Inventory Optimization: Evolving from Fad to Necessity

This is an excerpt of the original article. It was written for the March-April 2013 edition of Supply Chain Management Review. The full article is available to current subscribers.

March-April 2013

Inventory needs to be “optimized” to properly match supply and demand. This has become all the more important as competition intensifies globally and supply chains get longer and longer. Learn from a subject matter expert about the benefits of inventory optimization and how to get an IO initiative on track in your organization

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How you think about inventory says a lot about where you sit in your organization. Sales views inventory as an opportunity because you can sell what you have. Finance views inventory as a liability, or a depreciating asset; the arrival of these units could have been delayed without harm. Supply chain views it as a buffer reconciling the variability of demand and supply. The perception from the executive team lies on a spectrum ranging from unnecessary waste to necessary evil. Regardless of how an individual views inventory, everyone can agree that inventory should be optimized to properly match supply and demand.

The concept of inventory optimization is not new. The six-volume Library of Factory Management, originally published by A. W. Shaw in 1915, has a chapter on economic order quantity. And for more than a decade, enterprise-class software solutions have helped companies cut billions of dollars in inventory levels. Yet even with nearly 100 years of history, inventory optimization is still perceived by some as more “nice to have” than “need to have.” Further, it is still discussed primarily within the supply chain organization vs. the senior executive ranks.

This article articulates how to move inventory optimization beyond a fad to an integral facet of supply chain planning. To facilitate this transition and make the discussion relevant to senior executives, successful inventory optimization requires the following three active ingredients:

1. Change how inventory is measured and discussed.
2. Recognize the role of inventory optimization at every level of supply chain planning.
3. Choose the right inventory improvement initiatives for your company.

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