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Inventory Optimization

Inventory isn’t the sexist topic in supply chain, yet more than often one of the most common issues for companies especially in managing it specifically in optimization. Inventory optimization according to Sean P. Willems, Associate Professor of Operations and Technology Management at Boston University is a journey in which most companies move through three efficient frontiers: Ad hoc frontier, single stage frontier and lastly supply chain frontier. Dr. Willems writes in his article for Supply Chain 27/4 writes about his five obstacles to moving from an ad hoc frontier to a single stage frontier.

1. The intuition for how to correctly determine inventory targets is wrong.

Focus on the past, not the future in terms of inventory targets. Inventory on hand is a result of supply decisions that were made in the past.

2. Corporate metrics reinforce the wrong behaviors.

While corporate metric reinstates to look ahead, when setting up inventory it is a bad metric and these corporate standards reinforce bad habits.

3. People lack faith in the results from a “simple” scientific inventory formula.

A formula doesn’t have to be complicated to be right and that is more than often why people tend to steer clear of them, assuming they will provide a more estimate answer. Rather it is better go ahead and use these “simple” scientific methods knowing that it will be easier to track the output and keep the following in mind: reality can differ from the assumptions in a simple model and even if the reality matches the model assumptions the data inputs can be poor. How do we fix that? Just find another model or recalculate consciously.

4. They don’t realize how much money they are leaving on the table by not changing.

Moving over from the ad hoc to the single stage frontier can save companies almost 10% of the company’s total investment in inventory because total safety stock cost is reduced by almost 10 to 30 percent.

5. They don’t realize the ease with which they can change to scientifically calculated targets.

It is only a matter of changing targets, not creating a new process. Since the change is occurring on a location level, the data requirements are not difficult either.

For more background on the article, click here.

-Riti Patel, Assistant, Supply & Value Chain Center

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