Three Critical Steps Toward Mastering Total Inventory Optimization in 2024

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Just months after snarled supply chains led to widespread inventory shortages, the proverbial pendulum has decidedly shifted to the other side. 

Now, companies have a different problem. They have entirely too much merchandise sitting in their warehouses. As a result, business executives and C-suite leaders face enormous pressure to reduce their inventory and lower costs. This is easier said than done. 

One analysis estimates that retailers are sitting on a stockpile of unsold inventory totaling more than $732 billion. Unloading three-quarters of a billion worth of inventory doesn’t happen overnight. 

According to a CNBC Supply Chain Survey, just one-third of supply chain managers expect their inventories to return to normal in the early part of 2024. In an effort to reduce their soaring storage costs, more than a quarter of businesses are selling excess inventory on the secondary market, which diminishes the brand impact and business potential. 

Unsurprisingly, unloading this merchandise and right-sizing inventory management and supply chains have become a long-term hindrance that is taking too long to abate.

Meanwhile, supply chains are becoming increasingly complex. An explosion of SKUs to manage, and a shrinking window for efficiently moving products through distribution centers, puts enormous pressure on leaders to optimize their approach to supply chain management. 

In response, companies across industries and sectors are using a three-step “total inventory optimization” approach that allows supply chain leaders to quickly analyze the trade-offs between cost and service, to maximize profits while minimizing risk. The concept is simple, but its implementation can be difficult — hence the three-step approach.

Following are the three steps of the process.

Identify and optimize near-term cash flow improvements in finished goods inventories. The first step is to define the digital twin with the correct parameters to ensure that it mimics the existing supply chain. 

A supply chain digital twin allows planners to deeply analyze the tradeoffs between cost, lead time, quality, inventory carrying costs, supply chain risk and strategy. 

The digital twin can be used to optimize for cash by selling non-moving stock, reducing supply, and becoming more precise in supply replenishment. 

However, while most companies already optimize their supply chains for near-term cash flow, their optimization strategy typically ends here.

Broaden the view to include work in process inventory to optimize intermediate-term margin and working capital. The next step is to look at the bigger picture and evaluate more scenarios and alternatives. Chief supply chain officers can do this by considering the other layers in the supply chain, such as warehouses, plants and suppliers. Using a guaranteed service model, the organization can optimize these layers or echelons individually and based on how they impact each other.

Most companies have a sizable investment in work-in-progress inventory held at production facilities, or subassemblies or kits stored at warehouses, that can also be optimized. This typically results in sizable cost savings on non-value-added transportation moves as well.

Think outside the enterprise to drive long-term profitable growth and market share. The last step is to continue driving fundamental strategic changes that create greater resiliency and agility with a cycle of continuous improvement. This can include disposing of obsolete stock, increasing common parts and materials, and rationalizing underperforming products.

Look beyond traditional techniques such as collaborative planning, forecasting, replenishment and scheduling (CFRS) or vendor-managed inventory (VMI). Considering the bigger picture helps customers avoid stockouts or overstocks, while supplier collaboration helps eliminate unnecessary buys. 

To optimize supply chains in this era of complexity, executives must fine-tune on a more granular level, considering multiple supply chain echelons, such as raw-materials suppliers, as well as work-in-progress components and subassemblies.  

Multi-echelon inventory optimization (MEIO) enables supply chain leaders to reduce risk, lower costs and optimize the tradeoff between inventory investment and customer service. Many supply chain organizations have found significant benefits by revamping policies and modifying stock buffers through this approach. MEIO makes strategy operational, and can optimize up to 80% of inventory in 120 days, reduce inventory costs by up to 15%, and increase service availability by up to 5%.

At the end of the day, a comprehensive view of the supply chain for total inventory optimization has the greatest impact. Manufacturers can truly optimize inventory and maximize plant utilization when demand visibility drives inventory policies and production schedules.

Lisa Henriott is senior vice president product marketing at Logility.

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