Combining Inventory Optimization With Additional Analytics Approaches

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Key Takeaways

⇨ Inventory optimization is frequently done in silos which is not an optimal approach.

⇨ Many additional type of analytics needs to happen in sync, like SKU level profitability analysis, Service level determination, product design, and network design.

⇨ Each of these types of analytics influence inventory costs and hence play a key role in inventory optimization.

Inventory Optimization emerged as a key focus area over the next two years for SAPinsiders in our recent research, Supply Chain Planning in The Cloud. As organizations still struggle with fluctuating demand patterns developed during the pandemic, inventory policies are also developing. Hence, it is unsurprising that inventory management and optimization remain a key focus area for SAPinsiders and is the theme of our upcoming research report in November 2022. But an important aspect to understand for those embarking on an inventory optimization journey is that we cannot plan inventory policies in silos, and inventory optimization needs to happen in tandem with many other types of analysis. A few important ones are SKU level profitability analysis, Service level determination, product design, and network design.

Combining Inventory Optimization with Other Analytics Approaches

Profitability analysis needs to be done before any inventory management exercise. Chances are your organizations may already leverage approaches like activity-based costing to allocate costs to products. Use these to understand the profitability of your SKUs, accounting for the inventory costs in this analysis. Each SKU in your portfolio eventually adds complexity to your supply chain and inventory management process. If the SKU is not profitable, it warrants further attention to understand why you are carrying the SKU. Sometimes, you may need to carry the SKU despite being unprofitable to support sales of other highly profitable SKUs or keep customers, among other reasons. However, if the analysis shows that an unprofitable SKU can be removed, consider doing that.

The service level is an important parameter in safety stock calculation. Service level analysis may sometimes happen in tandem with profitability analysis, but can also be done separately. A simple example of why it ties to profitability is this: You are an online-only aftermarket auto parts seller. You will prefer to provide expedited shipping to only certain high-volume customers. This is because while on some shipments, due to low product margin, you take a hit on profitability, because of the high volume and diversity of parts ordered, you eventually end up making a net profit in this account. Whereas if a customer orders sporadically, and the resulting profit is negligible, or you end up taking a hit due to expedited shipping, you do not want to offer free expedited shipping to these customers unless these are strategic accounts you want to culture over some time. Why does this tie to inventory? Because when you define and apply inventory policies, you aggregate them at the product level to categorize a product for formulating a policy. But if you have many customers who order the same product with lumpy demand and are not profitable, these numbers may also end up aggregating.

Network redesign is an easy decision. The closer you are to your suppliers, the less raw material and components inventory you need to keep. And the closer you are to your customers, the less finished goods inventory you need to keep. Network design models help you design balanced supply chain footprints, considering many additional costs and parameters. Most leading network optimization tools have inventory costs baked in, thus emphasizing the role network footprint plays in network design. An “artfully” designed network model can be a focal point of your entire supply chain planning landscape.

Last but not least is product design. The first aspect is decreasing the overall inventory cost associated with a finished product. If you reduce your parts through commonality, you reduce the total inventory you need to carry. Then think from a pipeline inventory perspective. If your product design allows you to ship more parts of an SKU in a container, your inventory position, which includes pipeline inventory in transit, also increases.

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