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Efficient Frontier: A Moving Target

May 20, 2012 • Business Process, OPERATION, Supply Chain, Supply Chain Management

By Karin Bursa

Do you view inventory as a cost factor, a risk, a service level influencer or a competitive advantage? Many executives view inventory mainly as a cost. In reality, inventory can be a competitive advantage that lowers costs, improves service levels, and helps boost revenue – all at the same time.

 

Over the past decade, inventory optimization (IO) has moved from a concept discussed in academic forums to a proven strategic weapon that improves corporate profitability. Well documented results include Hewlett Packard’s achieving more than $130 million in total inventory savings1, Microsoft increasing their inventory turns 18-20% while simultaneously increasing fill rates by 6-7%2, and Procter & Gamble’s reduction of inventory levels by $100 million for its beauty division3. These are not isolated incidents. For companies that implement IO, a 10% – 30% reduction in total inventory is common, achieving a major shift in the balance between inventory cost and service level.

Inventory optimization is an advanced scientific approach to understanding and quantifying the propagation of demand and supply uncertainties across a multi-level supply chain. Today it is considered a core competency at both mid-size and Fortune 500 companies in a wide range of industries, and has proven to be a sustainable process that frees up millions in working capital by reducing inventory without negatively impacting service levels. Unlike traditional ‘binge and purge’ cycles of overproduction followed by brute-force reductions, savings are achieved and inventory turns are increased while driving more profit to the bottom line.



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