Electrocomponents, a UK based distributor of electronics and maintenance products, increased profits by £36 million by using inventory optimization to achieve higher service levels while reducing inventory.1
One of the biggest challenges for most retailers is optimizing stock levels. When should you buy stock, how much stock do you need to buy? Do you have too little or too much?
How you make these decisions, operationally, will depend on what functionality is provided by your warehouse management system (WMS) or enterprise resource planning (ERP) system. For the purposes of inventory optimization, these systems fall into three broad categories:
- No inventory optimization functionality (dumb)
- Threshold based inventory optimization (naive)
- Forecast driven inventory optimization (smart)
No inventory optimization
The most primitive systems (dumb systems) only allow you to track how much inventory you have in stock and perhaps how much you have on order (from suppliers) and/or how much has been allocated to pending orders. However they don’t provide any way to specify minimum, maximum or target stock levels and thus they can’t answer questions like, “What stock do I need to order?”.
If your order management system falls into this category, you’ll need to make your stock purchasing decisions using a separate tool. If you can export sales data from the tool to CSV format then you could use SkuBrain to import this and generate sales forecasts. And if you can export inventory stock levels, SkuBrain can use these to generate replenishment reports with specific recommendations about how much stock you need to buy for each of the products you carry, as well as warnings about any products that are overstocked.
Threshold based inventory optimization
These tools attempt to address the problem of stock outs by allowing you to specify minimum (and sometimes maximum) stock level thresholds for each of the products that you carry. The thresholds are then used in reports indicating any items with stock levels that are below their configured minimums.
Whilst this is certainly a step in the right direction, it is still rather a naive solution.
If any of the products that you carry have seasonal selling patterns then the optimim/minimum number of units that you want to keep on hand will depend on the time of year. So, for example, a toy retailer probably wants to have quite different SKU minimums configured in November than they would in March and a Sports retailer will have different SKU minimums for their Winter Sports gear in December than they will have in July.
Even if the products you sell aren’t subject to seasonal selling patterns, thresholds will need to be adjusted up/down in line with the growth of your business. Moreover, the sales of some products will be trending upward at the same time as others are trending down so each threshold needs to be managed individually. As such, managing thresholds manually for more than a handful of products is not really practical.
If you are using a software platform that supports naive threshold based inventory optimization then, once again, you’ll probably want to use a third party demand forecasting and replenishment planning tool, like SkuBrain, to help you optimize your inventory.
However, once you’ve imported your data into SkuBrain, built a demand forecast and generated a replenishment plan, if your WMS or ERP software supports stock thresholds then you have a couple of different options:
- Generate purchase orders directly from the SkuBrain replenishment report
- Use the SkuBrain replenishment report to configure appropriate forecast driven SKU level minimums and reorder quantities in your WMS/ERP system. You can then generate purchase orders from your WMS or ERP system as you normally would
Forecast driven inventory optimization
An ERP system that supports forecast driven replenishment decisions will let you make purchase decisions based on forecasted demand and target service levels for the products that you sell. These systems typically take into account trend, seasonality and variability in the sales of the products you sell and so will use dynamic/intelligent reorder points and target stock levels for the products you carry.
If you’re using an ERP platform that already has this functionality (such as SAP or Oracle) then you probably already have a fairly streamlined purchasing process and an army of IT geeks to advise you on how to use this platform.
If not, that’s what SkuBrain is for. You can use SkuBrain for your demand forecasting and replenishment planning needs, and continue to use your existing warehouse management system or ERP software for everything else!
- Sarah Lafferty, “Handling Volatile Demand”