Prior to the COVID-19 pandemic, supply chains were typically fairly dependable. However, one thing that 2020 did was drive home the fact that inventory optimization has been overlooked for some time and is more important than ever before. When COVID19 first struck, the impact was staggering with 8 trillion dollars worth of goods held up as operations ground to a halt. The UK sustained 66 billion in damage due to the pandemic related disruptions.
A Return to the ‘New’ Normal
Now that we are halfway through 2021 and the pandemic crisis has waned, most organizations are returning to normal operation.. However, there is a ‘new’ normal as many react to the supply struggles that were revealed during the pademenic. Business leaders are now thinking about investing in inventory optimization to prevent a repeat of 2020.
Past and Present Inventory Problems
Of course, making a precautionary investment to successfully mitigate the potential future risks is reasonable. However, in all honesty, supply chain falters are nothing new and the problem has plagued global retailers even before COVID19. However, they managed to combat the inventory distortion The inventory problems remained a challenge and were only made worse by COVID19.
Inventory Management
Ned Glattly, Managing Director and Leader in Deloitte Consulting’s Supply Chain and Network Operations Practice states the following in a revealing interview, “More than anything else, the COVID-19 pandemic has provided a teaching moment in what can happen when inventory planning, tracking, and management capabilities are not where they need to be. Over the last year, we have learned that ‘rules of thumb’ unit-based policies for safety stock are far too static to respond to sudden and significant demand and supply disruption. We learned that suboptimal deployment ‘stranded’ inventory where it was not needed and left huge gaps where demand spiked. We learned that visibility – just knowing what we have and where it is – is perhaps more critical than ‘optimised’ inventory levels, and working remotely made us more reliant on data and systems to provide this visibility. We learned the importance of including inventory planning as part of an integrated business planning capability. In short, inventory tends to shine a light on all things both good and bad in a supply chain, and COVID-19 provided a case study in how important it is to get it right.”
Inventory management ranks as one of the most important elements of any profitable supply chain. Organizations regularly leverage inventory optimization for long term success in the competitive market and to gain a valued strategic advantage.
Stock Availability
Advanced Supply Chain Group (ASCG) has reported the following “poor stock availability leading to lost sales and margin dilution, as well as high levels of stock surpluses resulting in heavy discounting of products and losses incurred through aged and out-dated stock.” Without a doubt, supply chain inventory optimization can create balance to overcome investment constraints and reach greater goals with increased SKU numbers.
“At Deloitte, we have proposed six core ‘ingredients’ of inventory excellence – governance, tools, visibility, strategy, analytics, and process”, Glattly further states.“Collectively, these ingredients contribute to a capability. You can make improvements with just process fixes or tools. You can put in place governance and measurements. You can provide better visibility, and you can use this visibility to enable actionable analytics and insight. However, the reason they are all collectively important is that together they make inventory management both impactful and sustainable.”
Inventory optimization practices that look at supply continuity, stock levels and demand forecasting will dominate the future and impact decisions.
Importance of Forecasting
Traditional forecasting works in stable conditions, but as COVID19 showed, some things can cause massive upheaval. Using inventory optimization tools that rely on statistical forecasting formulas will help supply changes determine variations in demand.
Stock Considerations
Carrying in demand items and foreseeing what the right stock is can be challenging. Obviously, any investment in stock must remain sensible and change depending on influencing factors.
Eazystock writes, “Inventory optimization helps by classifying items and focusing on the availability of those most important to the business. A simple form of inventory classification can be done manually using ABC analysis, but with inventory optimisation software, the categorisation can be much more sophisticated […] The big advantage of inventory optimisation software is that stocking rules and reordering parameters are automatically adjusted to ensure service levels are met. This means that reorder points, reorder quantities and safety stock levels are all dynamically calculated, based on market dynamics.”
Supply Continuity
When it comes to supply continuity, Eazystock states “Securing supply has been extremely difficult for many SCM teams in 2020, and supply issues could re-emerge at any time. Formulas used to calculate replenishment, e.g. reorder points or safety stock levels etc., need the ability to be adjusted when supplier lead times change to avoid stockout situations. This can be done manually on a regular basis or using inventory optimisation software that will track lead times and update purchasing requirements automatically.”
Digitalization Transformation of Inventory Management
Ned Glattly, further states about digitization transformation and inventory management,
“real-time sensor data and tracking capabilities are being leveraged to optimise placement, avoid obsolescence, and help enable proactive planning and responsive replenishment [in inventory management],” says Glattly.
“The digitisation of inventory has also enabled game-changing analytics. By harnessing the data that captures how inventory moves through a supply chain, we are able to build a “digital twin”– a model that illuminates what is actually happening versus what we planned to happen. From this, we gain insight into what is needed, what is excess, and more importantly, how inventory requirements are being impacted by the underlying drivers such as lead time, production and shipping frequency, demand volatility, quality, and supply variability.The value of digital in inventory management is significant and impacts all aspects of the enterprise value equation.”
Core Benefits Include:
- Outstanding revenue benefits are obtained from mitigating sotokcous and lost sales. In addition, quickly redeploying products to meet the demand changes.
- Avoid firefighting, writes-offs, and expediting.
- Digital capability helps to shine a light on excess and gives insight into needed actions.
Glatty concludes with the following: “Technology is foundational to Inventory optimization. Most advanced planning solutions provide for multi-echelon inventory optimisation (MEIO) that provide inventory levels across a network and not just at individual locations. Keep in mind that having good inventory visibility as well as core planning fundamentals in place is critical before targeting optimization, as you really can’t optimise inventory without knowing what is currently in the network and having a planning process to execute against the recommendations.”
The Future of Management Optimization
- Focus on inventory visibility
- Pay attention to inventory strategy
- Emphasize inventory management
