Executive Briefings

A Well-Designed Inventory Planning & Optimization Strategy Must Be Maintained

Analyst Insight: It can be a struggle for organizations to obtain the right balance between keeping enough inventory on hand to meet customer demand and minimizing costs related to carrying inventory. APQC's research indicates that best-practice organizations achieve this balance through the creation of inventory optimization programs with well-designed strategies, effective processes, appropriate technology, and regular assessment. - Becky Partida, knowledge specialist, APQC

Organizations face a balancing act as they try to carry enough inventory to meet customer demand while minimizing their inventory and storage costs. APQC's Open Standards Benchmarking in Logistics reveals that many organizations are still trying to find the right balance. At the median of the organizations surveyed, inventory value as a percentage of revenue is 10.6 percent. For organizations with $5bn in revenue, this means an inventory carrying cost of $53,070,950. For top performers within this group, inventory value as a percentage of revenue is 7.3 percent (or $38,476,439). The gap in inventory carrying cost between the two groups is more than $14m, which indicates room for improvement. APQC's Collaborative Benchmarking research indicates that organizations can tackle this inefficiency by creating inventory optimization programs that have well-designed strategies, effective processes, appropriate technologies, and regular assessments.

A well-defined inventory optimization strategy should include the support of senior management because inventory optimization can affect all functions and many processes within the organization. Inventory optimization programs must also include periodic evaluations of the organization's supply chain so that inefficiencies can be addressed. Organizations should partner with suppliers so that they can work to improve inventory replenishment speed and efficiency.

Once they have established a well-designed inventory optimization strategy, organizations should focus on the procedures necessary to maintain efficient inventory practices. This should start with the alignment of internal and external roles, responsibilities, and accountabilities. Organizations should then map their processes to determine areas for improvement and establish standardized processes that can be adopted by stakeholders. From this, formal sales and operations planning schedules can be established.

Technology can be helpful in enabling inventory optimization programs. However, organizations must see technology as a supplement to stable inventory planning processes so that the processes, not the technology, are the drivers of performance. To ensure that their inventory optimization programs adjust to marketplace changes, organizations should tie the technology to their operational processes and systems. Organizations should also implement training and education programs to maximize the effectiveness of the technology. These programs not only provide a way for staff to become familiar with the technology but help identify functional gaps and provide incremental performance enhancement.

A final process in the development of inventory optimization programs is the establishment of key performance indicators. These allow organizations to enforce processes and benchmark their performance. Through the monitoring of their performance, organizations can identify additional areas for improvement or areas of success that can be developed further.

These best practices can aid organizations in designing inventory optimization programs that improve the efficiency of the entire supply chain. With the right amount of inventory, organizations can improve their customer service and reduce their inventory carrying costs.

                                       The Outlook

APQC's research makes it clear that organizations still have room for improvement when it comes to maintaining adequate yet cost-effective inventory levels. To reduce the costs associated with holding inventory, organizations should make inventory optimization programs a priority in the new year. APQC's research has identified best practices that can help organizations in establishing inventory optimization programs that will enable them to improve their customer service while reducing inventory carrying costs.


Keywords:  Inventory Planning & Optimization, Third-Party Logistics, Logistics; Warehouse Management, Technology; Supply Chain Analysis & Consulting, Global Supply Chain Management; APQC, APQC's Open Standards Benchmarking in Logistics, Replenishment, Inventory Carrying Costs

Organizations face a balancing act as they try to carry enough inventory to meet customer demand while minimizing their inventory and storage costs. APQC's Open Standards Benchmarking in Logistics reveals that many organizations are still trying to find the right balance. At the median of the organizations surveyed, inventory value as a percentage of revenue is 10.6 percent. For organizations with $5bn in revenue, this means an inventory carrying cost of $53,070,950. For top performers within this group, inventory value as a percentage of revenue is 7.3 percent (or $38,476,439). The gap in inventory carrying cost between the two groups is more than $14m, which indicates room for improvement. APQC's Collaborative Benchmarking research indicates that organizations can tackle this inefficiency by creating inventory optimization programs that have well-designed strategies, effective processes, appropriate technologies, and regular assessments.

A well-defined inventory optimization strategy should include the support of senior management because inventory optimization can affect all functions and many processes within the organization. Inventory optimization programs must also include periodic evaluations of the organization's supply chain so that inefficiencies can be addressed. Organizations should partner with suppliers so that they can work to improve inventory replenishment speed and efficiency.

Once they have established a well-designed inventory optimization strategy, organizations should focus on the procedures necessary to maintain efficient inventory practices. This should start with the alignment of internal and external roles, responsibilities, and accountabilities. Organizations should then map their processes to determine areas for improvement and establish standardized processes that can be adopted by stakeholders. From this, formal sales and operations planning schedules can be established.

Technology can be helpful in enabling inventory optimization programs. However, organizations must see technology as a supplement to stable inventory planning processes so that the processes, not the technology, are the drivers of performance. To ensure that their inventory optimization programs adjust to marketplace changes, organizations should tie the technology to their operational processes and systems. Organizations should also implement training and education programs to maximize the effectiveness of the technology. These programs not only provide a way for staff to become familiar with the technology but help identify functional gaps and provide incremental performance enhancement.

A final process in the development of inventory optimization programs is the establishment of key performance indicators. These allow organizations to enforce processes and benchmark their performance. Through the monitoring of their performance, organizations can identify additional areas for improvement or areas of success that can be developed further.

These best practices can aid organizations in designing inventory optimization programs that improve the efficiency of the entire supply chain. With the right amount of inventory, organizations can improve their customer service and reduce their inventory carrying costs.

                                       The Outlook

APQC's research makes it clear that organizations still have room for improvement when it comes to maintaining adequate yet cost-effective inventory levels. To reduce the costs associated with holding inventory, organizations should make inventory optimization programs a priority in the new year. APQC's research has identified best practices that can help organizations in establishing inventory optimization programs that will enable them to improve their customer service while reducing inventory carrying costs.


Keywords:  Inventory Planning & Optimization, Third-Party Logistics, Logistics; Warehouse Management, Technology; Supply Chain Analysis & Consulting, Global Supply Chain Management; APQC, APQC's Open Standards Benchmarking in Logistics, Replenishment, Inventory Carrying Costs