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What is Inventory Management & Optimization

Inventory management should not be an individual task. Instead, it should be a collaborative process where all manufacturing echelons work together. It’s up to the manufacturer to have inventory management software that enables this type of collaboration. A manufacturer’s sales and distribution team may set inventory targets for a specific SKU-Location based on average demand for a broad product family across a wide geographic region. This approach does not account for variability: individual products may have a similar average demand but dramatically different incoming order patterns. To stay competitive, manufacturers are turning to two types of solutions to handle their supply chain: inventory optimization software and multi-echelon inventory optimization software (MEIO). 

The basic approach to inventory optimization

The standard way of inventory optimization is to define a plan that maximizes sales while minimizing the cost of goods sold (COGS) and the cost of inventory. COGS is the total cost of the raw materials, labor, and other costs associated with producing a single unit of inventory. The key is to find the optimal mix of planned and actual inventory to minimize overall inventory costs. When a manufacturer plans its inventory, it typically defines a set number of units for each SKU-Location combination, based on demand forecasts, historical demand, and projected sales. For example, a manufacturer may plan to order 500 SKUs-Location combinations to keep up with demand. Then, when actual demand is higher than forecasted demand, the manufacturer may need to adjust its plan by ordering more units or adjusting the SKU-Location combinations. With a traditional approach to inventory planning, the goal is to minimize the total cost of inventory. This means that as a manufacturer orders more units, it needs to order less of each individual unit in order to maintain a constant unit cost per unit.

Beyond standard inventory optimization approach

A multi layered approach is to determine which locations are needed to keep up with demand. Each location has an incoming demand curve and an outgoing demand curve. The incoming demand curve shows the demand for a given SKU-Location combination based on forecasted demand. The outgoing demand curve shows the demand for a given SKU-Location combination based on historical data. The outgoing demand curve is used to predict future demand. It is important to note that demand is not uniform across all locations; therefore, it is critical to use a location-specific model. By understanding the relationship between incoming and outgoing demand, manufacturers can more efficiently set their inventory levels. If a manufacturer is able to match incoming demand to outgoing demand, it will be able to reduce its COGS by reducing the cost of inventory. With the multi-echelon inventory optimization approach, manufacturers first need to forecast demand for each SKU-Location combination. Once demand is forecasted, manufacturers need to determine where to place orders to meet demand. For example, manufacturers may need to order a large quantity of raw materials from one location to meet demand at another location. This type of order is called a cross-docking order. When a manufacturer orders a cross-docking order, it must decide how many units it needs to place at each location.

Who is Inventory Optimization for?

Obviously, the manufacturer needs to have an accurate forecast of demand and be able to accurately predict where and when demand will be generated. However, inventory optimization solutions are also designed to be used by logistics providers, which can include: Inventory optimization solutions are ideal for manufacturers because they can help them achieve their goals while minimizing their inventory costs. However, some manufacturers may not have the resources or capabilities to develop an inventory optimization solution themselves. This is where MEIO can help. MEIO: An inventory optimization solution that makes it easy for manufacturers to achieve their goals while minimizing their inventory costs MEIO provides manufacturers with a flexible and easy-to-use inventory optimization solution. This means that manufacturers don’t need to know how to calculate the incoming and outgoing demand curves. In fact, MEIO has a robust reporting engine that allows users to create their own models to generate custom reports that are customized for their specific needs. With MEIO, manufacturers can easily meet their demand forecasted and minimize their inventory costs. In this brief, we will compare MEIO and IO solutions. How does MEIO work? MEIO works by creating an inventory optimization model that uses historical data to forecast demand.

What questions can Inventory Optimization answer?

In addition to answering the question of how to set inventory levels, MEIO can also help you determine which locations are needed to meet demand, which can help you avoid shortages or outages. Inventory optimization solutions that use historical data can also help you predict where and when demand is going to be generated. For example, MEIO can be used to determine the demand curve for each location. Once a manufacturer has a demand curve for each location, it is then able to forecast future demand. How can MEIO be used? The first step in using MEIO is to download the MEIO application and connect it to your ERP system. Once the application is installed, users can start working with the MEIO tool. MEIO can be used to forecast demand, optimize inventory levels, and determine the best location to place orders to meet demand. MEIO can also help users develop their own models to create custom reports. The reports can be used to identify potential issues and opportunities for improvement. Why should manufacturers use MEIO? MEIO makes it easy for manufacturers to achieve their goals while minimizing their inventory costs. MEIO is ideal for manufacturers because it provides a flexible and easy-to-use inventory optimization solution. MEIO is designed to work with the existing ERP system. This means that manufacturers don’t need to have any technical skills to use MEIO.

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