Symptoms of inventory management pain
Our partner, Establish, was already working with the company and had done the groundwork. 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.
The company’s inventory management processes and systems were undoubtedly failing. The question was – what do we need to do to fix it?
ERP limitations and the importance of product categorization
One of the main problems was the absence of product classification. The company’s ERP system treated high and low margin items the same and gave little consideration to service level agreements.
As a result, they couldn’t deploy item-specific inventory policies for their 5,000+ products. On top of that, the ERP system could not determine optimal stock levels and replenishment parameters.
Proof of Concept – ABC classification and safety stock optimization
The manufacturer needed a more targeted and business-focused inventory management process. Together with our partner, we decided on a three-step proof of concept.
Step 1: We started by developing a product classification framework based on inventory cost, delivery targets, and profit margin.
Step 2: Next, we used Optimity’s ABC Analyzer to automatically assign an ABC class to each product’s respective dimensions and determine a combined product-level classification – with A-products demanding more consideration and a higher service level than B and C items.
Step 3: Finally, we used Optimity’s Inventory Optimizer to optimize safety stock levels and replenishment quantities and frequencies based on the new inventory classes.
This exercise didn’t take long and it showed the immediate benefits of an automated and more scientific inventory management approach.