The Turbulent Economy: Strong or Weak?
If you follow the stock market, you might think the economy is strong. As consumers, we are frustrated with the price of everyday supplies such as food, gas, and housing. Depending on your position, you could be making a decent salary yet struggling. On the other hand, spending continues to drive growth. If you are a business owner, you are concerned with inflation, interest rates, softening demand and heightened risk levels. Thus, there is focus across the board to bring down inventory levels to free up cash flow.
While some organizations seem to be in panic mode, smart, proactive clients are focused on right-sizing inventory – having the “right” inventory in the “right” place at the “right” time to support profitable growth.
Inventory Optimization to the Rescue
Inventory optimization is riding to the rescue. For every dollar tied up in inventory that is not required to support customer service and growth plans, it is a dollar that comes directly off the bottom line. Certainly, post-pandemic, most if not all companies went from the inventory strategy of JIT (just-in-time), following the literal definition instead of the Japanese philosophy more associated with right-sizing inventory to the strategy of JIC (just-in-case), thereby resulting in more inventory than required to satisfy growth plans. In this turbulent, high-cost environment, executives are re-thinking inventory strategy with an immediate focus on reduction.
What is inventory optimization? In essence, it is right-sizing inventory so that you have just enough inventory to support profitable growth without crossing the line to excess inventory. The bottom line is that you must meet customer service requirements, have enough inventory to allow for increased efficiencies and reduced waste, be prepared for growth, reduce what’s no longer needed, minimize slow-moving and obsolete inventory, and redefine your products to be more flexible so that you can carry less inventory while serving changing customer needs. To learn more, read our article on managing inventory and cost to navigate economic turbulence.
SIOP to Drive Inventory Optimization
Since the best way to right-size your inventory is to start with the big picture, our best clients start with a SIOP (Sales Inventory Operations Planning) process. The SIOP process provides the sales forecast / demand plan inclusive of customer needs, new products and services, geographic allocations, service policy guidelines, customer and product profitability insights, and other requirements. The bottom line is to start with a full picture of demand as that drives the need for inventory.
After addressing the “S” in SIOP, the process aligns supply (inventory, manufacturing and supply chain operations) with demand in the best manner to support growth, profitability, working capital, and team engagement. Inventory optimization is integral to these supply plans. SIOP highlights strategic decisions such as manufacturing and supply chain network changes and impacts on inventory levels. Strategic inventory objectives feed the SIOP process (for example, increasing inventory to support a move or supplier transition), and the result of the SIOP process is an inventory projection. To learn more about how to rollout a SIOP process, refer to our book, SIOP (Sales Inventory Operations Planning): Creating Predictable Revenue and EBITDA Growth.
Planning Strategies & Tools to Fuel Inventory Optimization
Planning strategies fuel inventory optimization. Demand planning fuels the sales forecast. Master planning fuels the long-term supply plans including manufacturing, distribution, storage, transportation, replenishment, vendor-managed, materials, and more. Production scheduling fuels the detailed schedule for the shop floor. Replenishment / distribution planning fuels the distribution plans. Vendor managed inventory fuels supplier managed inventory programs. Materials planning fuels material and component plans.
There are several tools and strategies to support inventory optimization. A modern ERP system is a base requirement to utilize standard planning tools such as sales forecasting, CRM, e-commerce, inventory planning, MRP and DDMRP (demand driven MRP), warehouse management (WMS), transportation management (TMS) etc. Beyond modern ERP, advanced planning and forecasting systems accelerate inventory optimization. For example, advanced engineer-to-order (ETO) / configure-to-order (CTO) and quoting systems predict planning groups to optimize inventory levels while meeting service levels. Check out our article to learn more about these planning processes with case studies.
If you are interested in reading more on this topic:
Right-Size Inventory to Thrive During Inflationary & Recessionary Times