DRP vs. Inventory Optimization
Traditional methods such as Distribution Requirements Planning (DRP) aren’t equipped to handle this challenge. It is because they assume static supply relationships and usually don’t help balance out shortages against surpluses.
On the other hand, an Inventory Optimization solution will determine the optimal quantities to move between warehouses so that you can meet target service levels with a minimum amount of stock.
When should you move stock?
There are a few factors that impact whether a move of stock between warehouses is warranted. The first being supply lead times – the longer the lead times, the more critical it is to consider redistributing excess inventory. You are simply more likely to get shortages if you have long supply lead times. And once there’s a shortage, those long lead times will only compound the problem.
Secondly, it’s usually more beneficial to redistribute small and expensive products that are cheap to transport.
How can optimization help?
Inventory Optimization will work out the optimal quantities to move between warehouses and balances the total cost of being out of stock versus moving stock. A range of parameters are considered for the optimization:
- future demand –customer orders and forecast
- sales prices
- min/max stock level targets
- transportation costs
- customer priorities
Once generated, the optimized plan is sent back to the ERP system as a firm planned distribution proposal. The next planning cycle can now use this information to achieve improved delivery service and lower supply costs.
If you’re interested in this topic, you should also check out our White Paper, Setting the Optimal Safety Stock.