Demand-Driven Inventory Optimization and Replenishment

Chapter 1Creating Demand-Driven Supply

When people talk about inventory optimization I am always surprised at the number of definitions that are rolling around out there. Most C-level executives know it has something to do with reducing or right-sizing inventories and that it really helps control supply chain costs. The career path of that C-level executive can morph her viewpoint about where that optimization resides. Indeed, the closer you get to the customer, the more optimization means replenishment. This means a retail executive has a far different view of optimization compared to that of a manufacturing executive.

For many, the focal point of supply chain efficiency projects is to uncover and exploit cost discrepancies positioned by supply chain partners in the name of “optimization.” For instance, in the article “Optimizing Replenishment Policies Using Genetic Algorithms for Single Warehouse/Multi-retailer System,” W. Yang, T. Felix, S. Chan, and V. Kumar cite how huge savings can be achieved by adhering to a methodology of quantity discounts in transportation cost models.¹ This technique of uncovering supply chain inefficiencies to fill the void with cost savings shifts costs onto another portion in the supply chain. It is rampant inside companies and between external trading partners in almost all industries. Obviously, the whole point of optimization is to take advantage of every opportunity of cost savings, not just taking advantage of trading partner inefficiencies. ...