Back to Basics: The Fundamentals of Inventory Optimization Part Two

Welcome back to our Back to Basics series, where we’re talking about how to achieve ongoing success in the “new normal” by focusing on the basics of after-sales service operations. (If you missed the first two posts, you can read them here: Back to Basics: The Fundamentals of Price Optimization, and Back to Basics: The Fundamentals of Inventory Optimization, Part One.)

Today we’re continuing the conversation about inventory management with a focus on two areas: stock strategy and optimization, and obsolescence policies. Here are some common challenges and key considerations planners should think about when it comes to stocking parts, especially across a network of locations.

Stock strategy and optimization: start with segmentation

When dealing with hundreds of thousands or even millions of parts, managing your inventory as a single portfolio is too complicated. A more efficient approach is to segment products into smaller buckets, grouping parts by things like cost, ease of sourcing, criticality and velocity. Segmentation, also known as multi-item optimization, can help you improve your working capital by enabling more granular control over inventory, while still meeting target service levels and availability.

For example, instead of aiming for 95% parts availability across the board, you might target 98-99% for highly critical parts and drop it to 91-92% for less critical items. Adjusting targets across your range frees up working capital so you can buy more of the parts you really need. Plus, it decreases the overfill rate for less critical or slower moving parts.

Segmentation gives you the flexibility to support and model across segments, balancing demand profiles for various parts at different locations with each part’s contribution to the fill rate. You can then extend that out in multi-tier networks, rationalizing the inventory investment to achieve a network fill rate for less. It’s worth noting that while these networks have many advantages, they’re hard to plan for compared to single-tier or single point networks, where much of the work is intuitive. To unlock  the value of multi-tier networks, you need tools with robust simulation capabilities.

Planning orders and calculating lot size

First things first—if your planners are spending time manually placing orders, consider automating the order flow from your planning systems through your order execution systems to increase efficiency. This gives planners more time to focus on strategic activities such as reviewing significant stock order changes. Next, look at whether your order quantities are being driven by supplier minimum order quantities. This is a common mistake, because it means you may be buying more than you really need to.

To drive value from both an inventory and a supply chain perspective, look at your economic order quantities (EOQ) for individual parts. This is a fairly standard calculation that involves a lot of holding and carrying or replacement costs, and requires robust data. But this feedback loop is essential to figuring out how much you should actually be buying. Run the EOQ against your minimum order quantities to find discrepancies, which you can then use to calculate optimal orders in the real world. Basing orders on things like pallet truckload or time period is not the best way to manage your inventory. Segmenting by how fast or slow parts move lets you factor in those differences and adjust accordingly.

Redistribution and virtual planning

Sharing excess inventory across multiple locations is another way to get more value out of the inventory you already have, especially for high-dollar parts. If you have an extra transmission on hand, for example, that’s worth $35,000, and another location needs one, it makes more sense to ship that item within your network rather than to re-order it. But this requires visibility into the entire network, which ties into the concept of virtual planning. Pulling stock demands across a number of locations within a region also allows you to reduce lead times and minimize backorders.

Retention and obsolescence policies

Policies that determine how long spare parts are kept on hand have traditionally taken a broad-sweep approach, with manufacturers keeping items on the shelf for 10, 15, or even 20 years. But with more intelligent planning processes in place, that’s starting to change.  Just as segmentation allows you to order more strategically, your retention policy also has a big impact on inventory—particularly for parts that are nearing their “end of life.”

Retention policies should be taken into account during planning, especially when you have visibility across your network. For example, if you’re going to retain a part for several years, making a high minimum order purchase might be worth the upfront investment. You’ll save on future orders and can always redistribute excess inventory to other locations. But for items that have a shorter shelf life, such as safety parts which are closely regulated, it may be more cost effective to buy on an as-needed basis.

Virtual planning can also help manufacturers make use of excess inventory before it becomes obsolete. Selling off or redistributing parts that are nearing that obsolescence date is a good way to avoid buying new inventory from suppliers. However, once a stocked part reaches its technical financial obsolescence, even if it’s fully reserved, it’s time to get rid of it. At that point you’re tying up space in your distribution centers that is preventing you from bringing in more physical material, even if there isn’t a technical financial impact. Inventory optimization is all about looking at the big picture and making the most of the parts, space, and working capital that’s available to you.

Stay tuned for the next post in this series, where we’ll be talking about the basics of Retail Inventory Management. Until then, learn more about the value Syncron InventoryTM can bring to your business today.