The reason for holding inventory is to provide service to customers whilst dealing with uncertainties in demand and supply. Inventory optimization allows the drivers of inventory to become visible and measurable, providing an understanding of what can be changed and how easily. It quantifies the relationship between the different drivers so that the effect of change can be modeled and the best strategies for optimization identified.
On the demand side, the forecast is a major driver of inventory, coupled to the service level that is targeted for the item. The higher the service level and the less accurate the forecast, the more inventory is required to meet the required service level.
On the supply side, inventory is driven by two major influences - the frequency of the replenishment order and the length and reliability of the lead time. Longer and more variable lead times mean more uncertainty and hence more inventory to balance the risk.
Inventory optimization uses the drivers of inventory to calculate time-phased safety stock at the SKU level, which can then be used to project inventory and cash flow into the future. IO can reduce investment and subsequently ROI, while improving service levels which often leads to improved turnover.
Managing Unpredictable Demand with SYSPRO Inventory Optimization (Video)