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Mastering Inventory with Strategic Optimization Techniques

Inventory Optimization for Long-Term Success

By
Jason Dyer
SAP Inventory Optimization

Maximizing Business Performance Through Strategic Inventory Optimization

We’re going to delve into the crucial aspect of inventory optimization within supply chain management, emphasizing the significance of understanding fundamental principles and adopting a sustainable approach. By exploring the methodology, potential outcomes, metrics, and underlying mechanisms, this paper provides actionable insights for organizations aiming to enhance their business outcomes through inventory optimization initiatives.

Efficient inventory management is a cornerstone of successful supply chain operations, with optimal inventory levels directly impacting business performance. While the concept of inventory optimization is not novel, its implementation often proves challenging. We advocate for a holistic approach, focusing on sustainable strategies rather than short-term fixes; a lifestyle change vs. a fad diet to put it another way.

Before diving into optimization techniques, it is imperative to educate teams on the underlying principles of inventory optimization. This starts with cultivating daily habits to ensure data integrity. SAP must reflect the current reality of the supply chain before we can think about optimization. This means overdue MRP elements are brought current or closed if appropriate. It means actively managing and addressing MRP exceptions daily. Once we’ve established a strong daily cadence and are working toward better data integrity, we can begin identifying optimization opportunities through comprehensive analysis, understanding the influence of master data on performance, and tailoring strategies to specific scenarios.

Structured Approach to Implementation

A structured approach is essential for successful implementation. This involves creating standardized processes, setting clear targets and timelines, and fostering a culture of continuous learning and improvement. The education required goes far beyond the typical transactional processing training provided during an SAP implementation and digs deep into underlying supply chain principles and strategies, as well as how to use master data to implement these strategies in SAP. It should use a “learn by doing” approach with real data, rather than a sterile test lab environment. By engaging in hands-on exercises in the live environment with expert guidance, teams can solidify their understanding and internalize the optimization approach.

Scalability & Quick Wins

Scaling optimization efforts require a systematic approach. By identifying key drivers of high inventory levels and leveraging early manual efforts to develop scalable solutions, organizations can achieve quicker outcomes. Here, it’s important to avoid blanket settings based purely on material characteristics. Too often, two items that are seemingly very similar have very different demand patterns and require different management strategies. An item that is sold weekly, for example, would be managed very differently than an item that is ordered once per quarter. The scaling strategy must consider this. Collaboration with MRP controllers that are most familiar with the items they manage facilitates this understanding and informs mass updates to material masters, ensuring consistency and accuracy across the supply chain.

Performance Metrics

Measuring the success of inventory optimization initiatives requires tracking relevant metrics. These include exceptions, overdue MRP elements, average daily usage, and inventory turns. A downward trend in exceptions and overdue elements indicates improved efficiency while increasing inventory turns signify enhanced throughput.

Underlying Mechanisms

At the core of inventory optimization lies the concept of throughput. By aligning strategies with customer demand, lot sizes, and safety stock requirements, organizations can improve overall throughput. This approach prioritizes reality over conventional methods, ensuring optimal management of diverse inventory items.

Potential Pitfalls & Mitigation Strategies

Despite its benefits, inventory optimization presents challenges. One common pitfall is the tendency to chase local optima, neglecting the holistic system perspective. This may mean lower operational efficiency on non-bottleneck resources, which can be a real challenge for organizations to accept. However, it is imperative to maximize throughput and right-sizing inventory. Maintaining tight collaboration between planners, schedulers, and operations teams can mitigate this risk, facilitating agile decision-making and fostering adaptability within the supply chain.  It’s critical that leadership understands these concepts and sets the right performance expectations. Another common challenge is empowering front-line MRP controllers to manage key master data settings based on their expertise and familiarity with material performance.  While we understand the desire to have tight control over master data, too often a centralized approach leads to blanket, default settings based on material characteristics and not on demand patterns. This one-size-fits-all approach is often a direct path to high inventory levels and slow-moving and obsolete stock. True optimization requires that all levels of the organization adopt a different mindset, often breaking with long-established traditions. Breaking through this barrier is typically the hardest part of the process.

Achieving optimal inventory levels is not merely a goal but a continuous journey toward enhancing business performance. By embracing foundational principles, adopting structured implementation approaches, leveraging performance metrics, and fostering a culture of collaboration and continuous improvement, organizations can navigate the complexities of inventory optimization and drive sustainable growth in the ever-evolving business landscape.

Transforming What Matters

A Reveal transformation goes way beyond transactional execution. We teach your team the ins and outs of using SAP to run the business. What master data settings are needed to achieve the behavior we’re looking for from a given material? How do I decide what lot size to use?  What is the right level and strategy for safety stock?  What in the world is “dead stock” and why should I care? When should I consider using consumption-based planning in MRP?  Beyond SAP, we dig into core supply chain principles, and teach the team how to work together in an integrated, collaborative fashion to drive improved business results, all in a learn-by-doing atmosphere where concepts are introduced, and then immediately applied in the live system so the impacts are felt right away. People emerge from a transformation loaded with deep knowledge of SAP, empowered to think critically about daily supply chain challenges, and prepared to collaborate in ways many never knew were possible. This comprehensive approach is why our clients routinely recognize such incredible business results, in particular lowering inventory by 15-20% within 12-18 months, and in a sustainable fashion that continues to drive additional value into the future.

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