Exactly how much
does your stock costs you?
Optimizing stock levels has never been easy and nothing indicate it will become less difficult. Dynamic marketplaces and increased uncertainties about tomorrow lead many companies to choose stock levels without a clear picture of what’s financially optimal. In this context Economic Stock Optimization lights up the fog like a scene light. The ESO approach rethinks how stock levels are set by breaking down all costs related to carrying stock. The level of economic transparency ESO provides often leads to +20% working capital reduction without sacrificing service levels.
ESO is more than software, it’s a planning philosophy that bridges the gap between conflicting organizational agendas that influence how stock levels are set. Instead of meeting the needs of one department ESO calculates the stock levels that is in the best interest of the company as a whole.
Go beyond ABC classification
and reduce stock min 20%
The use of ABC classification is widespread in inventory management. But ABC does not tell you how service levels impact logistics costs. Typically all items in specific ABC groups have same service levels. For example 99% service level is assigned for A products, with lower levels for B and C products. Whether these service levels lead to the lowest possible costs is not analyzed; the percentages are accepted as correct. Assigning same service levels to all items within an ABC group is one of the most expensive mistakes in supply chain management.
Questions that ESO answer
- What is the total cost of maintaining the current service level for a specific product?
- Which items are associated with the biggest potential for cost savings?
- How will changing service levels from 95% to 97% affect all our logistics costs?
- Is there a benefit to changing service levels for any of our A-category products?
- What is the total potential for savings associated with optimizing current inventory?
- How will savings be distributed among expenditures such as capital cost, warehousing, and obsolescence cost?
As a manager armed with this information, you can decide exactly how much safety stock to carry and when you need to re-order to maintain the service level that best serves your bottom line.
How ESO identify
optimal stock levels
Based on demand uncertainty, business constraints and economic factors ESO deploy massive simulations to find the safety stock and minimum orders that lead to lowest costs. To speed up computations ESO has multi-threaded execution that enables parallel simulation. This reduces simulation to seconds, not hours.
To calculate the economic optimal stock levels for each item ESO consider a range of economic factors along with supply and demand uncertainty. The outcome of ESO is presented in dashboards and pivot tables for quick drill-down.