Senior executives of manufacturing organizations all know and understand the importance of managing inventory. What is surprising is how many managers are unable to get inventory optimization right. This can be attributed to the fact that many decision makers tend to rely on a range of external benchmarks which rarely give accurate insights. As a result, they end up making the wrong operating assumptions.
Getting down the right inventory levels is essential for manufacturing plants because it not only helps to control their costs, but is also used as a barometer of the overall health of a company.
- Configuration of Inventory
Configuration of inventory helps to address the issue of the form in which inventory should be held – is it raw materials, work in process or finished goods? Optimization of inventory is a postponement strategy that makes use of the tradeoff of upstream and downstream inventory in order to identify a globally efficient balance.
Inventory that is positioned downstream closer to demand trades it off against upstream inventory positioning where it offers a broad range of possible uses. Manufacturing operations position adequate levels of finished goods and assemblies so that they can deliver a final product as late as possible while maintaining acceptable service timeframes.
- Optimization of Process Stages
Process stage optimization uses similar postponement principles, except that it applies them to the distribution network. Here, the type of inventory remains the same, only changing its place within the network.
Process stage optimization addresses the decisions regarding whether inventory should be stocked at the factory, at a distribution center, in a regional network or a combination of these.
Optimal staging of inventory requires the consideration of many variables within the risk-pooling tradeoff. These include such factors as supply uncertainty, lead time or issues such as the value of inventory at a particular location.
- Mix Optimization
Inventory policy is used to address the inventory targets necessary if a manufacturing plant is to address the service level requirements of a product group. This kind of inventory optimization, by nature, has to be dynamic and should consider factors such as changing demand patterns, fluctuations in order lead times and seasonality.
Commonly referred to as service level optimization, mix optimization lets a business position its inventory throughout the distribution network. This lets the business meet stringent service level requirements in a more efficient way than simply having a ‘one size fits all’ homogenous mix of its inventory.
Instead, mix optimization results in a blend of service level targets set up for each SKU at every location in order to achieve an aggregate service level in line with business and marketing objectives.
- Optimization of Lot Sizes
Lot size optimization provides simultaneous optimization of a company’s safety stock compared to cycle stock values. The optimal lot sizes are determined by studying the required service levels, the manufacturing setup cost, handling costs and safety stocks in comparison to the inventory holding cost among other factors.
With an increase in the lot sizes, there is a corresponding decrease in the handling costs. On the other hand, the cost of holding stock increases alongside increases in average stock levels. However, it is not a linear relationship as is seen in many classic models.
- Prebuild Optimization
Prebuilt inventory needs to be planned carefully so that it can cover excess demand during periods where there is inadequate supply. Prebuild inventory optimization dynamically expresses inventory requirements based on the supply capacity and updated time-phased forecasts for the manufacturing plant to the end of the season.
This inventory mix covers any excess demand during a manufacturing season while ensuring that there is no overstocking or loss in sales. Prebuild analysis forms an important part of Sales and Operations Planning (S&OP).
Among the most common mistakes that supply organizations make is looking at just a small subset of inventory, often finished goods stored in their main warehouses, resulting in missed savings. Diagnosis and optimization of inventory in manufacturing organizations will set them up for improvements in asset and expense effectiveness and efficiency.