify where you are overstocked and understocked.
        • Modify  planning parameters based on your business rules, service targets, and inventory budget.
        • Leverage the optimization logic in SIO to prescribe planning parameters and service levels for you.
        • Compare proposed policies to the benchmark.
        • Collaborate and develop a consensus inventory plan.
        • Automatically generate revised planning parameters as demand and other inputs change.

        Smart Inventory Optimization

        Reduce Excess Stock

        Optimal Inventory Levels

        Reduce excess stock
        Improve service levels
        Minimize buyer transactions
        Maximize return on assets

        Identify Stockout Risk

        Organizational Consensus

        Balance service levels
        Identify stockout risk
        Identify overstocks
        No finger-pointing

        Inventory Warehouse Connectivity

        Operational Connectivity

        Align process with strategic objectives
        Empower team to “make it so”
        Optimize as conditions change
        Pass results to ERP

        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.

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