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Predict, Not Just Respond

How Much Inventory is Enough?

Inventory Cost

Most companies try to minimize inventory by improving their turns. However, this measure does not reflect the potential impact of inventory on revenue. Too little inventory may cause missed opportunities and too much would lead to excess cost and reducing profits. Inventory maybe undesirable however it is both an investment as well as insurance to protect the business. Uncertainty is given and stockpile helps to deliver when demand changes or disruptions occur. Keeping the wrong stockpile is bad investment and a high premium to pay for your insurance.

Depending on the industry, companies have different policies regarding how much inventory to keep and where in the supply chain it should be kept. The common thread is the question of responsiveness, which is a choice between leadtime to make and inventory to keep. For example, semiconductor and pharmaceutical industries have long leadtimes to make and cannot afford to lose market share, hence they are inclined to keeping, perhaps more than, enough inventory. For industries where there are too many configurations and options keeping FG inventory is virtually impossible. They need to be in a position to react and respond very quickly. To do so, they have to keep the right level of partially made products along the supply chain. Such that they can reduce leadtime to delivery of the final product.

For most industries, the companies have to walk a fine line between service level and cost of stockpile. But having a high service level does not necessarily imply a higher cost! One can deploy postponement strategies so that for a given service level lowest amount of inventory is deployed across the entire supply chain. This can be done using stochastic techniques to predict how much inventory should be kept at each echelon of the supply chain so that based on specific products or customer(s) the accepted leadtime is adapted at the lowest cost. Learn more about his Here.

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