What are the key elements of inventory optimization?

Inventory optimization is a discipline that has become crucial to many companies in the past few years. Following the broad inventory slashing policies from 2008 to 2010, organizations realized they required a more strategic method. To free up working capital with minimum impact to service levels. The ideal would be to actually increase service levels. While reducing or maintaining inventory investments which many companies are doing right now.

Air Cover

‘Air cover’ for a supply chain professional means solid support at the executive level. Even a senior staffer needs the backing of peers in supply-side procurement, manufacturing, distribution, sales. Also marketing, finance, and even strategic planning.

If you are just starting, you need to foster an attitude among senior management. That it is crucial to learn about inventory optimization because leading companies probably your competitors are taking it very seriously.

The rising tide lifts all boats: working together

Stakeholders in the supply chain come from diverse, often isolated, functions. Also ranging from purchasing to 3PL’s, from sales to inventory planners, and so on. The organization that succeeds is the one that realizes it has much more to gain by generating a shared understanding (vision) of the shared supply chain. Making inventory-related key performance indicators (KPIs) visible, comparable. Furthermore available amongst all business units will create a sense of internal competition and achievement.

Getting educated about inventory optimization

There are significant, proven benefits for just about every large or mid-sized manufacturing company that adopts an inventory optimization program. This is not in dispute – just read any recent supply chain report from industry analysts like Gartner, IDC, or Aberdeen. They basically assume every manufacturer with revenues of US $500 million or more is already using inventory optimization technology to raise the performance of its ERP and supply chain infrastructure.

If you’re just starting, you need to foster an attitude among senior management that it’s crucial to learn about inventory optimization because leading companies—probably your competitors—are taking it very seriously.

Here are some ideas to consider:

  • Clinging to a rule-of-thumb inventory methodology, such as ‘30 days of supply across your portfolio’, will absolutely erode your competitiveness. The complexity of today’s global supply chains and the need to be demand-driven has thrown those old concepts out of the window.
  • Supply chains have stages and locations, called ‘echelons’, that interact in complex ways that always produce excess inventory. This excess can be scientifically counteracted without resorting to crippling brute-force reductions.
  • Uncertainty on the demand side and volatility on the supply side can be managed. To produce vastly better business results, but not by execution systems like ERP and advanced planning systems (APS) alone.

Avoid the Black Box

Most inventory management system will not use a solution unless and until they believe in it. It is simply not possible to put a ‘black box’ into the supply chain organization and expect everyone to follow its lead.

Basically there is no substitute for or shortcut around using the knowledge of planners. Who are ‘in the trenches’ on a day–to-day basis. These planners must have at least a basic understanding of the data that goes into the process and accept the results that come out.

The ongoing optimization takes into account transaction data. As well as uncertainty in demand, volatile supply, costs and delivery timetables, inaccurate or inconsistent forecasts, replenishment cycles, manufacturing considerations, and more. Even though the algorithms and analytics have been extensively validated by academics and practitioners across industries and around the world over years of successful use, it is still crucial that your users have a chance to validate results, not only during the initial launch, but on an ongoing basis.

When planners are comfortable with the results of optimization recommendations if they take ownership of the numbers they become confident and will not revert back to old static and simplistic methods.

Move Fast!

Every supply chain characterized by an ‘efficient frontier’ curve. It represents the trade-off between inventory cost and service level performance. You are in the process of moving your entire supply chain from one frontier curve to a new ‘efficient frontier’. It achieves higher performance at lower cost.

The most important factor in reaching this new level is to organize and mobilize your key resources quickly. Long, multi-year rollouts are vulnerable to shifts in focus and budget. You may lose key resources. And of course, there is always the impact of stakeholders changing jobs. So ‘optimize your optimization initiative’.


Inventory optimization is a proven vehicle to gain competitive value through reduced safety stock, freed-up working capital and improved service levels. Ensuring that your organization’s inventory optimization initiative is successful takes more than understanding its cost savings and customer service improvement potential.

Set up your team for success: Let multi-echelon inventory optimization become central to your supply chain performance improvement strategy and your ongoing S&OP process.


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