How to Improve Your Supply Chain through Inventory Optimization

How to Improve Your Supply Chain through Inventory Optimization

Autor : Ian Gabrielides

The trouble with Inventory is…

Inventory covers a multitude of sins.  Therefore, at Milliken, we aim for ZERO inventory. That’s right, ZERO Raw Material (RM), ZERO Work-In-Progress (WIP) and ZERO Finished Goods (FG). That doesn’t mean to say that you won’t find RM, WIP or FG in our plants, you will, but aiming for ZERO does several things

  • Communicates across the organization that inventory is a loss, a luxury
  • Behaviors are and attitudes towards inventory are aligned to supply chain management
  • Ensures that inventory is measured, tracked, and focused upon at all levels of the organization
  • Challenge’s mindsets relating to inventory requirements
  • Drives the relentless pursuit of inventory reduction

Inventory allows us (Milliken) to service our customers, to be able to provide our customers with the products they want, when they want, in the quantities that they want. We realize there are costs associated to doing this – inventory isn’t free. By aiming for ZERO, we commit to reducing inventory, but not at the expense of our service performance.

Performance Solutions by Milliken has supported several organizations to identify their true total cost(s)/ losses associated with storing inventory. These cost/losses include the capital consumed to manufacture/ purchase the inventory, warehousing & storage, taxes, damage, and obsolescence.


Why do Organizations Hold Inventory?

So, besides the want to service the customer; why do organizations incur these logistics costs and hold inventory? To put it simply, inventory can be an easy solution when an organization faces challenges concerning inefficiencies and variation. These inefficiencies manifest themselves in several forms of waste

  • Excessive lead-time(s)
  • Incoming material variation
  • Inconsistent machine/ process performance
  • Poor right-first-time

Keeping inventory protects the customer from such inefficiencies. However, servicing the customer and pursuing inventory optimization isn’t an either or. You can and should do both!

Global events have had a profound effect on supply chain inventory across the globe. Not a single supply chain would have been unaffected by the effects of the United States reshoring from China, the United Kingdom leaving the European Union, cycles of what feels like a never-ending global pandemic, global shipping container shortages, global microchip shortages, labor shortages, the European emissions scandal(s) and global competitors taking advantage of the advancements in digital enterprise amongst others. These events have made business leaders refocus on their supply chain operations. Resetting strategies, challenging their supply chain leaders to deliver more robust yet agile processes, and optimize inventory management.


Inventory Reduction is the process of habitually reducing the amount of inventory towards the goal of ZERO inventory.


Inventory Optimization is the strategic process of balancing inventory and processing exactly what the customer wants, in the quantities they require and when they require it.


Supply Chain operations are best improved in by having a lean supply chain strategy, and a model that can deliver on the strategy.



Improving Inventory Management by Understanding Customer Needs

The first step is to make inventory optimization techniques a part of your Supply Chain optimization strategy. Inventory reduction starts with working closely with your customer base. Understand what the customer wants and challenge the status quo to boost customer satisfaction.

  • What quantities do you require?
  • What is the earliest point that you can let us know when you require them?
  • How do you want goods delivering?
  • Could you take an alternative product from our offer?

Many organizations handle legacy Stock Keeping Units (SKUs) that tie up capital and can often age or become obsolete. Working with customers there may be an opportunity to migrate to a standard product.

Some organizations, not the market, drive product offer complexity and thus make a ‘rod for their own back’. Offering unnecessary customization when the customer doesn’t want or need the level of customization on offer. Again, there may be an opportunity to work with the customer to reduce/ standardize SKUs and subsequently reduce inventory levels and increase efficiencies.


Reducing Waste to Optimize Inventory Levels

Once you have confirmed what the customer wants and what room for maneuver you have, it is now time to focus inward to recognize and eliminate/reduce waste.

Many organizations have information flow issues that drive longer lead times and in turn create an artificial inventory requirement. Focusing on waste in these back-office processes, that link the customer with all parts of the organization through to the supplier base will lead to inventory reduction. Improving the responsiveness to market/customer changes will positively impact inventory levels. Getting better at processes such as demand forecasting accuracy will further drive down inventory levels and prevent obsolescence. All these processes rely on effective information flow.

Focusing on, understanding, and improving flow is a crucial driver to reduce inventory. In addition to the information flow opportunities, there will always be material and human resource flow opportunities. Devising a Value Stream Map (VSM) and adopting a routine habit of mapping will enable an organization to routinely identify and attack these opportunities.


How is Inventory Reduction Measured?

As improvements are made, it is important to verify their impact on the strategic supply chain ambitions of the organization. There are several methods in which supply chain managers can measure inventory reduction. Two of which are days of inventory and stock (inventory) turns.

Days of inventory is a measure of the average time an organization can process its inventory into sales.

    Inventory Days = Closing Stock or Average Stock



      COGS   X 365  


Stock turns are a measure of how quickly an organization can sell (turn) its inventory. 

    *Inventory Turns = COGS = Units Sold x Unit Cost  
      Inventory Cost   Units in Stock x Unit Cost  
    **Inventory Turns = Sales = Units Sold x Unit Selling Price  
      Inventory Cost   Units in Stock x Unit Cost  


*Preferred measurement method 
**Alternative measurement method

Other organizations may only use the inventory value, but this alone doesn’t always tell the whole story (though inventory value may well be a measure of a strategic objective). Whichever set of measures you choose to adopt it’s important to habitually track progress. After all, you can’t improve what you don’t track! Contact Performance Solutions today to get started.