Inventory Optimization: Putting it in to Practice

We’re wrapping up an informative series on inventory optimization today: we’d like to give you some advice on actually putting it all in to practice. If you haven’t been with us throughout the month, the series has included:

What’s the Payoff?

What are the aims of Inventory Optimization? We argue that Inventory Optimization aims to improve your margins through a net reduction of acquisition and carrying costs. So what does this look like?

We recently studied one of our clients, a retailer with annual COGS in the $100M-$1B range. Were this retailer using a flat order cycle of 7 days for all vendors, they would have a yearly profit in the $100M range. If this retailer were to implement an ideal order cycle per the Data Profits Inventory Optimization algorithms, then this retailer would have a profit of $115M. These changes, we project, would lead to a 13% increase in yearly profit.

So Why Doesn’t Everyone Implement Inventory Optimization

Lead Time Forecasting - What's New in 2013

Inventory Optimization is complicated. It starts with accurate demand forecasting and lead time forecasting. It requires being able to assess vendor minimums, warehouse limitations, and multi-echelon interactions. More importantly, it requires trust and buy-in from executives, buyers, and analysts.

Even harder, effective inventory optimization requires decision makers to ignore their gut feelings on when and how much to buy and to go with what the data recommends. We’ve found that buyers and analysts (understandably) live in fear of out-of-stock. As such, they order far more frequently than is ideal. This is due to two factors:

  • They feel that ordering frequently offers more of a safety net.
  • They’ve been burned in the past by poor demand forecasts, poor lead time forecasts, and wildly inaccurate order cycle suggestions.

Inventory Optimization: How to Start

We deeply care about businesses and their ability to succeed in this challenging market. As such, we want to give you every possible tool to improve your ability to compete in the marketplace. We recommend the following steps:

  1. Start somewhere. We understand that it’s daunting to begin an inventory optimization program from scratch, but the payoffs are simply too large to ignore. Therefore, take small steps and track your progress.
  2. Implement Demand Forecasting
  3. Implement Lead Time Forecasting
  4. Track your Stock Model (order point order max) and calculate your total acquisition costs. You should be able to calculate a reasonable approximation of your carrying costs as well.
  5. Test order cycles of varying lengths by projecting your orders for the upcoming year. Calculate orders based upon your seasonal (if appropriate) demand forecast.
  6. Analyze the results against your current order cycle for each vendor (or supplier or manufacturer).

We understand that you’ll do projections before using a calculated optimal order cycle, but you must go through this process to understand how much profit you’re leaving on the table. You’ll be shocked. We guarantee it.

Inventory Optimization: How to Implement it Faster

Give Data Profits a call (770-574-4100) or request a demo online. We’ll show you behind the curtain and help you to find the profit in your data.

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