Seeing Your Way to Successful Inventory Management
08/01/2005
Introduction
There is no shortage of theory about the management of inventories. However, often the statistical methods are given without a credible account of practical application, for example in a business with many thousands of stock-keeping units. Alternatively, there are a number of software packages available that offer to solve inventory problems, but these are expensive and often the anticipated benefits are not fully achieved, perhaps due to the complexity of implementation. In fact, the power and flexibility of today’s database analysis environments make it possible to build models that not only address these problems but are also highly configurable and produce output that is readily understood by managers. The approach described in this paper allows managers to:
- Gain visibility of current inventory policy and practice within their company.
- Fully understand the trade-offs between inventory holding and customer service.
- Calculate required stock-holding for a given service level and consider the result in terms of days’ stock, value, cost, units and, importantly, cubic volume.
- Segment the product range according to value and velocity.
- Apply inventory and service-level policies selectively by segment.
- Determine optimal inventory parameters at the level of stock-keeping units.
- Interface with a storage and picking equipment selection model, leading to alignment of inventory policy with operations considerations e.g. appropriate unit load selection.
- Derive outputs that can be used to support logistics strategy decisions.
The modelling approach described in this paper was developed internally by Total Logistics and is known as IAN (Inventory Analysis Network).
Conclusion
The need for effectiveness in inventory management has never been more relevant to achieving competitive advantage. The approach outlined in this paper has a track record of delivering improvement and has the following advantages over other approaches:
- Diagnostic and improvement models give a clear view of issues, solutions and achievable benefits
- Transparency of all calculations and assumptions assures that buy-in is achieved at all stages and that results bear management scrutiny
- Models are fully adaptable to suit the individual project circumstances
- Integration with storage media allocation and network strategy modelling provides a complete solution for supply-chain decision making
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