Using Inventory Modeling to Develop a Holistic Inventory Strategy

v3Top supply chain officers across the industry were recently surveyed¹ on their biggest barriers to effective inventory management. Their top two responses were “Can’t Optimize Network Holistically” and “Demand Volatility”. It’s no wonder: often inventory placement decisions are made in a vacuum without considering the end-to-end supply chain impact. In addition, product demand has become more volatile and hard to predict over time. How do you predict how much inventory to build when you can’t predict the demand?

Without a way to digitally model supply chain operations and inventory policies, companies need to experiment in the real world, which is time-consuming and extremely risky. Supply chain design enables companies to create living models of the end-to-end supply chain, encompassing physical infrastructure, policies, demand and inventory. These models provide a true holistic view of all the interdependencies and trade-offs with each supply chain question and enable true data-backed decision support instead of risky and often costly real-world testing.

Considerations for Inventory Strategy Development
Influencing Factors and Interdependencies
There are many varied questions that need to be addressed as you begin to build an inventory strategy, including:

  • What service levels should we have?
  • Where should we stock our inventory?
  • How much do we need to stock?
  • Where should our stock flow through and with what production and distribution network?
  • How do I consider product shelf life and short product life cycles when right sizing inventory?

There are also many other aspects of stock besides safety stock that need to be considered, each interdependent and directly related to supply chain network design decisions that have already been made. It is essential to have tools that enable you to not only look at these decisions from an inventory perspective but analyze how changes in inventory effect the entire supply chain network and performance.

Understanding Demand Patterns/Variability
How well do you understand your demand? Most demand has high levels of variability and is not consistent from period to period. You need the ability to classify your demand to make high level segmented supply chain decisions to drive stocking and overall inventory strategies.

Demand Propagation and Analysis
When making inventory decisions based on demand, focusing on just one individual customer will give you a false reading of what correct aggregate demand actually is. You may have many customers with erratic demand but in aggregate you will create smooth demand that is easier to analyze. Armed with this information you can work with manufacturing to better understand how changes in production will effect inventory and service levels at each distribution center.

Building an Inventory Strategy: Where to Begin
The business problem(s) should be identified as the first step to building an inventory strategy to tackle them. Understanding demand and the root cause of inventory issues should be next, then technology assessment and finally model development and scenario analysis. Creating inventory strategy needs to be considered a continuous process and a best practice. Supply chains are dynamic. With constant changes, analyzing inventory processes in a company only every three to five years could become a huge competitive disadvantage.

Llamasoft Inventory Policy

Tips for Choosing Technology Partners to Support Your Inventory Strategy

There are a variety of capabilities to consider as you build your inventory strategy

There are a variety of capabilities to consider as you build your inventory strategy

Look for technologies that:

  • Can help you to track and predict demand
  • Optimize inventory across all tiers of the supply chain
  • Can help make decisions on when to prebuild inventory, where to hold inventory, and whether to build more capacity instead of prebuilding
  • Provide service level optimization and stratification to help you decide what the best levels of service are for all of your product SKUs
  • Include simulation to test how inventory changes affect the supply chain

By understanding your current demand levels, the root cause of inventory issues and choosing the right modeling technology, you can better position your organization to right-size inventory for continuous improvements in cost, service and risk.

¹Chief Supply Chain Officer Insights, 2011

Vikram Srinivasan is Product Manager of Inventory Optimization at LLamasoft and is primarily responsible for managing the inventory product life cycle, defining and prioritizing market requirements. Vikram’s expertise spans across Network & Inventory optimization. Prior to his Product Manager role, Vikram worked as a Senior Consultant at LLamasoft on multiple projects solving various supply chain design problems. He received his M.S in Industrial Engineering (Major: Operations Research) at The Ohio State University.

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