Inventory Optimization is Not Just About Reducing Costs
Optimizing inventory is about determining the appropriate reorder points and order sizes so you have the right amount of inventory for every SKU at every location.
The graph to the left shows the results of an inventory study. The SKU's are along the x-axis and the y-axis shows the needed change in inventory.
The SKU's with the red bars show that you should hold less inventory for these items. That is, for these items, you will reduce the amount of inventory. This frees up cash and reduces your cost to finance and hold that inventory.
However, the SKU's with the green bars show items where you should be holding more inventory. What this tells you is that for these items, you are currently either missing sales, providing poor service, or going through extraordinary means to fill the orders (shipping out of territory, expediting, and so on). Of course, these extra costs may not matter to you-- but, our experience has shown that these extra costs or lost sales easily swamp the extra cost of the inventory. And, it is important that you explicitly decide whether you want to hold the right amount of inventory or pay the costs in lost sales, poor service, out of territory shipments, or expediting.