The Myths and Truths About Inventory Optimization

This is an excerpt of the original article. It was written for the March-April 2014 edition of Supply Chain Management Review. The full article is available to current subscribers.

March-April 2014

Retailers and distributors alike have attempted to solve their inventory challenges by using forecasting tools to determine what to buy and when to buy it. A better approach is to change the flow of inventory by reducing cycle times, more effective inventory positioning, and synchronizing supply chains based on the variability of demand.

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We all dream of a perfect world. For supply chain managers charged with optimizing inventory, especially in the retail industry, Supply Chain Utopia might be a make-to-order environment where a customer walks into a store or visits a Web site to purchase a new shirt to go with a stylish summer outfit. In a matter of minutes, a seamstress turns out a beautiful blue cotton shirt in just the right size. A few minutes later, the shirt is boxed in tissue paper and handed to the happy customer or dropped off at a parcel carrier for the last mile delivery. In Supply Chain Utopia, retailers would always have ample capacity, raw materials, and labor to meet periods of average and peak demand. Inventory optimization would be taught in The History Of Supply Chain 101; inventory managers would bore their grandchildren with stories about distribution centers, stocking points, and back of the store storage rooms from the good old days.

Unfortunately, Supply Chain Utopia is a myth. The truth of today’s competitive markets is that customers want instant purchase gratification while lead times for incoming merchandise can be 20 days to 180 days. That especially holds true for retailers at all stages of the transformation from single channels of business, such as a brick and mortar or catalog retailer, to multi- and omni-channel retailing from stores, catalogs, the Web, and other mediums. But, it also holds true for industrial distributors and manufacturers competing on a greater depth of product, drop shipments, and higher levels of customer service.

This does not mean we should stop developing demand driven retail or distribution supply chain strategies with the concept of buy one and stock (replenish) one. In the meantime, however, most retailers and distributors will struggle to have the right SKU at the right place, in the right quantity, and at the right time to meet the demands of their customers.

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