Find the right balance between enhanced customer service, less inventory

Is it possible to reach supply chain utopia? Some would define this as achieving both enhanced customer service and low inventory levels. Yet even attaining a balance between the two remains elusive, as a company typically concentrates on improving one side of the equation only to see the other side suffer.

It's a difficult balance to master, but not impossible with the right tools, focus, and philosophy.

Whereas typical planning and scheduling systems look at one plant or location, inventory optimization can plan for each stock keeping unit (SKU) based on uncertainty inherent in the supply chain.

"Inventory optimization takes an end-to-end approach, from sourcing through production, final assembly, finishing, and distribution," says Julie Fraser, principal of Industry Directions, a Cummaquid, Mass.-based IT consulting firm.

The Efficient Frontier is a term used in Fraser's recent report on inventory optimization (see graphic). It is the line against which a company can execute, for example, at "x" inventory level, and achieve 90-percent on-time delivery.

"The concept is to move that frontier to get better service levels with lower amounts of inventory," says Fraser. "It is possible to achieve both, but it can be very challenging."

Inventory optimization systems use stochastic algorithms to account for uncertainty in the supply chain, pertaining to supply, demand, production, or any form of random behavior.

"Such a system is unique because it takes a holistic view of the entire supply chain network and looks at probability and variability," explains Fraser. "The algorithm may foresee a future spike in sales and take that into account to plan for enough safety stock."

While consumer products companies are using inventory optimization for tactical purposes—such as tracking a specific SKU in a specific location—manufacturers also are looking to address long-term strategic planning and supply chain network design. Inventory optimization considers historical data, but also creates demand projections, integrating to an enterprise system to report suggested inventory stock levels and other targets.

"Projections can look out a few weeks to a year," says Jeff Bodenstab, VP of marketing for ToolsGroup, which offers the DPM inventory optimization solution. "If a product has a long lead time, or if there are seasonality issues, users must build ahead and look far out in advance."

An inventory optimization solution pulls data from ERP systems. After ensuring data is clean, the solution drills down to very granular levels, optimizing inventory for every SKU and location.

The system's demand-sensing feature also allows users to obtain a clean demand signal from business partners via point-of-sale and RFID data. Demand modeling creates a profile for users of possible demand outcomes, allowing them to make good inventory decisions.

"To improve inventory management, you must have a good idea of what's happening at a granular level because this is where most problems occur," says Bodenstab. "You don't just run out of orange juice; you run out of medium-bulk, six-pack cartons at the Framingham store."

Bodenstab cites three key benefits of an inventory optimization system: top-line growth, inventory reduction, and reduced supply chain variability.