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Inventory Optimization: A Progress Report

Inventory optimization: Old in concept, but new in application. Chris Russell, vice president of Logility, discusses trends in the use of the practice, especially from a multi-echelon perspective.

This is a good time to be addressing the process of inventory optimization. Companies are finding the concept to be highly valuable, as they determine whether to offshore their manufacturing. Inventory optimization allows them to factor in supply lead times and variability, along with the resulting need for buffer stock.

Multi-echelon inventory optimization examines the supply chain from end to end, embracing raw materials, manufacturing, distribution to stores and customers, and inventory levels across that entire network. It allows companies to model their supply chains based on actual and potential demand, and to determine how much inventory to hold at each location, in order to achieve the lowest possible cost and highest service levels to the end customer.

Traditionally, businesses have looked at inventories from a siloed perspective. The result has been multiple pools of buffer stock. In the alternative, they might have restricted their view to that of finished goods, the most expensive and least flexible type of inventory.

The push for multi-echelon inventory optimization began about 10 years ago, with early adopters forming centers of excellence to plan across corporate silos. Now, more companies are beginning to get into the act. “There are tools that remove that complexity and allow you to manage that,” says Russell.

Sales and operations planning is complementary to multi-echelon inventory optimization, allowing businesses to match up sales, production capacity and inventory. “Historically, companies have had inventory as an output – a symptom of S&OP, instead of something you can drive across the organization,” says Russell. Now the tool allows them to become “truly demand-driven.” Major decisions on inventory deployment are, in essence, determined by the customer. “The person purchasing raw materials is executing against a service level that is established at the end,” he says.

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