7 Ways to Succeed in Supply Chain Inventory Optimization

How much inventory is too much or too little?

This is perhaps the biggest concern for businesses today.

Yet, there doesn’t seem to be a clear answer.

Nonetheless, all businesses, big or small, must get this aspect of supply chain operations right, especially as the larger economic environment continues to be uncertain.

The key objective in this process is to ensure that products are in stock at the right time and at the right cost.

Done right, supply chain inventory optimization can help a business effectively meet demand, lower costs and mitigate supply-related risks.

However, this is easier said than done, and maintaining optimum inventory can be difficult in volatile market conditions.

When the pandemic broke out a few years ago, for example, many leading retail stores and pharmaceuticals struggled with inventory shortages. They found their stock wasn’t enough to meet demand, as consumers looked to buy and store more-than-usual stock at home amid prolonged lockdowns.

Likewise, the shortage of semiconductors impacted production in multiple industries during this period.

Even today, a lot of businesses are struggling to align supply and demand.

How can they determine inventory levels sufficient to meet customer demand? Are they prepared to respond to black swan events and sudden surges in demand?

Inflationary pressures and rising input costs have aggravated the problems of business leaders and supply chain managers.

Excess inventory can lead to wastage and block working capital. It also takes up extra space and increases storage costs. On the other hand, too little inventory can mean empty shelves, disappointed customers and loss of market share to competition.

So, how can businesses avoid under- or over-stocking and maintain optimum inventory? Here are a few ways.

How You Can Succeed in Supply Chain Inventory Optimization

1. Forecast Demand with Precision:

At the outset, businesses need to find a way to forecast demand with some level of accuracy. Traditional methods that relied heavily on historical data to predict demand can no longer work in today’s dynamic business environment with rapidly changing buying patterns.

Advanced inventory management technology, powered by AI and machine learning algorithms, can analyze huge volumes of data, identify patterns and predict with incredible accuracy. Along with historical data, AI can look at market trends and external factors that can affect demand such as macroeconomic conditions, social media trends, news buzz and even weather data. The analysis of multiple sources helps arrive at a near-accurate estimate of demand and adjust inventory plans accordingly.

2. Replenish Dynamically:

With AI’s accurate demand forecasts, inventory replenishment becomes dynamic. Planners do not need to rely on fixed reorder points. Instead, they can calculate dynamic reorder points and adjust order quantities based on real-time data. Constraint-based inventory optimization combined with live market data allows planners to quickly adjust stock levels as conditions change.

In the case of seasonal products, the technology’s pattern recognition capabilities can identify immediate and short-term trends, thereby allowing a business to adjust inventory.

3. Get Real-Time Visibility:

Gaining end-to-end supply chain visibility in real time is key to optimizing inventory. Advanced supply chain software helps a business achieve this by integrating data from disparate sources and enterprise systems. End-to-end visibility across multiple locations and partners helps a business make informed decisions. It also helps spot potential bottlenecks and take proactive action to mitigate risks. Generative AI can enhance the capability to continuously monitor stock levels by integrating sales, production and warehousing data in real time.

4. Invest in Hyper-Collaboration:

Organizations need to figure out how to work with their supply chain partners more effectively. Hyper collaboration essentially means a deeper level of collaboration that involves elements such as n-tier collaboration, seamless flow of information, bi-directional forecast, capacity and constraint sharing and joint allocation and management, says Mike Jette, vice president of consulting at GEP in this webcast.

5. Look Beyond Sole Sourcing:

Dual sourcing and diversifying the supplier base can also help businesses succeed in inventory optimization. This is especially true for businesses that engage in sole sourcing or rely primarily on a single supplier. By identifying alternative secondary suppliers in different regions and time zones, they can lower supply risks and reduce lead times. Another aspect of dual sourcing is to identify alternative materials that can be used when primary materials are not available.

6. Optimize Across Multiple Echelons:

Unlike traditional methods where inventory optimization is done at an individual stage level, there is a need to optimize inventory across multiple levels beginning from raw material suppliers to manufacturing plants and distribution centers. Such a multi-echelon approach can help optimize inventory across the entire supply chain.

7. Monitor Supplier Performance:

Tracking supplier performance can also help maintain optimum inventory. Advanced supply chain software can analyze delivery times, quality, pricing accuracy and other parameters to objectively evaluate supplier performance. Such an evaluation can highlight suppliers who have missed delivery timelines or erred on other parameters. When this happens often, businesses can take corrective action by shifting orders to a more reliable supplier with a proven track record.

Also Read: Inventory Reconciliation: A Step-By-Step Guide

A Balanced Approach

The unforeseen events of recent years have clearly demonstrated the risks involved in a just-in-time strategy, which was primarily deployed to lower inventory and associated costs. At the same time, many businesses are not keen on adopting a just-in-case strategy to avoid unnecessary costs.

The need of the hour today is to adopt a more flexible and holistic approach to inventory management.

The solution is not necessarily more inventory but better, more productive and dependable inventory, says Mike Jette.

Additionally, supply chain organizations must consider the overall costs while optimizing inventories. Instead of just looking at the cost of holding stock, they should also look at the costs associated with lost sales, missed opportunities or product shortages.

Advanced warehouse and inventory management software connects upstream procurement systems and downstream supply chain systems for better planning and optimization. It can provide real-time inventory visibility across the supply chain including on-hand, on-order and in-transit. This, in turn, helps maintain optimum inventory that can effectively meet demand.

Learn how GEP can help with supply chain inventory optimization.