supply chain process

Factors Driving Inventory Management and Optimization in Supply Chains

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Key Takeaways

⇨ Supply chain complexities have grown tremendously and arise from the interconnectedness of systems, processes, locations, and partners that companies must navigate

⇨ As companies struggle to find the right balance between just-in-time and just-in-case approaches, the significance of implementing effective inventory management processes cannot be overstated.

⇨ Supply chain visibility allows companies to make informed decisions, optimize them, and improve supply chain performance.

Supply chain resiliency is the primary driver for inventory management and optimization

A multitude of internal and external factors can pose challenges for supply chain resiliency. These challenges may stem from economic volatility, evolving customer expectations, and various other risks. As a result, companies must consider a broad range of business factors to navigate these challenges effectively.

SAPinsider’s benchmark report on Inventory Management and Optimization revealed that the primary driver for organizations is the increased risk of disruptions, accounting for 46% of concerns. This underscores the importance of proactive supply chain risk management. With 34% of organizations recognizing the need, the demand for agile supply chains has also emerged as a critical driver. Additionally, SAPinsiders identified coping with the exponential growth of enterprise data as the third most vital driver, representing 24% of the total.

The top drivers for inventory management and optimization identified by the research report are:

Supply chain resiliency: Supply chain resiliency is rapidly becoming a strategic priority for organizations. The ongoing disruptions in supply chains, such as shortages in supermarkets and port congestions, are predicted to continue throughout 2023. Therefore, there is an increasing need to change the way organizations plan and operate supply chains to prevent facing large and consecutive disruptions in the future. This has resulted in a greater emphasis on enhancing supply chain resiliency. While businesses worldwide are exploring different approaches to manage this problem, technology will be a facilitator in effectively managing disruptions. 

Supply chain complexities: Supply chain complexities have grown tremendously and have become a defining characteristic of the global business environment. These complexities arise from the intricate interconnections of systems, processes, locations, and partners that companies must navigate. Agile supply chains have become a top priority for companies due to the immense levels of complexity. Implementing strong inventory optimization capabilities can help organizations enhance the flexibility of their supply chains. As companies struggle to find the right balance between just-in-time and just-in-case approaches, the significance of implementing effective inventory management processes cannot be overstated.

Visibility: Developing agile and resilient supply chains requires a critical capability that is, visibility. Visibility is a crucial driving factor for supply chain optimization. Having visibility into various aspects of the supply chain, such as inventory levels, order status, and transportation activities, companies can make better-informed decisions and improve supply chain performance. Companies can also anticipate potential disruptions and take corrective actions before they occur and optimize processes and reduce costs. Organizations are investing heavily in systems and solutions to gain visibility into their supply chain processes, including inventory management. However, although these solutions have enabled organizations to collect data on their supply chain processes, they have created large and fragmented data pools. Addressing the issues related to massive, fragmented, and siloed data sets is a significant driver for organizations.

Technology: To improve supply chain visibility and management, organizations feel the pressure to leverage advanced and emerging technologies like IoT and cloud computing. Additionally, they are looking to get better at asset utilization and reduce asset-related costs. As technology and computing power continue to lower barriers to entry, organizations must compete with newer, more agile players for the same customer pool. In this context, it is critical for organizations to embrace the latest digital tools and technologies to effectively compete against these new, disruptive competitors. Robust inventory management and optimization capabilities can help them fulfill customer demands effectively and efficiently.

Other factors driving inventory management and optimization in supply chains are:

Customer demand: One of the other drivers of inventory management is customer demand. Companies need to maintain sufficient inventory levels to meet customer demand while minimizing excess inventory that can tie up capital and increase storage costs.

Lead time: Lead time is the time it takes for an order to be fulfilled—from the time it is placed until it is delivered. Lead time variability can significantly impact inventory management, as companies need to maintain enough inventory to cover demand during longer lead times.

Cost of carrying inventory: Inventory carrying costs, including storage, insurance, and financing costs, can be significant for companies. Therefore, inventory optimization involves finding the right balance between carrying enough inventory to meet customer demand and minimizing the costs associated with carrying excess inventory.

Supply chain disruptions: Supply chain disruptions, such as natural disasters or transportation issues, can impact inventory management. Companies need to be prepared to adjust their inventory levels to ensure that they can continue to meet customer demand during disruptions.

Production capacity: Production capacity limitations can impact inventory management, as companies need to maintain enough inventory to cover demand during periods of high production activity and minimize inventory during periods of low production activity.

Cost of production: The cost of production can impact inventory management decisions. Companies need to balance the cost of producing more inventory against the costs of carrying excess inventory.

Effective inventory management and optimization require a deep understanding of the supply chain and its various components, including demand, supply, lead times, and costs. Companies that can effectively balance these factors can improve customer service levels while minimizing costs and improving overall supply chain performance.

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