How You Can Use Inventory Optimization to Reduce Costs

Supply chains are increasingly complicated. The current global pandemic is the latest, extreme evidence that factors like globalization, international politics, and security threats are all affecting the ability of suppliers to deliver what people need. Meanwhile, consumer behavior is changing, and their expectations are higher. People can order anything they want from their cell phones, and increasingly, they expect it to arrive almost immediately which adds more pressure to manufacturers’ inventory control process.

But inventory control is a difficult needle to thread. Surplus warehouse stock represents wasted costs, but limited stock makes it hard to meet customer demands. Inventory optimization is the answer in a highly competitive market. In addition, inventory optimization has direct impact on service functions; these groups incur costs from overstocking and under-stocked parts can result in costly lag times for service teams to respond to calls.

What is inventory optimization and why does it matter?

Inventory (or stock) refers to the goods and materials that are part of a production process; a business either sells to these items to consumers, or uses to supply service teams.

Inventory management can be a complex process but one which is essential to the smooth running of manufacturing and service operations. Inventory managers need to take into account potential volatility in both supply and demand, and ensure that goods are held in the right place according to when and where they are needed in the production process. For service organizations, this also requires staging parts in warehouses based on maintenance and service needs.

Inventory optimization enables balancing of stock levels to ensure there is enough to meet planned production and service needs while minimizing excess.

In a manufacturing context, keeping stock to minimum levels is important because stock equates to working capital, or in simple terms, cash available. Too much cash invested in inventory impacts spending elsewhere in the business. Carrying too much stock also incurs a cost, which is estimated at approximately 10 percent of the value of the stock–so excess stock equates to excess cost. Again, for service organizations, the effects can be even more severe, if stock imbalances prevent the rapid and efficient delivery of service visits. Fortunately, advances in technology can help overcome this issue.

Inventory optimization and Industry 4.0

Industry 4.0 has led to unprecedented connectivity between computers, machines, and machine-operated processes, and that connectivity offers real advantages for inventory optimization.

Visibility

World-class inventory management starts with an in-depth knowledge of your inventory. Industry 4.0 makes it possible to get accurate, real-time data at the touch of a button about exactly how much stock you have and where it is in the production process. Plus, you don’t just learn how much stock you have, but also where it came from and when, its shelf-life, and even its quality.

Advanced analytics

Analytical tools enabled by Industry 4.0 technology make it possible to accurately predict future product requirements based on wider trends, customer behavior, previous performance, time-to-market, shipping delays, and so on. It allows for incredibly accurate forecasting, which is central to effective inventory optimization.

Collaboration

The connectivity that is central to Industry 4.0 means all parts of the organization–and even stakeholders–have a consistent view of the entire end-to-end supply chain. That makes it easier to react quickly to volatility such as demand surges, availability problems with raw materials, and changes in inventory prices.

6 tips to make inventory process improvement easier

While the specific pressures on manufacturing and service to make inventory process improvements vary, there are some common ways to improve these workflows to ensure the right parts are in the right place, right when they’re needed. 

1. Implement digital solutions

Digital technologies like inventory management software can be game-changing. Once established, almost all the legwork involved in inventory management can be automated and streamlined, saving a huge amount of staff time while removing the potential for human error. But alongside making the process quicker, cheaper, and easier, digital solutions offer the potential to maximize the benefits of inventory management.

Inventory management software solutions not only automate and simplify end-to-end inventory tracking and monitoring, but they also offer accurate, real-time data and insights about the inventory, demand, etc. When connected to the IIoT, at the touch of a button that data can be shared in an accessible and actionable way across teams, locations, and even companies–supporting critical supply chain inventory management planning and decision-making.

2. Build supplier relationships

Successful inventory management starts with getting the right quantity of stock, at the right time, at the right price. That requires strong relationships with your suppliers to make sure they understand your needs. If you have built up a good relationship as a client, they’re more likely to work with you to solve problems, to negotiate deals, and to go the extra mile if the supply chain is interrupted. Ideally, these partners are using their own digital solutions to optimize their own inventory.

3. Get a comprehensive view of the entire process

An end-to-end view of the entire inventory process is key to identifying problems and implementing process improvements. The connectivity offered by Industry 4.0 technologies means that IT and OT systems can converge, making that comprehensive view a reality–and in real time. It enables the most accurate forecasting, ensuring stock on hand is precisely what’s needed, while minimizing the risk of overselling.  

4. Make informed decisions

Accurate data is essential. Decisions about inventory process improvements must be informed by valid and up-to-date information. Likewise, the effectiveness of process changes must be measured reliably. There are a number of ways to collect, record, and analyze inventory data, but in almost all cases, a digitalized approach–where data is collected and processed by computers–will save time and be more accurate.

5. Communicate and collaborate

One of the biggest causes of inventory process problems is human. It’s not human error, though–it’s a failure to communicate. That applies both within companies and when working with stakeholders and suppliers. Individuals, teams, and departments must work together collaboratively; otherwise, process problems are almost inevitable. Digital technologies can make collaboration easier, particularly by routinely making team data visible to others.

6. Tie inventory to wider improvement initiatives

The inventory process isn’t standalone in a business–it’s part of a bigger picture. While you can certainly make improvements and experience cost savings by examining and improving inventory management, the biggest gains are to be made when it’s approached as part of a holistic business improvement or transformation program. Embracing business management techniques like Lean or Six Sigma will lead to inventory process improvements and also provoke more general business improvements.

Bottom line benefits

According to a study by the consulting firm The Hackett Group, Inc., an incredible $1.1 trillion is tied up in inventory in the US alone–that’s about six percent of total GDP. Coupled with increasingly complex global supply chains, it’s little wonder manufacturers are looking to inventory optimization to maintain both cash flow and productivity as well as reduce running costs.

The benefits of inventory optimization can be maximized when they are supported by advanced digital technologies. These make it easier than ever to monitor supplies and production, forecast accurately, improve stock efficiency, and react to volatile markets and supply problems. It all adds up to inventory costs that are lower, and companies that are more resilient, in the face of external changes–making it a compelling prospect for manufacturers.

Learn how implementing connectivity can unlock inventory optimization improvements

It's no surprise that many manufacturers are investing in inventory process improvements. Inventory takes up a significant portion of the budget and in some industries, almost half of all businesses describe keeping on top of it as a daily challenge. Thankfully, digital technologies can make it easier, quicker, and cheaper–as well as more accurate. 

Learn more about how PTC can help your manufacturing organization implement industrial connectivity solutions.