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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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Changes in Demand Forecasting and Inventory Replenishment Methods: Top 5 Blogs of 2013

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Demand Driven Inventory Management: Your Target in 2014

Demand Forecasting and Inventory Replenishment Methods were the top stories (blogs) downloaded and reviewed in 2013. Based on the number of readers and average time spent on a page (3min), these 5 stories stayed in front all year long. These stories are good indicators of where companies like yours see their opportunity to use better methodologies and new technology for higher supply chain profits in 2014.

Change is Good. Do You Know the Right Questions?

The marketplace changes faster today than anyone could have predicted 5 years ago. While many supply chain analysts have touted the need to be demand driven, the facts show that most retail, wholesale, and grocery businesses have done little to improve their processes. The good news is today hardware can run 3-5X faster than 5 years ago at 1/2 the cost. The bad news is that software systems cannot just be ‘upgraded’ to make use of the new hardware, forcing business to accept 3rd rate results or outlay large amounts of cash to write new software. Software companies have made it very difficult for buyers to understand what is old technology with a new wrapper and what is really new software technology. The following top stories of 2013 highlight the right questions to ask, why the questions are important and the answers you should expect.

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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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LeadTime and Seasonality: Top 5 Replenishment Blogs of Summer

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Hottest Summer Topics of 2013: LeadTime and Seasonality

LeadTime, Lead Time Forecasting and Seasonality /Market Trends are the top interest blogs (stories) from Summer 2013. Based on the number of blog viewers and average time each viewer spent on each page, the following five blogs are 3-1 favorites from Summer 2013. These blogs indicate the key areas that companies want to improve going into the key fall sales season in 2013.

 

LeadTime and Lead Time Forecasting Do’s and Don’ts

LeadTime and Lead Time Forecasting (LT) are critical in the supply chain today. Tracking lead time variance and vendor fill rates may make a nice report; but reports don’t help you manage product service levels. We have customers who grew their gross margin over a million dollars from implementing our Lead Time Forecasting module; the ROI from effective Lead Time Forecasting is huge. While knowing when lead times change is important, most of you agree that how you use your lead time variance and fill rate (you are tracking lead time variance and fill rates right?) to improve your product/location service attained is the real goal in your supply chain
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Inventory Optimization: Putting it in to Practice

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We’re wrapping up an informative series on inventory optimization today: we’d like to give you some advice on actually putting it all in to practice. If you haven’t been with us throughout the month, the series has included:

What’s the Payoff?

What are the aims of Inventory Optimization? We argue that Inventory Optimization aims to improve your margins through a net reduction of acquisition and carrying costs. So what does this look like?

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The 3 Most Ignored (and Profitable) Factors in Inventory Optimization

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When is the last time your Inventory Optimization (IO) program saw the inside of a warehouse, the bed of a truck, or a container floating across the ocean? Most inventory optimization programs overlook the harsh realities of replenishment and logistics. How does your program stack up?

Note: We’re in week four of our series on inventory optimization.

Oft-Overlooked Inventory Optimization Factors

While it’s true that inventory optimization is largely a math equation, the devil (and the profit) is in the details. Most solutions talk about carry cost, acquisition cost, and profits because it sounds good and seems impressive, but what is really happening under the hood of your IO solution? Read more

Lead Time Forecasting: Are Your Shelves Overstocked or Out-of-Stock?

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Time is money – making lead time forecasting critical for your business. Over the next three weeks we will take a deeper look at lead times and the impact they have on today’s retail market supply chain.

A lead time of 60 days or more can become the largest influence in your safety stock due to variations in the actual lead times for receipted goods. The variations between actual lead times and also the differences between actual and expected lead times will need to be offset with the use of additional safety stock which lowers your profit margins significantly.

Do you find yourself looking at what inventory you have on the shelf while you wait for the slow boat to cross the Pacific? Do your suppliers provide an estimated lead time that quickly comes and goes and leaves you with overstock or out-of-stock? A recent study of a Top 100 North American Retailer showed lost sales of over a million dollars in gross margin due to inaccuracy in their lead time planning.

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