Does Your Inventory Replenishment Model Fit With Company Objectives?

Spend Matters welcomes this guest post by Daniel Martinez of GEP.

Most companies do not have a complete understanding of how important is to select the correct inventory replenishment model. As such, inventory remains a nightmare of chief executives and finance professionals due to the perception that they are handling inventory planning and management in the wrong way. Companies are not operating “on the curve” in order to optimize the balance between services and inventory levels.

These wrong perceptions include:

  • Holding all items at all levels in a finished goods network will provide the highest service level
  • Each location/level in the supply chain sets its own service level targets and replenishment planning frequencies
  • Inventory minimization should be the goal
  • Safety stock becomes a buffer to absorb the variability in the supply chain for any lead time delay and output variability based on forecast errors
  • Demand volatility and production delays become an additional operative cost but should be quantified to have a complete visibility as part of the total operating cost

The lack of balance between low/exceed inventory has an impact as an operational cost or could reduce the net profit losing sales due to lack of inventory to accomplish demand.

GEP

 

GEP

Note: Pipeline inventory is what is currently under production and will be available within the expected lead time

The difference between current situation and desirable situation generate either low or excess levels of inventory that has a direct impact on service levels. Nevertheless, measuring correctly and having a complete understanding of the company’s situation will help you to change the internal perspective and improve tremendously by calculating the correct cycles and visibility in each variable.

Most of the companies are looking for potential improvements with the correct replenishment model that let them adapt and be flexible according to the market needs, mainly to optimize the inventory replenishment based on real requirements and external expectations for the managed finished goods, defining the correct replenishment based on deep analysis with accurate information.

Safety stock – reduction of lead time

GEP

  • Safety stock — Optimizing the service level through balancing the percentage of stock-out
  • Reducing standard deviation — Through forecast improvement and reducing demand variability
  • Improving order/delivery cycle time — Reducing period duration and forecast error magnitude
  • Unexpected demand — By improving the forecast requires an incremental effort growing exponentially and special focus on improve collaboration with customers

Ultimately, the inventory model should provide a balance and a set of complex algorithms to calculate the correct replenishment levels through accurate information, enabling the company to achieve benefits aligned with the company objectives that adapt to the market needs.

GEP

Note: Pipeline inventory is what is currently under production and will be available within the expected lead time

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