In the wake of a series of significant disruptions in the last few years, supply chain professionals and corporate decision-makers are searching for ways to build more resilient supply chains. This has led them to redefine what supply chains should look like and what leaders need to do in a world where the assumption is that significant disruptions are here to stay. A critical piece of the puzzle lies in inventory optimization. Over the last two decades, the trend had been toward lowest cost purchasing and a supply chain model based on lean principles like those used in manufacturing and distribution operations. Now, however, inventory optimization will also be part of the overall redefinition.
Disruption from an Inventory Perspective
The move to a new mindset on inventory optimization means supply chain professionals will not drive to a low-cost, lean supply chain. But neither does it mean they should load up on inventory and migrate to the other extreme. Instead, inventory optimization will need to be done with an eye toward agility and an understanding of the tradeoffs to develop a model that manages cost while ensuring supply.
One way to do this is to redefine risk. When the price of materials and lead times were the two driving factors, companies could move to low or no inventory standing. But with COVID-19, trade wars, and other disruptions, companies have been forced to redefine risks to weigh supplier risk heavier than cost. Consideration on where and how much inventory may include geographic, pandemic, compliance, and other factors to set inventories to levels that allow continued business during the next disruption.
Many companies will also need to look at inventory levels based on capacity constraints. All the disruptions mentioned above have had the effect of creating capacity constraints in upstream supply in both the manufacture of materials and logistics for bringing them in. Understanding the demand signals and developing a strategy to cope with supplier capacity issues will be critical as well. The result of this perspective will be an inventory plan that moves inventory from a cost consideration to one of strategic concern.
Considerations for New Inventory Optimization Strategies
There are several things companies should do when preparing for this shift. They include:
- Assess Current Inventory – This means more than counting what is on hand. It may include strategic buffer stocks of raw materials or components. It could also involve identifying more substitutes at a local or regional level.
- Evaluate Geographic Reality – Both production and logistics encounter capacity issues for obtaining raw materials and components, where the inventory comes from matters more than it did a few years ago. Shifting to nearshoring or reshoring for critical components can help ensure more reliable inventory levels during global disruption.
- Identify Core Product Lines – In the worst of disruptions, it may be necessary to scale back some production to protect the most profitable product lines. This happened to many suppliers during the COVID-19 pandemic, forcing many brands famous for a wide range of product variations to reduce back to their core lines. Conducting an ABC analysis to identify and prioritize those products and what stock levels are required for maximum profitability can help establish the tradeoffs and set priorities.
- Implement Full Visibility Across the Supply Chain – Recent disruptions have hit those with old, spreadsheet-driven planning systems the hardest. Time lags in data collection, manual inputs, limited human-based analysis, and other task-driven systems had little visibility into what was coming at them next. To build a strategically optimized inventory, companies will need to have complete end-to-end visibility and collaboration to leave themselves time to respond and adjust.
How Software Can Optimize Inventory
Building an inventory optimization strategy to weather the next wave of disruption requires planning and organizational buy-in. But it also requires software to leverage real-time or near real-time data into actionable insights. It is unlikely that a company can follow any of the above suggestions without it.
With Inventory Planning and Optimization software by Plex DemandCaster, inventory planning is streamlined. Fundamental processes such as purchasing inventory transfer can be automated, and with advanced analytics and reporting, you can have forward-looking analytics at your fingertips. With robust “what-if” scenarios, you can strategize what level and location of inventory work best for you. And with ABC analysis and detailed material requirement plans, you can leverage real-time data to execute an inventory plan to not only stay afloat during a disruption but to move ahead of the competition. To find out more about Plex DemandCaster’s Inventory Planning and Optimization software, contact us.