“Sizing the prize” is a term commonly used by management to define a dollar amount that will reflect how significant their benefits will be as a result of change in strategies. While this method can be used for any number of potential changes within an organization, it is becoming increasingly valuable for inventory optimization. Companies across a wide range of industries can benefit from this type of evaluation.
Recently, a client requested such a study from Miebach Consulting - the primary goal was to maximize savings by changing only their inventory policies. The study included distribution centers in multiple countries within the same region and the analysis had to be replicable for facilities in other countries or regions. A key consideration was that certain inventory policies varied by country, while others are global standards set by the planning team, which brought additional complexity to the project.
The Miebach team used several scenarios to study the impact for both safety stock and cycle stock levels. The scenarios were evaluated independently and consisted of adjusting service levels, lead times for manufacturing, and modes of transportation.
First, the SKUs were grouped into A-B-C categories according to demand and revenue, assigning different service levels prioritizing the high demand and high revenue items. The second scenario considered segmentation of items based on demand and variability; different corresponding manufacturing lead times were then assigned. The third considered using intermediate product as part of safety stock levels, which greatly reduced the lead time. Finally, the last scenario studied the impact of changing transportation modes.
The next step in the process was to provide the client with a detailed optimization of a preselected combination of scenarios, including simulation runs to validate the savings and test the policies. Utilizing LLamasoft’s Supply Chain Guru, capable of performing such an exercise, Miebach’s team of skilled modelers will provide this management team with actionable data to make changes impacting the overall bottom line.
Results from the scenarios were in inventory reduction (inventory quantity by inventory value) and inventory carrying cost savings (inventory reduction by total holding cost) of the inventory balance. Clustering SKUs into A-B-C categories and adjusting service levels and adjusting manufacturing lead time depending on SKU demand and variability both resulted in inventory reductions and inventory carrying cost savings. Switching transportation modes would cause a minor increase in average inventory, however these costs are offset by savings in transportation, going from air freight to ocean freight.
Overall, the various solutions provided inventory reductions of 5-25% and annual inventory savings between $2-8M.
As this project illustrates, the experts at Miebach are highly skilled at assisting companies to identify areas within their organization to optimize inventory levels. While “sizing the prize” is a popular place to start the process of inventory optimization to identify potential cost savings, the detailed analysis and our robust suite of proprietary tools enable us to confidently provide advice to our clients on strategy changes, including real-world variability in the scenarios. Additionally, the models developed by the Miebach team as part of the project can be handed over to the client for their future use as part of their planning process for potential future changes.
For further information on this project, please contact Angelica Rodriguez at email@example.com