Inventory Optimization: Introduction

Inventory has been a hotly debated subject for the last fifty years. There were a lot of models, including ABC analysis and EOQ models. However, the first real breakthrough was JIT purchasing which was practised in Japan in the 1960s but was known in the western world only in the 1970s. A lot of US and European companies adopted JIT as they felt that it would reduce their inventories drastically. However, very few companies enjoyed the benefit which was achieved by the Japanese companies. The reasons given for this were that the corporate culture in western companies was not amenable for implementing JIT. In the 1980s and 90s some Indian companies also implemented JIT with limited success. In the 1990s a new technique called inventory optimization was developed in western countries. Inventory optimization was a technique which was developed for reducing the inventory across the entire supply chain. This included suppliers, all manufacturing plants, distributor points and retailing points. Along with inventory optimization, the science of network design of the supply chain became popular. In addition to inventory optimization other methods of reducing inventory include vendor-managed inventory (VMI) and consignment inventory model. Over a period of time, a number of software companies have developed packages to implement inventory optimization. Most of these packages use the data from an existing ERP system or other systems, and fix the inventory levels across the supply chain. The main approach of inventory optimization is to minimize investment in inventory for a given service level.