Inventory Optimization: Part 1

What do we actually mean by Inventory Optimization?  It is something bandied about these days with great ease.  We do it ourselves.  Heck, it is our business and we claim to be experts!  You would not think we would be asking this in our own blog.

Actually, it is not clear to everyone.  In fact, Inventory Optimization may be more of a Zen state that we all aspire to, work for, and never actually achieve.  If we are in fact lucky enough to achieve it, it may only be for a blissful instant.  Then, poof… it is gone as something in the system changes.  Let us not kid ourselves, something always changes.

We have reviewed that any equation we might use to Optimize Inventory levels relies on

1. Predicting demand


2. Knowing the lead times

The further we forecast into the future the fuzzier the numbers will be.  We at least have a shot at knowing the lead time when we first update our systems.  Hopefully, we will keep them up to date and perhaps even compare them to performance.

But, the question still stands.  What do we mean be Optimizing Inventory?

What happens if a C-level executive wants to see an Optimized Inventory plan on the basis of a rolling 18 month horizon?  Do we even have a shot at doing this?  Is the plan meaningful?  Is it worth the time it takes to produce and report on such?

Certainly, the Inventory Optimization plan is only as good as the demand plan over the same rolling time horizon.   Who thinks their forecast for October 2010 is any good as we ponder this question in October 2009?  Are we looking at an SKU level forecast or at some reasonable level of aggregation?  The Inventory Plan out that far cannot be better than the Demand Plan is accurate… No how, no way!

Well at least we can stand on the lead times.  We have that going for us.  Yes we do!  We have the current lead times based on the CURRENT fuel prices, equipment availability, factory capacities, and product mix.  Over eighteen months, these lead times can change.  So, the question still stands:  How accurate and meaningful is an Optimized Inventory Plan that is projected out 8, 12, or 18 months?

There are many analogies that we could invoke to illustrate the point here.  The one that makes the most sense, at least to me, is dieting.  I cannot predict what I will weigh in one year.  But, I know my day to day behavior will determine the outcome.  If I consume more calories than I expend, I will gain weight.  If I consume less than I expend I will lose weight.  Assuming the goal is to be leaner, which actually relates to most Inventory Optimization initiatives, I know what to do each and every day to get there in terms of what to eat, how much to eat, and what not to eat.

The same applies to Inventory Optimization.

Please visit our blog next week as we continue this discussion on Inventory Optimization