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Inventory Optimization. Inventory Optimization. The case for inventory optimization Reduce stock holding 15% to 20% Service levels which match the company’s capacity to deliver Manufacturing stability and improved plant utilization Recognition as a reliable supplier Increased turnover

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Inventory optimization

Inventory Optimization

The case for inventory optimization

Reduce stock holding 15% to 20%

Service levels which match the company’s capacity to deliver

Manufacturing stability and improved plant utilization

Recognition as a reliable supplier

Increased turnover

Improved working capital 6% to 10% improvement on ROE

Optimal use of scarce resources

Benefits of optimization
Benefits of Optimization

Reduced Risk Profile

Improved Service Levels

Streamlined Product Range

More Working Capital

Improved Market Perception

Better Supplier Management

Improved Factory Utilization

Optimal Warehouse Utilization

Greater Flexibility

The inventory problem


Inventory Optimization

Lead Time

The Inventory Problem

Level of Inventory

Footprint of Uncertainty


Inventory risk
Inventory Risk

Primary Risk

Forecast Accuracy

Lead Time Variability

Secondary Risk

Cycle Stock

Batch or Lot size, EBQ, MOQ

Shipping constraints (time, mass or volume)

Lead Time

Review frequency

Data inaccuracies

Poor Management

Elements of inventory



Elements of Inventory

Excess stock

Result of poor forecasts, policy settings or management

Cycle stock (Order frequency)

Determined by batch size, EBQ, MOQ, or shipping constraints

Level of Inventory

Safety or buffer stock

Set to cover the risk to find a balance between service and investment


Inventory optimization suite
Inventory Optimization Suite


Pareto Analysis, batch and manual forecasting, forecast accuracy, simple work flow


Families & Groupings

Pareto and forecasting at higher levels, aggregation and disaggregation of forecasts

Families & Groupings

Inventory Optimization

Track Lead Times, set policy, order & distribution planning, inventory modeling

Inventory Optimization

The supply chain

Service Efficiency

Service Efficiency

Service Efficiency

Service Efficiency

Retail Store

Distribution Centre


Raw Material Supplier

Lead Time

Lead Time

Lead Time





The Supply Chain

Predominant Flow of information

Predominant Flow of materials and goods

Forecasting module

Planning Module


Sales Orders

Invoiced Sales

Forecasting Module

Forecasting Module

Adjustments to History















Families and groupings
Families and Groupings

Objective is to logically group Stock items

Analyze Inventory Movement (Pareto), Generate Forecasts and monitor Inventory Holding and Turns at levels above SKU (Stock Keeping Unit)

Categorize stock into Active, Excess, Slow Moving or Static at each of the levels

Groupings set in F&G used to set policy

Families and groupings1
Families and Groupings

Porsche Family

Volkswagen Family





Brakes Group



Clutch & Gearbox

Clutch & Gearbox

Body Parts

Body Parts

Families and groupings2


in Hecto Litres

Families and Groupings

Aggregate in Units or Thousands

Brand Orange

Brand Apple

Pack Size

Orange 500ml

Orange 300ml

Apple 1litre

Orange 1litre

Apple 500ml

Apple 300ml

Consolidated Warehouse

East Warehouse

South Warehouse

North Warehouse

East Warehouse

Inventory optimization1
Inventory Optimization

Inventory Optimization is the Focal Point for Forecasting and families & Groupings

Define parameters to balance investment & service

Key elements that drive inventory are coordinated, tracked and controlled to optimize inventory

Primary output of IO is time phased safety stock to drive the replenishment through MRP

Optimization work flow
Optimization Work Flow

Forecast process

Approve & write to RP Database

Families and Groupings

Requirements Planning

Policy and Setup

Order Actions Process

Supplier Evaluation

Run Optimization


SCT Actions

Check Variances and Targets





Lead time tracking
Lead Time Tracking

Accurate tracking of actual lead times

Different delivery methods tracked

Lead time variances monitored

Input to Supplier evaluation

Input to risk assessment

Used in calculation of the safety stock

Used in distribution pull calculations

Supplier scorecards
Supplier Scorecards

Evaluation of contribution to turnover and profit

Evaluation of delivery performance

Evaluation of their relative performance to other suppliers

Evaluation of their importance to the business

Evaluation of their relative supply chain efficiency

Inventory policy
Inventory Policy

Policy settings drive the target inventory

Set by groupings defined in F&G

Defines frequency of ordering

Defines stock cover in SCT supplied warehouses

Sets target service levels

Feeds safety stock calculation

Used by MRP to establish quantities to order based on time phased safety stock

Distribution planning
Distribution Planning

Supply chain rules set up between internal warehouses

Rules set for the distribution of stock between warehouses

Will drive both replenishment and re-distribution of excess

De-coupled supply chain with pull logic

Order planning
Order Planning

Plan the order cycles based on planned order frequency, MOQs and supplier constraints (like time, mass or volume requirements)

Set up order calendar allocating all items by warehouse in accordance with planned cycles

Checks for ‘new’ or re-distribution

Can auto-order on internal supplier

Order work flow
Order Work Flow

Families & Groupings Process

Forecast Process

Order Cycle Setup

Distribution Setup

Optimization Process/MRP

Order Action Report

Order Review

Safety stock vs service level
Safety Stock vs Service Level

100 %

3 %

95 %

10 %

90 %

Service Level

85 %

80 %

75 %

70 %

6 weeks

2 weeks

4 weeks


Effects of policy changes
Effects of Policy Changes

Level of Inventory

Level of Inventory

Level of Inventory




Cycle Stock 2 weeks Target service 98%

Safety Stock 5 weeks

Average stock 6 weeks

Cycle Stock 2 weeks Target service 95%

Safety Stock 4 weeks

Average stock 5 weeks

Cycle Stock 4 weeks

Target service 95%

Safety Stock 4 weeks

Average stock 6 weeks