Managing inventory - It doesn't have to be like herding cats

Each new trend makes it more difficult to predict what inventory is required and when and where it is needed. In this article I will explore these trends and the impact they have on inventory management, and look at how inventory optimisation software can help companies plan, predict, manage and measure inventory flow, in even the most 'dynamic' environments.

Mass Customisation
Customer demand for tailored products is forcing companies to provide an almost infinite product variety while still achieving the cost performance and economies of scale of a limited product mix. This makes it very difficult to predict what end products customers will want, and consequently what finished goods to stock.

Shrinking Product Lifecycles
Product lifecycles continue to shrink as new products and technologies are introduced at an increasing rate. This has a profound effect on inventory management. Not having the right level of new product inventory early in the lifecycle can mean missing service level targets, or even losing an opportunity to establish market share. At the other end of the lifecycle, products can lose value very quickly. Too much inventory can lead to massive write-offs or sales at a loss.

Increased Competition
Increased competition, brought about by factors such as the Internet, technology and globalisation, is putting pressure on companies to achieve ever higher levels of customer service. This results in a catch-22 - companies want to invest in higher levels of inventory in order to react quickly to market demand, but at the same time, pricing pressures dictate that they should reduce inventory investment to reduce costs and improve margins.

So with challenges like these, how can companies remain competitive? It is possible, but only if they can get quick and accurate answers to tough questions like:


• What is my most profitable customer service level?

• Where and how much inventory should I hold?

• Should I stock components or finished goods?

• Which suppliers should I buy material from?

Companies can use specialised inventory optimisation software, such as that supplied by Oracle, to get quick answers to these questions. This helps them to react quickly to changing conditions, reduce exposure to the risks inherent in uncertain economic times and become less susceptible to large inventory write-offs.

To determine its optimum inventory strategy, a company must make several important decisions. The first is to establish what service level objectives are appropriate for each product line, and which customers or channels to target. Not all products are equally profitable, and the cost and risk characteristics change over time. Another is to decide where in the supply chain inventory should be held. This is known as a postponement strategy, and properly executed, it can dramatically improve customer service and reduce costs.

Next, companies need to capture the variability in supply and demand. Demand variation may be due to seasonal factors, forecast errors, consumer promotions, or new product launches. Supply variation may be due to lead-time uncertainties or supplier performance issues. Capturing these variables lets businesses determine the levels of inventory investment required to meet customer service objectives at the lowest possible total cost.

Strategic sourcing decisions based on supplier quality are key to procurement strategy based on total costs. Another key decision process is determining a procurement budget or strategy. This includes both determining what commodities to focus on and what suppliers to work with. It also requires understanding how factors like quality, delivery, commonality, and the impact on total revenue affect strategic sourcing decisions. Finally, companies also need to be able to measure their performance, to ensure that the objectives of the plan are being met.

Already in use by more than 800 companies in Europe, the Middle East and Africa, Oracle Inventory Optimisation software enables businesses to make all of these decisions accurately and rapidly. It incorporates very sophisticated technology for advanced stochastic optimization and constraint-based solving, but it is designed to be used by business planners, with a simple and intuitive graphical user interface that allows users to simply state the problem they want to solve. Fast 'what if' simulations allow users to quickly compare different scenarios to determine the effects of changing service level targets or inventory investment.

It's also fully integrated with the other components of the Oracle E-Business Suite so companies using other Oracle applications can seamlessly blend strategic, tactical, and operational planning as well as execution. All of the input data required, such as cost information, approved supplier lists, item and bill of material data, constraint data, carrying costs, and others can be used directly from other applications.

Managing a supply chain in today's uncertain business climate is a difficult challenge, but with advanced inventory optimisation software, companies can improve delivery performance, reduce inventory costs, manage supply chain variability, focus on the most critical products and channels, determine strategic sourcing policies, and measure performance against objectives. With the right software in place, inventory management can turn from a chaotic cat-herding exercise to a finely-tuned balancing act.