Inventory Optimisation

GRA’s strategic and holistic approach to inventory management optimises the complex relationships between costs, capacities, constraints, target service levels, variability and risk (such as forecast error and supplier delivery performance) for each item at each location across the supply chain network to increase service levels, improve cash flow, reduce operating costs, and improve the management of working capital.

Challenges

Despite being classified as an asset, investments in inventory often do not undergo the same rigor and analysis as investments in other types of assets, particularly plant and equipment. 

In addition, the optimisation of inventory is not an isolated or static activity. It requires an approach that is closely integrated with other supply chain activities and has the capability to respond to factors such as changing demand patterns. However, the relationship between these factors can be complex and difficult to interpret and manage.

As a result, poorly managed and misbalanced inventory may result. Symptoms and consequences of this include:

  • Understocked Inventory
  • Overstocked Inventory
  • Poor & Inconsistent Service Levels
  • Diminished Margins
  • Frequent Rescheduling
  • Excess Ordering Costs
  • Expedite Costs & Premium Prices
  • Poor Capacity and Storage Utilisation
  • Asset Downtime
  • High Obsolescence & Write-Off Costs
  • Unnecessary Overtime
  • Opportunity Cost
Opportunities

For capital intensive businesses, Inventory Optimisation represents a unique opportunity to create competitive advantage and generate substantial return on investment through better management of working capital, improved customer service levels, greater return on assets, and by reducing supply chain operating costs as a percentage of sales, increased profits.

By dynamically optimising inventory parameters, this process also enhances the ability of organisations to respond to external factors, buffer volatility and realise the cost & service benefits of process improvements.

Approach

GRA’s approach to inventory optimisation involves two key steps.  Firstly, we take a strategic view of inventory, which focuses on the network structures, inventory segmentation and appropriate stocking policies to best fit an organisation's strategy. Using our analysis tools and techniques, GRA can run simulations and model different scenarios to show the impacts of different service levels and locations on inventory investment.

Secondly, there is the operationalising of these policies. This involves calculating the optimal inventory parameters, including safety stocks and order quantities, for the purposes of planning and replenishment. In a best-in-class scenario these inventory parameters should be regularly recalculated in order to keep inventories optimally balanced as key factors and drivers change. 
This approach considers all key drivers of inventory, including:

  • Inventory carrying costs
  • Inventory receiving costs
  • Demand forecasts and variability
  • Lead-times
  • Service levels
  • Production capacity
  • Manufacturing/vendor minimums and multiples
  • Yields and supplier variability
  • Transportation and warehousing constraints
  • Trading terms and sourcing options

This dynamic approach means inventory parameters always reflect the most recent changes in these inputs. As such, GRA also works with clients to improve these inputs – including forecast accuracy and manufacturing variability – to drive lower overall inventory levels that deliver the same, or better, service level results.

GRA also utilises the following capabilities and techniques as appropriate when optimising inventory:

  • Service Level & Constraint Based Optimisation
  • Bill of Material (BOM) and Multi-Echelon Optimisation (MEO)
  • Network Flow Optimisation (NFO)
  • Maintenance Repair & Overhaul (MRO) optimal mix analysis
Outcomes

Inventory optimisation effectively allows organisations to “achieve more with less”. The following questions are answered by this approach:

  • What stocking and replenishment strategies deliver the best outcomes for the organisation?
  • What is the optimal mix of inventory that will deliver service level targets given costs and constraints?
  • What are the optimal inventory parameters for every item at every location given these considerations?
  • How should inventory be segmented into appropriate behavioural and management categories? 
  • What policies and methodologies do we need to support inventory management?
  • Where are the opportunities to improve service levels and reduce inventory?
  • How can we better support customer service offerings?
  • How can we reduce expediting and obsolescence costs?
  • What are the impacts of inputs and constraints on inventory?
  • What additional process and system improvements are available to deliver further results?
  • How can we gain greater business engagement in the management of inventory?
Benefits

Benefits resulting from the effective application of this approach to Inventory Optimisation include:

  • Increased service levels up to 99.9%
  • 20-40% inventory investment reduction
  • 10%-15% reduction in supply chain operating costs
  • Significant working capital improvement
  • The ability to fund business initiatives from operating cash flow (OCF) 
Improvements
  • Compressed cash-to-cash cycles
  • Improved return on capital employed / net assets
  • Improved debt to equity ratios
  • Improved capacity and fixed asset utilisation
  • Improved relationships with suppliers and customers
  • Integration of business strategy and operational practices

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Testimonials

"After undertaking a broad diagnostic, GRA identified some great opportunities for our business. The GRA team worked effectively with management to prioritise the key areas of focus in terms of inventory reduction, freight cost optimisation, distribution network structure and broader organisational processes such as S&OP."

– Andrew Coventry, Catalyst Investment Managers Pty Ltd

Typical results

  • 20-40% inventory investment reduction
  • increased service levels ranging up to 99.9%
  • 10%-15% reduction in supply chain operating costs
  • 5%-20% spend management savings
  • the ability to fund business initiatives from operating cash flow (OCF) improvements
  • improved return on capital employed (ROCE)
  • a minimum 3:1 ROI (10:1 to 30:1 typical)