There are More Cost Effective Ways to Optimize Target Inventory Levels
The single most effective way to ensure the availability of stock items is to maintain sufficient on-hand quantities without breaking the bank. But how do you walk that fine line between having too much inventory and having too little?
Whether we’re talking about raw materials, WIP, or finished goods, manufacturers and distributors have to ensure a high fill rate without investing too much in inventory. If you are currently setting your minimum on-hand safety stock quantities based on a number of days or weeks of average demand, then you very probably have more inventory than you really need and are missing the boat on what safety stock really is for.
The purpose of safety stock is to absorb variation in demand (a.k.a., “spikes”). Averages only characterize steady state demand, not the spikes. Inventory reductions of 25% to as much as 85% have been realized by setting safety stock levels using statistical methods that focus on measuring the spikes rather than average demand. In many cases, overall fill rates have increased while total inventory has decreased, sometimes dramatically. This has a tangible impact on warehouse foot print and fulfillment costs.
For companies that are smaller or whose product demand is more sparse, statistical methods may be hampered by an insufficient number of data points. For these practitioners, an approach known as Demand-Driven MRP (DDMRP) may be useful. DDMRP doesn’t have the same reliance on statistically-derived estimates of demand. It instead provides an inventory control mechanism that is focused on responding to actual demand by dynamically adjusting target stock levels. DDMRP can often be added to existing ERPs as an adjunct system.
Altemir Consulting specializes in inventory optimization and control. Contact us today to schedule a free 15-minute phone call to discuss your particular needs.