Inventory optimization is more than just a nifty demo


The key to a successful inventory optimization has more to do with organizational goals than what you can witness in a nifty demo. I know that sounds glib, but as I said before, the proof of good inventory optimization has more to do with aligning a balance between inventory costs and attainable service levels than understanding the ways a user can manipulate the inputs and outputs.

Obviously, manipulation is important, but it is critical to understand that 95 percent of the work accomplished by inventory optimization is done behind the scenes, and the output makes inventory control and replenishment easier. The focus should never be taken off the ultimate goal of  broad-range improvements in the areas of:

  • Increased customer service (service level).
  • Increased revenue (decreasing lost sales from out of stocks).
  • Reduced inventory costs (right sizing inventory vs. demand and supply variables).

In the field, however, optimization gets confused with management and control.  It is hard to overcome 30 years of controlling inventory by way of an outlier report!

Inventory management is not inventory optimization

I am amused at how inventory management is palmed off as inventory optimization. Building a replenishment system with all the bells and whistles centered on buyer activities, driven by business rule alerts, and then calling it optimization just confuses the market space. However, that is what happens when a hot industry solution becomes vogue.  

Many times these so-called inventory management systems that sell themselves as optimization only really optimize about 10 to 20 percent of the inventory items and then segment the rest and apply business rules for best results. In the end, the vendor will claim that "optimization" is too hard and being close enough with business rules is good enough.

These inventory management practitioners are missing the point, just as ERP systems missed the point by assigning blanket weeks of supply numbers in a one-size-fits-all fashion. The buyers get overrun with out-of-tolerance inventory levels and have to quickly alter orders and increase their overall workload, which could have been avoided by true optimization routines.  

Inventory optimization is a gentle balance that allows technology to do most of the inventory management that you've always done it in the past.  For instance, when inventory optimization assigns unique inventory and replenishment policies for each product/location combination, it is enabling the system to right size the required inventory automatically instead of having a buyer constantly review out-of-tolerance products using an outlier report.

Inventory management is a bottom-up process designed to overcome out-of-balance inventories at the buyer level.  Inventory optimization is a top-down process designed to alleviate the out-of-balanced inventories before they ever reach a point of needing a buyer intervention.

Which brings me to my "nifty demo" comment.

When I am called upon to"demo" inventory optimization, I have a vast array of different bits of functionality I can show.  The SAS interface is a robust system designed to allow users to make both tactical and strategic changes to inputs and outputs of optimization so they can create different business scenarios.  Moreover, the replenishment functionality gives the user complete order manipulation.

The thing is, though, in every successful installation, the results of the optimization mean there are less and less "hair on fire" buyer overrides usually found in inventory management/control.  Indeed, when I am asked by  viewers of a SAS demo about the "day in the life" activities of a user....I just make the screen go black!

Users don't have to constantly use SAS Inventory Optimization on a daily or weekly basis like they would a buyer-based system.  Over time, the system optimizes so they are only making changes to inputs or outputs to achieve strategic business opportunities like increasing services levels at the same inventory cost or approving a service level agreement that might have taken months to analyze before, but doing it in SAS Inventory Optimization happens in minutes.

The point is.....SAS Inventory Optimization is designed to save buyers and analysts time.  There is a tremendous amount of functionality, but 95 percent of the time, the solution is running in the background to make your ERP investment work better without a lot of intervention! 


About Author

Bob Davis

Principal Industry Consultant

Bob Davis is a Principal Industry Consultant in the Supply Chain Management Solutions group at the SAS Institute. From 2000 to 2013 Davis was Principal Product Manager for SAS Inventory Optimization, Service Parts Optimization and Supply Chain Intelligence Center. Prior to joining SAS, Davis worked for over 20 years with Nestles and ConAgra in their Grocery Products Divisions. While at SAS Davis has helped SAS develop expertise in supply chain cost analysis in the fast moving consumer products industry, inventory optimization, service parts optimization and sales & operations planning. He is a recognized global expert in multi-echelon inventory and replenishment optimization. He has been featured as a speaker and writer on the topics of demand-driven supply chains and service chain processes. He has spoken at such conferences as the Council of Logistics Management, Logicon, BetterManagement Live and Frontline’s Supply Chain Week.

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