Freeing up capital through optimal inventory
Mathematical optimization for ideal stock levels
There has been a lot of talk about vulnerable supply chains in recent years. During the coronavirus pandemic, lockdowns and border closures put international supply chains under enormous pressure. Geopolitical events and wars meant that supply chains became increasingly vulnerable and companies were forced to take action in order to continue production.
One countermeasure that many companies have taken was to increase safety stocks in the warehouse. But it is precisely this that is now leading to new difficulties. In this article, we show what these are and how mathematical optimization can be used to counteract and prevent them.
Vulnerable supply chains lead to full warehouses
Unstable supply chains were and remain a major problem for the manufacturing industry. As a result, full warehouses have made a comeback: those with more material in stock are logically less dependent on functioning supply chains. However, these high stock levels tie up a lot of capital that is lacking elsewhere. In addition, the current high interest rates are increasing the cost of capital enormously, which is putting many companies under additional pressure.
However, in many industries, a lot of capital is needed right now in order to respond to current requirements and remain competitive in the long term. The switch to renewable energies to achieve defined climate targets and the switch to the production of electric cars in the automotive industry are just two examples of the high level of investment required.
So how can the capital tied up in inventories be sensibly released without jeopardizing secure production and, if the worst comes to the worst, being exposed to vulnerable supply chains again?
Stock vs. readiness to deliver
The best solution for both requirements
Optimal stock levels are primarily dependent on two factors: the reliability of the supply chain and the desired readiness to deliver. The more reliable the supply chain is, the lower the safety stock in the warehouse can be in order not to jeopardize the readiness to deliver. Conversely, the higher the desired level of readiness to deliver, the higher the safety stock levels in the warehouse and the reliability of the supply chain should be.
It is therefore necessary to determine the best trade-off between the lowest possible inventory level (and therefore higher cash flow), supply chain security and a high degree of readiness to deliver. In some cases, it will be necessary to lower the level of readiness to deliver slightly in order to achieve a reduction in safety stock. In other cases, however, the current safety stock levels are so high that a reduction in stock levels can even be achieved without any loss of readiness to deliver.
In a further step, the costs of lost sales can be quantified. This involves determining how much profit is lost if the delivery readiness level is reduced and therefore potential sales cannot be serviced. The optimum stock level can be determined by comparing the costs of lost sales with the expenses that would be incurred to avoid the lost sales.
This becomes a complex task that can no longer be solved manually, especially if you have many different products with different requirements and availabilities - and perhaps even have to consider the capacity of your warehouse. But with the right technical support, there is a simple solution for this too.
The right technique makes all the difference
Digitalization, machine learning and optimization
The key lies above all in using the right technology. Through Digitization the current stock levels can be called up and assessed at any time. The digitalization of the supply chain is also necessary in order to be able to monitor and plan failure probabilities and redundancies. Only this transparency makes it possible to analyze the current status and thus adjust stocks in a timely manner.
Another technology that can be used is Machine Learning help to ensure that inventories can be adapted to requirements. By processing historical data, algorithms of the Machine Learning Create forecasts that accurately predict demand, resulting in more realistic stock requirements.
Based on the forecast demand and the supply chain assessments, the mathematical optimization the required stock levels can be calculated and the safety stocks optimally adjusted.
With the help of these different technologies, safety stocks can be continuously adapted to requirements, storage space can be used efficiently and capital can be freed up.
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Freeing up capital with OPTANO
Lower, but still safe stock levels
As optimization software, OPTANO offers the possibility to carry out the described analyses and calculations efficiently and in a user-friendly way. This allows the supply chain to be designed securely, stock levels to be reduced to the necessary minimum and delivery readiness to be ensured at the same time. Capital is freed up and can be put to good use elsewhere.
OPTANO also offers the option of analyzing the consequences of decisions in what-if scenarios. For example, it is possible to calculate the impact of reducing stock levels on the level of readiness to deliver. Conversely, it is also possible to simulate which stocks are necessary and what costs are incurred in order to achieve a desired level of delivery readiness - depending on whether cost efficiency or delivery reliability is more important to the company. The consequences of changes to the supply chain, such as the choice of a new supplier, can also be realistically calculated in advance. This enables a decision to be made in favor of one or the other option on the basis of reliable data.
Would you also like to minimize your stock levels and at the same time be sure that production is not put at risk? We would be happy to support you in optimizing your inventory planning. Simply get in touch with us and together we will see how mathematical optimization can be put to good use in your company.
Into the future with confidence and optimal stock levels
Supply chains will probably never be considered as secure as they were a few years ago. The resilience of supply chains has increasingly come into focus and stocks have been increased and safety stocks expanded. But here too, more is not always better! Let's work together to free up capital that is lying dormant in excessively large inventories and keep production readiness equally high.