Retailers around the globe struggle to accurately forecast demand and, more importantly, optimise inventory levels. Consequently, this has a massive effect on bottom-line profitability.
My last blog post focused specifically on the problem of “getting the size mix right” that retailers face and how advanced analytical techniques can provide a solution. In this post, I would like to talk about how retailers can use optimisation to calculate optimal inventory levels.
The efficient frontier for cost and service levels
The current state (figure) shows the relationship between cost and service levels. In the example, we can move from the current state to the optimised state by improving service levels without increasing cost using optimisation techniques to get the optimal mix of inventories.
Let’s contextualise this. Think about every time you walk down an aisle for a given product (cereals come to mind for some reason). There’s clearly a lot of choice for customers (cereal types, sizes, brands, etc). Retailers must consider quite a few things:
- What is the trade-off in profitability between customer service levels and inventory cost?
- What is the impact on factors such as seasonality, promotions and other factors across the supply chain when looking at time-phased safety stocks?
- The quantities of inventory at SKU level across store locations at different periods of time.
- How to determine optimal order quantities for SKUs based on forecast demand.
Optimisation solutions are designed to help retailers get the right quantities of SKUs to meet customer demand. These solutions typically calculate parameters such as order level, order up to level and safety stock for a given product and a given store. These parameters are then fed into ERP and supply chain management solutions.Inventory optimisation solutions are designed to help #retailers get the right quantities of SKUs to meet customer demand. #retail #analytics Click To Tweet
There are clearly tangible benefits for retailers:
- Increase in sales.
- Improve customer service levels.
- Reduction in stock-outs and inventory cost.
- Here is a great story on how inventory optimisation has helped a retailer to reduce stock-outs and improve the customer experience: https://www.sas.com/en_us/customers/matas-dk.html