The retail industry and the consumer products (CP) sector are facing unprecedented volatility. In today's age of the empowered consumer, retailers are engaging with a new type of customer – people who shop armed with product information and connect with retailers on multiple channels, including in-store, online and mobile. Retailers must deal with consumers across different channels (online, in-store) and do so seamlessly. The demands of today's consumers are redefining how to price, sell and market products, and how to manage supply chains and inventory.
Adding to the complexity of the retail landscape is the overwhelming quantity and variety of consumer products available to retailers. Shelf space and positioning are at a premium and e-commerce sites compete for customers' attention. Global retailers are demanding that CP companies rationalize their SKU portfolio as a means of reducing complexity, simplifying the shopping experience and freeing up shelf space for private label brands.
Smart inventory optimization software is being used to look across multiple levels, or echelons, of a supply chain to detect changing conditions early on and suggest responses, this enables fast decisions that anticipate rather than simply react. For example, multi-echelon inventory optimization can identify the lowest-cost inventory strategy for each SKU, channel, and geographic region as well as model the trade-offs between inventory and service levels while considering such factors as forecast error, holding costs, supply time and variability, and transportation time and variability.
To address the challenge of optimizing inventory across an extended supply chain network, a manufacturer can re-engineer how it manages supply chain inventory and how it sets the right inventory targets for each item at each location. From a strategic perspective, it adopts inventory "risk pooling," where it holds as much inventory as possible in a central location and maintains smaller stock levels in decentralized locations to cover orders with short lead times.
The complex supply chain problem can only be solved with smart inventory solutions such as multi-echelon inventory optimization, which represents a dramatic advance over traditional inventory decision making. Inventory planning was not typically centralized, and service-level commitments were managed and measured at the warehouse and DC level based on individual or location-based metrics. As a result, inventory was optimized with no view into total supply chain stock levels, resulting in low inventory turns, inconsistent service levels, expediting of products, and a lack of understanding of supply chain-wide inventory drivers.
Inventory optimization considers the entire supply chain when making decisions and does not replace existing inventory management systems. Instead, it provides a method for setting the correct inventory targets across your complex supply chain.
Changing consumer behavior, fragmenting market channels, supplier constraints, cost and margin pressures, production challenges, changing demographics, emerging markets are just some of the pressures conspiring to eat into profitability and performance for CP companies and retailers.
Smart inventory optimization tools offer a weapon to tackle these challenges. These tools free up capital and resources for more productive uses – growing the company, improving the bottom line, cementing customer and consumer relationships and anticipating the future.
Michael Watson is the World-Wide ILOG Supply Chain Lead for IBM and an adjunct professor at Northwestern University.