Working capital optimization: the pressure is on!

Welcome to supply chain planning 2023: Lights, camera, action!

⏱️ 3-minute read 


inflation impacting demand

Dear supply chain and inventory managers: the pressure is on! Inventory levels have reached an all-time high while, fed by high inflation rates, markets are slowing down, and the demand volume and mix is changing. Inventories contain high buffers for supply risks whilst supply tends to become more reliable. High utilization rates keep warehousing costs at a high level and rising interest rates further increase inventory holding costs. And it’s not over yet: inflation rates are decreasing, but it is expected to be at the target 2% inflation rate in 2025 only and interest rates are not expected to decrease soon. It’s time to reduce unnecessary inventory buffers and replace them with buffers necessary to realize your customer service levels agreements. It’s time to right-size your inventory.


Inventory reduction: where to start?

There are three ways to reduce inventory:

  • increase demand
  • slow down or stop replenishment
  • scrap unnecessary inventory

Increasing demand is of course the preferred option, but it can be challenging in the current markets. Scrapping inventory is a last resort, it’s typically the most costly option.
The most natural way to reduce inventory is by slowing down or stopping the replenishment of unnecessary inventory.

This journey starts with making snapshots of your inventory health. The best practice is to use an inventory entitlement framework that breaks down your inventory into pieces based on their stock drivers, e.g. safety stock (service levels, demand- and supply variability) and cycle stock (replenishment frequencies, batch sizes). This breakdown makes a split between the inventory you are entitled to have, and the part that can be denoted slow moving and obsolete stock. You can directly slow down or stop the replenishment of items that have slow-moving or obsolete stock.

Next, the focus should be on right-sizing your inventory by adjusting the replenishment parameters like safety stocks, reorder points, and/or replenishment quantities. Reducing the target safety and cycle stocks will further help to decrease your inventory. But be aware, if not done properly it can significantly reduce customer service and it might further inject the bullwhip effect.

In the longer term, the big question is of course: How has your inventory reached such a high level? Is it just bad luck or can we pinpoint a structural cause? Inventory is the result of mismatches between supply and demand and depends on the quality of your inventory management process. Supporting tools to determine your inventory health and optimal replenishment parameters are a necessity, especially in these times when the demand volume and mix change almost every day.


Inventory right-sizing: Time for action!

frustrated angry plannerA new year has started, and it’s time to think about structural improvements to your inventory management process.

  • Does your inventory management process have the right maturity level?
  • Is there a lack of (easy-to-use and understand) decision support software?

We can kick-start your journey by bringing in our tools, expertise and benchmarks, for example:

  • Our inventory maturity self-assessment: Want to learn more about the maturity of your inventory management process compared to industry peers? Do a free self-assessment to determine gaps or advantages relative to your competition.
  • Our data scientists can help you swiftly gain insights into your inventory health and support you in optimizing replenishment parameters using multi-echelon inventory models.
  • Our web-based self-service software solution EyeOn Stock offers you a quick and easy way to calculate inventory health and optimal stocking parameters. Learn more or get in touch with us for additional information or a free demo.
Maarten Driessen, inventory management lead at EyeOn

Want to learn more about inventory optimization? Explore our website or reach out to our expert Maarten Driessen. Let’s solve your inventory challenges!

Remember to keep an eye on this page where we will address further supply chain challenges you will be facing this year.

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