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Inventory Optimization for Raw Materials

Summary

A manufacturer, facing challenges in managing raw-material inventory levels, wants to put in place a robust inventory optimization solution that helps in controlling costs and ensures uninterrupted production cycles. Forecasting techniques are deployed to project raw-material requirements for the various product lines and related SKUs. The interplay of inventory order costs and storage costs is examined to arrive at optimal inventory holding levels. Supplier data is analysed to estimate appropriate safety-stock levels for the different raw-materials. The result is a robust inventory management system that enables the manufacturer to optimize inventory levels, leading to efficient working-capital management as well as disruption-free production cycles.

Business Backdrop

A manufacturer is facing challenges in managing its raw-material inventory. The company manufactures a range of products, and hence needs to put in place a robust inventory management system that optimizes inventory holding costs, apart from ensuring a seamless uninterrupted production process. The manufacturer is looking for a solution framework that would enable it to calibrate its raw-material re-order process & sequence in close association with the likely raw-material demand at its various product lines.

Being able to efficiently manage raw-material inventory levels is crucial for manufacturing firms, since appropriate inventory levels are essential for smooth production operations as well as effective working-capital management. While a certain degree of buffer stock is desirable, in order to prevent raw-material stock-outs and consequent production-line interruptions, holding excess inventory ties up working capital and hampers cash flows & profitability. Inventory management systems also need to integrate seamlessly with raw-material ordering systems that communicate with suppliers.

Firms with streamlined inventory management systems & practices are able to optimize their raw-material inventories, resulting in smooth uninterrupted manufacturing operations in addition to efficient cost management. This is especially important for manufacturing houses that produce a wide range of diverse products, each with its own variety of SKUs. Versatile inventory management systems address the challenges associated with a huge variety of raw-materials, many of which enter the production line at different stages of the manufacturing process.

Analytical Approach

The manufacturer produces a wide range of products across multiple plants. Production schedules for each product line are prepared based on sales projections for the various SKUs of the different products. Forecasting techniques are deployed to arrive at projections for raw-material requirements at the different plants for the various products and SKUs. The forecasts are tailored to accommodate the likely seasonal fluctuations in raw-material demand. Given the overlap of certain raw-materials across SKUs and even across some products, raw-material requirement forecasts at the product/ SKU level are rolled up to provide a set of forecasts for each raw-material.

The manufacturer has a wide network of raw-material suppliers. Historical data for the various suppliers is analysed to understand lead times and the demonstrated variability in delivery times. Results of such supplier data analysis are utilized to estimate the necessary inventory safety-stock levels for the different raw materials. In addition, data on inventory item costs as well as storage costs, together with the associated cost of capital, is examined to determine overall inventory holding costs for the various raw materials. For each raw material item, the related order set-up costs are also examined.

The outputs of the various analyses, viz, raw-material requirements forecasting, seasonal variations, supplier lead times & associated variability, safety-stock estimations, and inventory holding costs, is consolidated and integrated into a robust inventory management system that serves to optimize inventory holding levels in a manner that balances the need to minimize inventory costs (storage costs as well as re-order costs) with the need to ensure an uninterrupted manufacturing process for the various product lines.

Solution Framework

  • Time Series Analysis
  • Business Forecasting
  • Supply Chain Management Analytics
  • EOQ / ROP Modelling
  • Exploratory Analysis

Business Benefits

With a robust inventory management system in place, the manufacturer is able to optimize its raw-material inventory holding levels. This in turn facilitates efficient working-capital management, apart from ensuring uninterrupted production cycles for the various product lines and associated SKUs. Being integrated with the order management systems, the solution also enhances timely communication with the firm’s vast network of suppliers.

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