As a precursor to my future post on SYSPRO’s new Inventory Optimization solution, I thought I’d provide a brief review of their free e-book on Supply Chain, Inventory Management, & Optimization: Skills for Small Businesses, available on request to clients and prospects. While it doesn’t delve deep into inventory (and related supply chain) optimization, it does a great job describing the basics of inventory management and serves as a great introduction to the subject to small and mid-size businesses just beginning to tackle the issue.
When beginning to delve into the issue of inventory management, there are five factors that need to be considered: production, stock, location, transport, and information requirements. Associated with each factor are a number of decisions that need to be made, which are summarized in the following table:
| Production | capacity
flexibility facilities SKU vs Job Lot vs. Cross-Docking |
| Stock | basic vs seasonal vs safety
level variety |
| Location | supplier proximity
customer proximity |
| Transportation | mode
frequency flexibility |
| Information | collection
distribution |
More specifically,
- should you centralize production, and increase shipment times to remote locations, or decentralize production and minimize shipment times to any particular customer location?
- should you maintain high levels of stock to prevent a stock-out, or implement flexible manufacturing and JIT delivery?
- should you organize inventory by SKU, by Job Lot, or implement Cross-Docking?
- how does seasonality affect your safety stock levels?
- ship, rail, truck, air, cableway, pipeline, conveyor, or wire?
- should you centralize your warehouses, or distribute them?
- should you implement POS or rely on traditional back-room systems?
The goal is to balance trade-offs to maximize agility, adaptability, and alignment in your supply chain which balances customer service levels and internal operating efficiencies to make sure that you can provide your customers with the right goods, at the right price, at the right time.
As such, you need to be concerned with stock assortment, level, turnover, and associated costs. More specifically, what is the right mix of product at any particular time to maximize turnover and minimize associated costs? Then, you have to acquire the inventory, within working capital constraints, and track real-time utilization to improve future forecasts. This should all be done in accordance with comprehensive inventory management policies, which should be designed to quickly identify and eliminate overstock (before the product spoils or becomes obsolete) and replenish popular items in a timely fashion. These policies can use one or more inventory control methods, which can be manual (like ticker, click, and stub) or automatic (like pos terminals).
And once you’ve got the basics of inventory management down, you can move on to inventory optimization.