Demystifying Inventory Optimization

This is an excerpt of the original article. It was written for the March-April 2015 edition of Supply Chain Management Review. The full article is available to current subscribers.

March-April 2015

Anyone who’s ever bought a house knows the realtor’s motto: Location, location,location. It’s the most important factor in determining the value of a property. Based on the press releases that come across my desk these days, supply chain’s motto is: Innovate,innovate, innovate. This issue includes approaches to inventory optimization, contract management with third party logistics providers and contract manufacturers, and the Goldilocks approach to supply management—an innovative concept aimed at keeping your procurement department from running too hot or too cold.

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The pressure to optimize inventory is only increasing. In industrial business-to-business supply chains, customer service level agreements are growing more stringent, with significant financial penalties for noncompliance. Meanwhile, brick-and-mortar retailers must successfully manage inventories across their network of distribution centers and stores to compete against Internet retailers.

I often find that inventory optimization intimidates and frustrates people working in supply chain. They are intimidated because they believe the problem is too difficult to solve. They are frustrated because solving it poorly has a material impact on their lives and operations—not to mention their careers. This is both unfortunate and unnecessary.

This article seeks to demystify inventory optimization so that you can optimize your company’s inventory immediately. It begins by representing the inventory optimization journey for any company as a progression through three efficient frontiers; companies begin at an ad hoc frontier and then move to a single stage frontier before finishing at a supply chain frontier. As I’ll demonstrate, the expected results of simply moving from the ad hoc frontier to the single stage frontier are substantial. And, I’ll explain the five impediments to overcome when moving from the ad hoc frontier to the single stage frontier.

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