Inventory optimization is a complex process that draws on algorithms to compare stocking options in a warehouse. It can account for multi-echelon, multilevel environments, as well as the unique needs of multiple distribution centers. "It tells people if, where and how much to stock," says Benton, adding that the calculation results in a total-cost assessment.
Inventory optimization goes beyond the standard "ABC" calculation that many D.C.s use to differentiate among fast- and slow-moving product. That exercise typically does not take a close look at cost, says Benton. For example, a company might be holding equal amounts of inventory of two items, both with an "A" designation because they sell rapidly. Yet one might be relatively easy to forecast, and the other subject to volatile or seasonal demand.
"You wouldn't want to hold them at the same service level," says Benton. "It might cost more per days of inventory for [one of the items]."
Using proper inventory optimization, distributors can reduce their total cost of material management by some 30 percent, according to Benton. Expenses related to inventory carrying, order placement and manufacturing changeovers can all be cut significantly.
Companies need to assess the tradeoff between manufacturing efficiency, whereby plants turn out large lots of a single product at one time, and the benefits of keeping inventory low. In addition, says Benton, merchandisers often overlook the cost of a stockout, which results in three possible scenarios: expedited transportation, substitution of a higher-priced item at a lower price, or loss of the sale. None should be considered an acceptable outcome in the highly competitive world of retail.
The data that supports inventory optimization comes from multiple sources, including historical performance and customer preference. "There might be a proven willingness to wait," says Benton, "in which case holding some products at 99.9-percent [availability] makes very little sense." Companies also need to factor in the degree to which a given product is available from competitive sources.
