Inventory optimization is a must for any wholesale, retail, or manufacturing firm. This practice allows a business to precisely calculate how much inventory they need for normal operations without an excessive outlay of capital. It also allows distribution operations to be lean and cost-effective at every step in the process.
Customers are quickly changing their requirements for how much product they need and when. This means that an optimization system needs to be agile and ready to take on new challenges. This is especially important in today’s difficult economic environment.
Verusen, an industry expert, delves into the details of inventory optimization and shows how this technique can help your company succeed.
How Optimization Works
First, the company needs to define the needs and objectives of the process areas in question. It is necessary to share supply and demand information between partners in the supply chain. This information can be used to optimize the network.
Senior management should be involved in deciding how much inventory to carry and what products should be featured. When senior management is involved, the process can be integrated across all departments. This means that the whole company is operating in accordance with optimization.
The inventory should be reviewed in a systematic fashion, taking into account the needs of each department within your company. Companies who are performing this analysis must make sure that they are working from more than one type of data to make their decisions.
Find Hidden Inventory
It is a good idea to go through your manufacturing areas and warehouses to find all of your inventory, not just the stock you use every day. You may be sitting on inventory that you could repurpose or sell at a profit.
Emphasize Data Collection
Today’s optimization process requires the collection of many data points. Data must be entered regarding the type, size, and cost of each item in your inventory, along with several other important metrics. Your optimization system is only as good as your data, and when you do not collect enough data you may find that you have too many or too few items in your inventory. Either situation leads to lost money and productivity.
Companies should avoid keeping their data in siloed systems. These systems are often out-of-date and cannot be compiled easily. It is far better to put the data in a centralized, company-wide system that everyone can access.
Reduce Overall Costs
According to APQC, a leading industry research group, the median inventory value as a percentage of total revenue comes out to 10.6 percent. This means that a company with $5 billion in revenue would have an inventory of $530 million. This represents a huge chunk of a company’s operating budget, so it is necessary to manage it carefully.
Moderating inventory levels when necessary also cuts down on the amount of money that needs to be spent on warehousing and shipping costs.
Matching Supply and Demand
One of the challenges of optimization is determining exactly how much inventory a company should keep. Supply and demand may fluctuate seasonally or depend on external pressure.
The supply chain can change constantly, requiring a great deal of legwork to keep up with it. When companies use real-time statistics, they are more likely to be able to keep their inventory levels manageable and profitable.
Gauging demand for a company’s products can rely on many types of data. For this reason, it is a good idea to work with an experienced consultant when it is time to put an optimization system in place.
Using AI to Guide the Process
Once the data has been collected, an excellent way to get it all into a usable format is to take advantage of an AI system. A system like that provided by Verusen can produce lists of what inventory you need at what time, and it can help you adjust your production and shipping properly.
Evaluate the System
Periodically, the optimization system should be evaluated. Using an AI platform means that this data will be easy to collect and understand. If any one data point is incorrect, the entire system could be thrown into disarray. When people keep a close eye on the system, they will be more likely to succeed.
Advantages of Optimization
While the cost savings associated with optimization are significant, there are several other advantages to consider. An agile optimization system can help your company reduce its warehouse size and presumably keep staffing levels to just the right level. It prevents waste and allows your company to adapt to supply and demand, especially under challenging conditions.
Verusen is prepared to help your company get organized and to make sure that your inventory optimization system works for your entire operation.