I recently traveled to a Consumer Packaged Company (CPG) headquarters to discuss ways to improve their inventory positions compared to those of their chief competitors. I got to meet with many of the top managers and analysts involved in their supply chain group, and I came away with a new appreciation for the challenges that CPG companies face in today's marketplace.

This supply chain team seemed to be stuck. They had an inventory optimization system installed, but they had not done a lot of updating due to the time and effort it required to create what-if scenarios.  Indeed, many of the original team members had left and the new members were relying on spreadsheets and rule-of-thumb business rules.

I asked the following question: "Why are you trying to attain a service level of 95 percent at your central warehouse in California when your downstream warehouses are also positioned with 98 percent service level?"

You would have thought I had asked them why I had a third eye in the middle of my forehead by the way they looked at me! I explained that a service level at the customer facing location is a logical requirement because you want to fulfill the demand "if" 98 percent came in all at the same time to buy. You can't roll that off chance demand to upstream warehouses.

What are the chances of all of your downstream warehouses running out at once if they are already at 98 percent service level? The answer...slim to none! This is why you don't have to carry so much redundant stock in upstream locations. You can have as low as a 60-70 percent service level at upstream locations and still maintain a customer facing service level of 98 percent.

I bring this up, because I find so many instances in the field where inventory optimization has been implemented and failed, or a team is in place working with limited visibility. So, often these groups have started on their journey of optimization, but they have stopped or been stymied by management. Sometimes it is best to take a look around like this CPG company I visited and take stock of where you are so you can move forward.

There are three major benefits of Inventory optimization that need to be kept in mind:

1. Inventory optimization creates the optimal balance between service levels and investment. It does not mean "less" in all cases.
2. Inventory optimization shows the causes of the inventory.
3. Inventory optimization allows you to explore ways to improve your supply chain.

Companies tend to fall along a spectrum of expertise when it comes to inventory optimization. The spectrum seems to fit along this five-step continuum:

1. Single location/single item: This is done with spreadsheets or simple safety stock modeling with the ERP system.
2. Single site optimization: This is known as single echelon optimization where scientifically set safety stock amounts are placed in a single warehouse. This makes for reduced inventory and/or increased service levels
3. Strategic single site optimization: Allows for the pre-testing of business opportunities in a single echelon environment
4. Multi-echelon optimization: Inventory optimization science is applied across multiple warehouse hierarchies. This further reduces the redundant inventories and creates a much more nimble supply chain.
5. Strategic multi-echelon optimization: Allows for the pre-testing of business opportunities across the network in a fully functional multi-echelon environment.

The CPG company I was visiting with was stuck. At one time they were in step three, but due to attrition in the workforce they were in step two with most of their background in step one.

Oftentimes, everyone needs to take a step back and understand where the team is positioned in its maturity.  The reason for my suggesting this kind of interaction is so we can get off the big bang methodology of installing inventory optimization.  Just because you "can" install it doesn't mean the organization has the ability to act upon the information.

Instead of trying to boil the ocean, the journey needs to be planned so that the steps can be logically developed and the company can take advantage of its own maturity levels.