Inventory Optimization
Optimum Profit Consulting provides Inventory Optimization as a consulting service. Optimum Profit Consulting’s Inventory Optimizer (OPCIO) can perform single-echelon and multi-echelon inventory optimization. Optimal inventory targets and safety stocks are based on several factors:
OPCIO will calculate the cycle stock, prebuild stock, in-transit stock and safety stock for every part/location combination in the inventory model. Multiple inventory simulations can be performed by changing the target service level by part class (e.g. change the A1 parts service target from 97% to 98%). After the inventory plan is developed the inventory targets can be entered into the company’s Enterprise Resource Planning (ERP) system to drive future manufacturing, transportation and purchase orders. The output from OPCIO to be entered into the ERP system at the part/location level can include:
While many companies believe they have more inventory than they should the bigger problem is usually with the mix of inventory. As product demands change over time the inventory parameters need to also change. IO can be used to re-calculate the inventory parameters as often as desired to keep a company’s inventories aligned with constantly changing demand patterns.
Inventory Optimization Outputs - Historical Performance
The first set of outputs from the OPCIC are historical performance in both dollars and units. Also shown below is the historical service level and inventory turns by part class. All of these metrics are calculated at the part/location level and summed up by part class.
Optimum Profit Consulting provides Inventory Optimization as a consulting service. Optimum Profit Consulting’s Inventory Optimizer (OPCIO) can perform single-echelon and multi-echelon inventory optimization. Optimal inventory targets and safety stocks are based on several factors:
- Part/location
- Demand history and/or forecasted demand
- Historical inventory levels by part/location
- Demonstrated lead times
- Lead time variability (if measured)
- Average purchasing lot size
- Manufacturing lot sizes
- Gross margin or revenue by part/location
- Unit cost per part/location
- Part classification (this will be calculated)
- Target service level by part class
- Inventory strategy by part class
OPCIO will calculate the cycle stock, prebuild stock, in-transit stock and safety stock for every part/location combination in the inventory model. Multiple inventory simulations can be performed by changing the target service level by part class (e.g. change the A1 parts service target from 97% to 98%). After the inventory plan is developed the inventory targets can be entered into the company’s Enterprise Resource Planning (ERP) system to drive future manufacturing, transportation and purchase orders. The output from OPCIO to be entered into the ERP system at the part/location level can include:
- Target inventory position
- Safety stock (fixed quantity or days of coverage)
- Reorder point and order up to quantity
While many companies believe they have more inventory than they should the bigger problem is usually with the mix of inventory. As product demands change over time the inventory parameters need to also change. IO can be used to re-calculate the inventory parameters as often as desired to keep a company’s inventories aligned with constantly changing demand patterns.
Inventory Optimization Outputs - Historical Performance
The first set of outputs from the OPCIC are historical performance in both dollars and units. Also shown below is the historical service level and inventory turns by part class. All of these metrics are calculated at the part/location level and summed up by part class.
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Inventory Optimization Outputs - Planned Future Performance The columns highlighted in yellow below allow for the Inventory Strategy and Target Service Level to be changed by part class. This enables rapid simulations to be performed to see the trade-offs between service levels and inventory dollars and units. 
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OPCIO Opportunity
The chart below shows how a customers inventory and service levels improve with inventory optimization. The green color shows the cycle stock needed to meet demand, the blue color shows the prebuild inventory due to minimum lot sizes and the gold color shows the optimal amount of safety stock needed to deliver the service levels shown on the horizontal axis. The red circles and line show the starting point (79.6% service with $65.0MM in inventory) and the future improvement goal (95.5% service with $54.2MM in inventory). The dollar amounts on the vertical axis differ for each customer but the possibility for significant improvements in inventory dollars and/or service level apply to every company. For more information on Inventory Optimization email elawton@optimumprofit.net or call or text to 770-617-6075.
The chart below shows how a customers inventory and service levels improve with inventory optimization. The green color shows the cycle stock needed to meet demand, the blue color shows the prebuild inventory due to minimum lot sizes and the gold color shows the optimal amount of safety stock needed to deliver the service levels shown on the horizontal axis. The red circles and line show the starting point (79.6% service with $65.0MM in inventory) and the future improvement goal (95.5% service with $54.2MM in inventory). The dollar amounts on the vertical axis differ for each customer but the possibility for significant improvements in inventory dollars and/or service level apply to every company. For more information on Inventory Optimization email elawton@optimumprofit.net or call or text to 770-617-6075.
A second way to look at the chart of Optimal Inventory Dollars vs Service Level is to start with the current performance position of 79.6% service with $65.0MM of inventory. In the chart below any position in the "Improvement Opportunity Area" represents a n improvement in service level and a better use of inventory dollars.
Optimized Inventory Results
The table below shows optimized inventory and service levels for several customers in a variety of industries. This process can be completed in as little as a week and at a very affordable cost. The results of this optimization can be uploaded to your ERP system as static safety stock targets by part/location or as periods of cover by part/location and your standard MRP run will create the manufacturing work orders and purchase orders to maintain your desired service levels.
