The impact of SKU and network complexity on inventory levels

Abstract

Many firms introduce new distinct products more quickly than they remove old products, and some firms have also established larger distribution networks to increase service levels or support new markets. This research applies ordinary least-squares regression and a simulation approach to identify the relationship between increased complexity and inventory levels relative to demand for a major fast-moving consumer goods company. For this research complexity is defined as the number of SKUs in a brand and the number of stocking locations for an SKU. We find that while increased complexity does translate into increased demand variability, it does not correspond to higher inventory levels. While this research does not isolate the exact reason for this disconnect, it could relate to the degree to which inventory targets recommended by an optimization software are adhered to by planning staff. For similar companies which are navigating inventory cost and complexity pressures, the research implies that there may not be a direct relationship if the company does not strictly execute an inventory policy which bases safety stock levels on forecast error.