Inventory Optimization at a Global Electronics Company

The Importance of Product Categorization

The inventory management issues became apparent as we began to interview stakeholders. Many of the usual signs were there: Late deliveries, stockouts of critical products, excess stock of slow-movers tying up capital, and people running around chasing backorders.

Following a mapping exercise of the company's inventory management processes and systems, we were able to identify several problem areas.

Interestingly, many of the issues could be traced back to the lack of product classification. The inventory set up in the ERP system was very simplistic, almost a one-size-fits-all approach. As a result, our client had no practical way to deploy different inventory management policies to their 5,000 products. In addition, the existing inventory management module lacked the ability to determine optimal stock levels and replenishment parameters.

So, with an inventory strategy that treated high and low margin items the same and gave little consideration to service level agreements, our client's inventory served neither their customers nor their own business goals adequately.

A Quick Fix or a Long-Term Solution?

To enable more targeted and business-focused inventory management, we helped our client develop a framework for product classification. We agreed on a set of classification dimensions, including inventory cost, delivery targets, and profit margin.

We then used specialized software from one of our partners to automatically assign an ABC class to each product's respective dimensions and to determine a combined product-level classification – with A-products demanding a higher service level than B and C items.

Once completed, we used the same software to optimize safety stock levels and replenishment quantities and frequencies based on the newly appointed inventory classes.

The client appreciated the exercise as it highlighted the importance of product classification and showed the benefits of an automated and more targeted inventory management approach.

Inventory Optimization

Highlighting the need for change is not the same as implementing lasting change – this is a different challenge altogether and requires more than just insight, even with the best intentions. The optimal stock levels for an item will vary over time and as the product moves through its life cycle, which is why a dynamic approach to inventory management is vital to sustaining benefits.

To ensure future success, we recommended implementing an inventory optimization solution. Working closely with the client's project team, we helped prepare a list of system requirements and a supporting business case, including a detailed cost-benefit analysis and RoI calculations.

The Result 

The new inventory optimization system is now live, and the solution enables a much more dynamic approach to inventory management. The ability to automatically (re-)classify products based on what matters most to the business means that planners can manage the portfolio more effectively and on an exception basis.

By dynamically optimizing safety stocks and order quantities to absorb demand and supply variability, the company now minimizes their inventory investment while keeping customer commitments.