Inventory optimization can be defined as the act of balancing supply and demand uncertainty to meet desired services level at a minimum level of investment. In addition to all of the basic factors of inventory management covered in our last post (namely, production, stock, location, transportation, and information), inventory management also considers all of the associated costs — carrying costs, stock out costs, alternate distribution costs, and lead time costs, and tries to balance them.
As such, an inventory optimization solution will allow you to define:
- your current production & distribution networks, and any flexibility you have
- the modes of transportation available to you and associated fixed and variable costs
- the lane options available to you and impacts on transportation costs
- current and projected demands by SKU, family, and location by time period (month, week, or day)
- storage and carrying costs
- desired service levels by SKU, family, and location
- projected cycle times
- production capacity constraints and feasible schedules
- network and storage constraints
- current contractual commitments
- upcoming promotions
- compliance requirements
As well as your flexibility in terms of service levels and working capital and produces optimal inventory recommendations at different trade-off levels. You can then analyze costs and projected losses at 90%, 93%, and 95% service levels (defined in terms of product availability) and make the best decision that balances working capital tied up in inventory and revenue potential.