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Is Inventory Optimization an Unending Pursuit? (Part 2)

Defining a strategic supply chain strategy starts by addressing these key issues.

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Is Inventory Optimization an Unending Pursuit? (Part 2)

Product segmentation. Most businesses today have recognized the 80/20 rule and are making some attempt to distinguish the inventory needs of their significant few products versus the trivial many. In today’s increasingly diverse global markets, product segmentation must be even more sophisticated, taking place at a new micro level that dissects the entire portfolio by each product’s significant characteristics across multiple dimensions. In a diverse marketplace, segmentation cannot be merely an act of simplifying or modeling assumptions. It should instead focus on developing an increasingly greater understanding of how to serve individual customers and market segments in a way that is consistent with both top-level business goals and worldwide supply chain constraints.

Inventory Levels. Following the economic downturn of the last several years, no one is debating the importance of risk minimization. For every product segment and customer channel, companies need to determine the right supply chain strategy to deliver consistently high service levels while also minimizing their financial exposure. In working to balance service and cost levels, it is critical to remember two important facts: (a) there is no single math algorithm that works for every business, segment and channel; and (b) calculations must always consider the total landed cost of inventory — including transportation expenses, handling charges and holding costs — which can change dramatically and swiftly in today’s volatile environment. Businesses must also consider more subtle costs such as channel liabilities.

Customer demand. Inventory strategists should always bear in mind this simple fact: Everything begins with the customer. Today, supply chain leaders are working hard to understand and interpret actual buying behaviors, using enterprise resource planning (ERP) historical transaction data and point-of-sale (POS) data to generate individual customer profiles. Based on this real-world insight, the supply chain posture can be aligned with unique customer expectations.

Postponing inventory decisions. Based on these specific customer insights, businesses can postpone their inventory decisions to place the right amount of inventory at the right level in the supply chain to meet each customer’s expectations for service levels and timely delivery—while also minimizing overall inventory costs and financial exposure. Given today’s volatile economic climate, postponement remains an extremely important strategy to minimize risk across the supply chain.

Replenishment strategy? There is proven value in lean and just-in-time replenishment strategies but these initiatives cannot be pursued in isolation, especially in an era of rapidly fluctuating transportation costs. The businesses that are succeeding in this volatile economic climate are balancing low inventory goals and fast delivery targets with a range of alternative replenishment strategies that consider total landed costs — including en-route transportation charges, as well as warehouse handling expenses — and create the best overall results for the supply chain as a whole.

Answering these five critical questions will help organizations adopt the right inventory policies and processes that address customer needs and supply constraints, while minimizing risk. Taken together, these inventory practices comprise an overall supply chain posture that positions the business for long-term success.

Continued in Part 3


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