How does inventory optimization relate to better customer service?
The amount of inventory that you choose to hold strongly effects the customer service level that you can achieve. Optimizing (the better term is ‘Right-Sizing’) your inventory can make the difference between happy customers and frustrated customers. To better understand the level your organization should choose, you have to, first, understand the effects of both decisions. Take the following scenarios as examples.
1) Setting inventory levels too low for some materials.
This is the easy one to understand. When inventory is too low, your risk of stock-outs increases. Stock-outs usually mean unhappy customers. This can also lead to increased shipping costs due to expediting and a company full of stressed-out employees. Not good.
2) Setting inventory levels too high for other materials.
To avoid the above situation from occurring, the knee jerk reaction is to keep inventory levels nice and high. This is usually done by running larger batch/lot/campaign sizes of each material. This often increases lead time and decreases your manufacturing flexibility. Result: unhappy customers.
From a plant management perspective, even if you are able to keep batch/lot/campaigns low, increasing inventory will tie up excessive working capital, and an increased risk of obsolescence, damage, or loss of material. Floor space then becomes warehouse space, when it should be manufacturing space.
Ideally, you want to Right-Size your inventory levels, so that each material has adequate inventory to buffer against variability in both supply and demand without having an excess of safety stock. An intelligent management decision can be made as to what customer service level is desired and the financial implications of this decision should be clearly understood.
Does your organization need help in this area? We are currently hosting Right-Sizing inventory webinars where we provide useful information on this topic. Sign up for one today!