Inventory Optimization is a link in your chain that is often misunderstood and misquoted at inventory meetings and sales presentations in many businesses today. Inventory Optimization issues are always easy to find – Buyers, Sales People, and inventory managers of high-volume inventories often complain that there is too much overstocked inventory of slow selling products and not enough of the inventory that is in demand. Sadly, the unnecessary inventory is tying up working capital and taking up much needed storage space. This is a major issue that lowers profits, service attained and customer opinions.
Inventory Optimization with Excel and the ‘Consultant’
So many ask, how do you improve the quality of customer service without storing excessive inventory?
There are a variety of inventory management techniques. However, the most frequently used inventory management technique is “Rule of Thumb” and an Excel spreadsheet. This is when a company hires a professional to analyze sales history, by comparing the older SKUs with the newer SKUs, in turn providing a mathematical prediction as to the appropriate purchase of inventory. However, as the SKU count increases and new products are added to the existing inventory, it becomes difficult to maintain that approach, and it is never accurate.
Demand Forecasting Links to Inventory Optimization
The problem with the aforementioned approach is that it disregards variability. A SKU with a demand of 100 units a week with a standard deviation of 25, cannot be managed the same as a SKU with a demand history of a 100 units a week having a standard deviation of 100. There are very specific demand forecast algorithms for slow and intermittent demand product. Intermittent Demand Products need to be forecasted with an intermittent demand algorithm to achieve higher forecast accuracy. Inventory Optimization needs demand forecast accuracy to effectively determine the amount of inventory to carry and maximize profits, lower operating costs and meet service goals. In large product assortments, slow and intermittent demand products are just part of the potential issues in optimizing inventory. Inventory Optimization is a complicated process but with very profitable rewards.Learn More
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