Right Sizing Safety Stock and Effectively Managing Inventory Using Forecastability
Author(s)Pan, Ni; Sweeney, Jamie
In a commodity consumer product business, such as bottled water, the customer has the power. Therefore, the business incurs whatever cost necessary to meet demand. To reduce the cost of fulfilling demand and of stockout, businesses must thoughtfully set inventory safety stock levels to compensate for potential spikes in demand. The purpose of this capstone is to analyze the current inventory strategy and its effectiveness of the sponsor, a bottled water company. The team worked to explore the drivers of supply and demand variability to identify potential improvements in inventory management, which could reduce cost while maintaining service levels. The team analyzed the customer demand, production demand, strategic forecast, and inventory on hand for over 100 stock keeping units (SKUs) in a specific geographic region over the last three years. As a result of the analysis, the team proposes SKU segmentation by forecastability and appropriate safety stock calculation using the standard deviation of forecast errors. This method of calculating safety stock, as compared to the sponsor’s current approach, reveals a clear opportunity to reduce the inventory by 28% for SKUs with predictable and positive demand. Another key finding is the opportunity to reduce the order quantities when the annual forecasted demand of a SKU is below an identified threshold. Lastly, the team recommends increasing the inventory level kept at supplier consignment to further minimize the risk of stockout at low cost due to consignment agreements. To further and continuously improve inventory position and service levels, the team recommends a quarterly strategic inventory review to adapt strategy as business needs and requirements shift.
inventory management, procurement, supply chain strategy