Traditionally, it has been understood that to improve customer service you have to have high levels of inventory. This ensures that orders are filled quickly. But it also means that the value of your inventory is high, to the detriment of your organisation as it ties up cash and warehouse space that could be put to other and better uses.

The aim of inventory optimisation is to decrease stock while increasing customer service levels. This can be difficult, particularly as it sounds like a contradiction in terms. However, it can be achieved either by:

•reducing your overall inventory while maintaining the same level of high service, or

•improving customer service levels without an increase to your investment in total inventory.

In order to optimise inventory, you will need to know what the current state of your inventory performance is, to act as a reference point. Then, continued performance analysis at later stages ensures that performance is improving and that inventory activity is being effectively optimised.
This analysis – both initially and at later stages – highlights areas where improvement is required. It also assists you in measuring service levels and focusing on delivery performance to customers, fill rates and order fulfilment times.

Some key areas that you can measure include:

• Delivery performance for customers
• Fill rates for customers
• Order fulfillment lead-time for customers
• Delivery performance per supplier
• Fill rate per supplier
• Order fulfillment lead-time per supplier
• Stock level
• Inventory days of supply, in other words stock turnover
• Safety stock and seasonal demand.

By measuring these key performance indicators (KPIs), you learn where you stand relative to your previous performance. This is valuable information, as it indicates whether and how well you have improved performance over time. The better values you have, the less safety stock you need and the lower quantity in stock.

However, you might have started from a low base (ie non-optimal or even poor performance). This could mean that any improvements you make might very well be marginal and your ultimate standing still poor compared with industry standards.

Therefore, it is also valuable to compare your performance against that of your competitors (or even partners in the supply chain). To do this you will need a common reference model for industry-wide KPIs in inventory value and service levels. Such figures give an idea of the potential improvements you can make, as well as how much you could probably reduce your stock and/or increase customer service even further. With these figures, it is also a simpler task to build a return on investment (ROI) calculation within the inventory optimisation area.

There is already exists such a common reference model, called the Supply-Chain Operations Reference model (SCOR).

This model has been developed by the Supply Chain Council, a global, not-for-profit trade association open to all types of organisation which is dedicated to improving supply chain efficiency. The Supply Chain Council, headquartered in the US, is supported by more than 1000 corporate members worldwide, representing a broad cross-section of industries, including manufacturers, services, distributors, and retailers.

The SCOR-KPI allows companies to examine and measure their supply chain processes. The SCOR model has been able to successfully describe and provide a basis for supply chain improvement for global projects as well as site-specific projects.

Key SCOR metrics include:

• Delivery performance to customer committed
• Delivery performance to customer requested
• Delivery performance to supplier committed
• Delivery performance to supplier requested
• Customer fill rate
• Supplier fill rate
• Customer order fulfilment lead-time
• Supplier order fulfilment lead-time
• Inventory days of supply

By comparing those KPIs with those of your competitors, you would easily determine where weak links exist, and identify how to make improvements. This would help you improve inventory optimisation and give you a dramatic ROI and savings.

Once you have performed a detailed performance analysis, you then have the indicators necessary to gauge the success of your optimisation program. If you haven’t analysed performance, you will never know whether you have improved, or by how much, and later stages in the program will basically be performed in the dark.

One you have performed an initial analysis, you can move on to the next stage, which is to classify your products and define your strategy.