LLamasoft Supply Chain Blog

­
← Back to Blog

Developing the Right Strategy for a Holistic Inventory View with Inventory Modeling

By Vikram Srinivasan  October 21, 2015

Most organizations have the same goal when talking about inventory: improve service while reducing on-hand inventory. And as most supply chain professionals can tell you, finding that balance is easier said than done. In a recent survey of top supply chain officers, the biggest barriers to effectively manage inventory were cited as “Can’t Optimize Network Holistically” and “Demand Volatility”. However, several leaders are taking new approaches to think about old inventory problems to strike that balance, with the help of supply chain modeling software.

By leveraging supply chain modeling and digital models, organizations can remove the risky and time-consuming element of experimenting with inventory in the real-world supply chain. Via these living models, organizations can get a holistic view of their end-to-end supply chain, including physical infrastructure like DCs and lanes, as well as account for policies, demand and inventory. This empowers modelers to view all the interdependencies and trade-offs to provide a data-supported decision when proposing a new strategy.

Considerations for Inventory Strategy Development

Influencing Factors and Interdependencies

There are a number of questions to take into account as you begin to build an inventory strategy, including:

  • What are our optimal service levels?
  • Where should we stock our inventory?
  • How much stock do we need?
  • Where should our stock flow through and with what production and distribution network?
  • What do I think to account for when considering product shelf life and product life cycles to right-size inventory?

In addition to safety stock, there are other aspects of stock to consider, each interdependent, and directly related to the supply chain network design decision already implemented. It is essential to have tools that enable you to not only look at these decisions from an inventory perspective but analyze how changes in inventory effect the entire supply chain network and performance.

Understanding Demand Patterns/Variability

How well do you really understand your demand? Most demand has high levels of variability that can vary to due to seasonality or just fluctuate from period-to-period. Demand classification is necessary to make high level segmented supply chain decisions to drive stocking and overall inventory strategies.

Demand Propagation and Analysis

As in nearly every situation, an individual rarely represents the whole. The same applies when making inventory decisions based on demand. By focusing on just one individual customer will provide a false reading of what is the correct aggregate demand. Some customers may have erratic demand outside of the mean, but with an aggregate picture upstream of customers, you may see a much smoother, and easier to analyze, demand pattern. With this information you can work with your manufacturers to better understand how changes in production will effect inventory and service levels at each distribution center.

 

Building an Inventory Strategy: How to Get Started

IOTable1

Before you dive into launching a new strategy, you must first identify the business problem(s) you want to address and define your strategy around tacking them. Understanding your demand and the root cause of inventory issues should be next, then technology assessment and finally model development and scenario analysis. Creating an inventory strategy needs to be considered a continuous process and a best practice. Supply chains are dynamic so to maximize your opportunity, regularly reassess and refine your strategy. With constant changes, analyzing inventory processes in a company only every three to five years could become a huge competitive disadvantage.

Tips for Choosing Technology Partners to Support Your Inventory Strategy

There are a variety of capabilities to consider as you build your inventory strategy

Look for technologies that:

  • Can help you to track and predict demand
  • Optimize inventory across all tiers of the supply chain
  • Can help make decisions on when to prebuild inventory, where to hold inventory, and whether to build more capacity instead of prebuilding
  • Provide service level optimization and stratification to help you decide what the best levels of service are across all product SKUs
  • Include simulation technology to test how inventory changes affect the supply chain

By understanding your current demand levels, the root cause of inventory issues and choosing the right modeling technology, you can better position your organization to right-size inventory for continuous improvements in cost, service and risk.

To learn more about best practices, considerations and tactics to implement your own inventory strategy, check out our Ebook: Using Inventory Modeling to Develop a Holistic Inventory Strategy