Business Analytics

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IBM Software Business Analytics

Predictive Analytics

Predictive inventory management: Keeping your supply chain in balance

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Predictive inventory management: Keeping your supply chain in balance

Contents
2 Introduction 2 Keeping shelves full, but not too full – Cost containment – Risk is everybody’s business – You can’t sell what you don’t have 4 How predictive analytics aid inventory management 5 Inventory and demand forecasting – Assortment planning and market basket analysis 9 The inner workings of predictive analytics 11 Conclusion

Introduction
A lean, efficient supply chain is an important goal for virtually any business involved in manufacturing, distribution or retail. In recent decades, innovations such as just-in-time manufacturing, bar codes and RFID tags, to name just a few, have revolutionized inventory tracking and the entire process of inventory management. Along with these innovations has come a dramatic increase in the quantity of information about inventory. The result is that today, one of the most basic and necessary capabilities of an effective inventory management system is that of coping with the sheer volume and diversity of data involved. This white paper outlines some of the major factors affecting inventory and supply chain management, and covers practices and capabilities that distinguish the most successful approaches to this complex process. It highlights some of the factors you should consider as you evaluate the maturity of your own supply chain and inventory management processes. It also identifies incremental improvements that can enable you to cost-effectively upgrade your inventory management system, one step at a time.

Keeping shelves full, but not too full
Inventory management is one of the most important operational activities that determine the success or failure of any business. Whether it’s a neighborhood bakery keeping enough doughnuts on hand for a construction crew working nearby or a multinational retailer ordering cargo containers full of merchandise from an overseas supplier, the basic issues are much the same. Maintaining optimal levels of inventory is a challenging process, and one that requires constant vigilance. The right level of inventory — enough, but not too much — can produce happy customers, brisk sales and an optimal capital cost structure. The wrong level of inventory can lead to logistical chaos, lost sales and lower profits.

IBM Software

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Cost containment Any organization involved in the production, distribution or sale of a product holds inventory in various forms (raw materials, work-in-process goods, and finished goods), awaiting processing, packaging, use or sale, as seen in Figure 1. Each type of inventory represents working capital that is tied up and unavailable for other purposes until that inventory leaves the company as purchased goods.

Inventory typically represents a large portion of the total investment in a business. For retailers, wholesalers and distributors, inventory is usually the largest single asset on the balance sheet and the cost of that inventory is the single largest expense item on the income statement. At any given time, large retailers can have billions of dollars tied up in inventory. For manufacturers, inventory carrying costs often comprise a substantial part of the cost of production, and those costs drive major decisions regarding production and distribution. It is important to note that the total cost of inventory extends far beyond the cost of goods sold. It also includes carrying costs, or the cost of managing and maintaining inventory. Components of inventory carrying costs can include financing charges or the opportunity cost of the inventory investment, as well as insurance, taxes, material handling expenses and warehouse overhead. Inventory control and cycle counting expenses, along with inventory shrinkage, damage and obsolescence are also factors. Studies of inventory carrying costs...
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