All businesses deal with the need to match customer demand against supply. How this is managed has major implications for profitability, since a percentage of the stock or inventory value will be spent on keeping it in a warehouse or store. This means you want to be able to move products through the system as quickly and cost-effectively as possible, without negatively impacting on the customer experience.
What’s more, the working capital cycle (the money you could be spending on other things) will be affected by the amount of capital invested as inventory. So this means you don’t want to have too much stock or inventory at any one point in the system so that it proves unnecessarily costly, but you want to have just enough to meet your revenue and service goals. In planning your inventory and stock, balance will need to be achieved between the cost-effectiveness of your inventory, the service level you aim to achieve, and your business’s KPIs.
Benefits of optimisation
All of this becomes increasingly complicated when you provide your products through multiple points of sale, and move into new product ranges. Inventory optimisation can be particularly useful during mergers and acquisitions, in business growth or downsizing, following changes to service levels, and alterations in fuel or transportation costs. It can also help you to deal with what is the ‘Long Tail Phenomenon’, where a greater proportion of overall sales comes from specialised products with a low total-sales velocity, placing greater demands on your inventory.
Stock and inventory optimisation can help to improve product availability and reduce working capital, increase profitability, develop business flexibility and respond to risk. If you keep a good track of your inventory and stock you will be better able to respond to increases or reductions in customer demand and technical developments in your industry.
How optimisation works
In order to respond to fluctuations in supply and demand without under-stocking or over-stocking, your company will need to have an accurate picture of what is happening to its stock and inventory, what has happened in the past, and what is likely to happen in the future. A complex model will work out the variability in supply and demand at different nodes in the distribution network and the impact that this has on other levels, rather than relying on intuition.
Once this information has been recorded, you can then create strategies and use technology to reduce the total costs of the inventory at the different nodes, increase turnover, reduce product obsolescence and rationalise your product portfolio if you so desire. The visibility of these processes will help you to work more effectively with your supply-chain partners, and scope out possibilities for improvement.
The benefits of optimisation can be significant. In the US, O’Reilly Auto Parts Inc. recently reported releasing $60 million in working capital through this process, according to Computerworld magazine.
About the Logistics Business
The Logistics Business is experienced in all aspects of supply chain management, and can advise you on the benefits of optimisation for your business. Our analysts will provide you with a joined-up picture of how your inventory and stock is performing for your business, and help you make your inventory less costly. To find out more about stock and inventory optimisation, please call our expert team on 01527 889060 or email firstname.lastname@example.org for more information.