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How to Avoid Carrying Cost Mistakes in Inventory Optimization

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Inventory optimization has two significant components: acquisition cost and carrying cost. If either of these factors is inaccurate, you could be leaving money on the table. An accurate carrying cost calculation can be the difference between a highly profitable inventory optimization program and one that forces you to close your doors.

Carrying Cost Mistakes: Inventory Optimization Killers

So, you’ve implemented a highly successful PO tracking program, and you know your acquisition cost for each product and location down to the cent (kudos if you’ve read our blog on acquisition cost). Now what?
While many top retailers (or grocers or wholesalers) may include many factors in their carrying cost calculations, we’ve found that most businesses overly simplify their projections, losing valuable margins. We’ve also found out that calculations often leave out real-world restrictions, including:

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The Hidden Connection: Lead Time And Inventory Optimization Explained

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What is Lead Time? Why Is it Important?

Lead Time is the length of days between when an order is placed and the date the goods are available for use. The largest impact to lead time accuracy is found by comparing the expected receipt date to the actual receipt date for each purchase order. In simple terms, the variance is calculated as the absolute value of the difference [expected or requested receipt date – actual receipt date] for each line on the purchase order. These variances in days across multiple purchase orders establish the need for lead time accuracy testing and lead time forecasting.

What is the Impact When Supplier Lead Time is Not Accurate?

Suppliers provide an estimate of lead time, but these numbers are not always accurate. The differences between your expected receipt date and the actual receipt date can lead to significant costs. This is due to unplanned overstocks, out-of-stock situations, and deflated consumer opinions. Furthermore, Lead Time tracking, and Lead Time forecasting are mission-critical to the success of your supply chain.

Math Algorithms are the Key

Lead Time Forecasting, like Demand Forecasting, should use a set of math algorithms to calculate the correct lead time days to use in planning purchase orders. Also, like Demand Forecasting, the Lead Time Forecast should move up and down according to changes in the market, business influences, and seasonality of the product.
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Stop! 3 Essential Inventory Optimization Elements to Add that Increase Profits

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Is Your Inventory Optimization Solution Actually Leading to Profits?

The Inventory Optimization link in your chain is a critical piece to increase profit. How much inventory do you carry to meet future service goals without overstock and high carrying costs? How often should you reorder, acquisition costs like inventory carrying costs will reduce profits. Your inventory optimization solution needs to balance how much to carry, how often to reorder, demand rates, gross profits, pick quantity, supplier minimum, and business rules with a methodology (the math) that maximizes your profits while minimizing your risks.
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7 Reasons Your Inventory Optimization Software Is Not Working

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Predicting the Unpredictable: Inventory Optimization Software

Inventory Optimization – nine syllables, two words, one concept. It means having what you need when you need it. Too much inventory can cut your profit margin; too little inventory can prevent you from meeting demand and tip your customers toward the competition. Sounds simple: but in reality, the inventory optimization math any supply chain process will use is as important as the metal alloy used in forging a chain of metal links. You can find cheap, plastic chains, and you can find expensive chains formed from strong metal alloys with all kinds of irresistible names and features.
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Do You Make These Mistakes with Inventory Optimization?

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Inventory Optimization is a link in your chain that is often misunderstood and misquoted at inventory meetings and sales presentations in many businesses today. Inventory Optimization issues are always easy to find – Buyers, Sales People, and inventory managers of high-volume inventories often complain that there is too much overstocked inventory of slow selling products and not enough of the inventory that is in demand. Sadly, the unnecessary inventory is tying up working capital and taking up much needed storage space. This is a major issue that lowers profits, service attained and customer opinions.
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Superior Inventory Optimization Takes Collaboration-Review 2 Things

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Review the Inventory Optimization Links in Your Chain

Inventory Optimization is often misunderstood due to the ‘creative marketing’ of many software companies that points people in the wrong direction. A well-known supply chain guru wrote an article recently stating that inventory optimization is dead. The reality is that inventory optimization should be a collection of math algorithms applied together to maximize your profit potential while meeting service goals for each product / location. The problem isn’t that this is new math; the issue is that enough people haven’t thought about the problem as a math problem. Most software isn’t written to handle the complex math fast enough to deliver dynamically updated answers to questions like ‘when should I order’ and ‘how much inventory should I carry?’
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Inventory Optimization Pieces that Disable Your Success

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Inventory Optimization: Balance is Key for a Success

How can you ensure the highest levels of success? Merchandisers and Buyers are executing promotions, product assortment changes, and new product roll-out events throughout the year. Those events affect the flow of product into your DCs and stores. They can also affect vendor fill rates and lead time performance. The volume of product purchased from a vendor also changes with those events. Unless you monitor and adjust to those changes, you will lose margin and sales. Inventory Optimization solutions provide value by monitoring the on time performance and volumes of your suppliers and allow you to make adjustments along the way.

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Top 5 Inventory Optimizations You Voted to Improve this Year

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Hottest Inventory Optimization Goals Set for 2013

As we close 2013, let’s review the 5 most popular areas that supply chain people said they wanted to improve. Our research and resulting blog released January 7 of 2013 highlighted 5 areas you said you wanted to improve; how did you do? What areas of your supply chain improved and what areas still have opportunity?

Top 3 Inventory Management Concepts for Improvement in 2013

The inventory concepts included inventory optimization (IO), lead-time forecasting (LT), and supply chain visibility (SC). Oddly, Demand Forecasting (DF) was not one of the top 5 improvement goals of 2013, but that changed dramatically during the year. Sign up for our free blog to learn why and how in a few weeks. Below we have attached the original lead stories for you to review. We will be releasing the most popular supply chain stories and topics of 2013 soon, but let’s review where we started at the end of 2012 to help us learn where we need to go next.
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The Truth about Inventory Optimization: Show Me the Money

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You might be asking why do I need Inventory Optimization? – To increase your profits and cut your costs. A truly optimized inventory results in lower inventory and lower lead times by creating a balancing act of acquisitions cost, carrying cost, vendor minimums, price breaks, gross margin, sales dollars and service goals. Retailers need to review, measure and act on their inventory every day.

Inventory Optimization doesn’t mean Out-of-Stock or Over-Stock

Just last week, a retailer wanted to know how his optimized inventory resulted in overstock and out-of-stock at the same time. We hear this question all the time and the answer is simple. This retailer doesn’t have a true demand driven optimized inventory because they don’t own an inventory optimization solution or the solution they are using doesn’t really optimizing inventory, or they don’t use the software they own preferring to rely on holding their thumb up to feel which way the wind is blowing among other old-school tricks.
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Two Expensive Inventory Issues: Which Do You Fix First?

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Do you know the root causes of the four common inventory issues: out of stock, overstock, bumpy cash flow, and lost sales? Your goal is to have the right products in the right quantity at the right locations just in time to sell with terms from your supplier that allow you to use your money again before you pay the supplier. No one would argue the success of this strategy, so where is all the grief? In truth, there are four root causes of the most common inventory issues. Unfortunately, many companies fail to identify and act on these root causes, resulting in lost profits in the form of lost sales and higher operating costs.

  • Out of Stocks – Supply Chain Issues
  • Overstocks – Operation Problems
  • Bumpy Cash Flow – Planning & Finance
  • Lost Sales – Customer Service Issues
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