How do you improve inventory models?

1 Identify the objectives and constraints

The first step to improve inventory models is to clearly define the objectives and constraints of your inventory system. What are you trying to achieve with your inventory model? Is it to minimize total cost, maximize service level, balance inventory and demand, or something else? What are the limitations and assumptions of your inventory system? How do you account for uncertainty, variability, lead time, capacity, demand, costs, and other factors? By identifying the objectives and constraints, you can choose the most suitable inventory model type and parameters for your situation.

2 Choose the appropriate inventory model type

The second step to improve inventory models is to choose the appropriate inventory model type based on your objectives and constraints. There are many types of inventory models, such as deterministic or stochastic, continuous or periodic, single or multi-item, single or multi-echelon, etc. Each type has its own advantages and disadvantages, and requires different data and methods to implement. For example, if you have constant and known demand, you can use a deterministic inventory model, such as the economic order quantity (EOQ) model. If you have uncertain and variable demand, you can use a stochastic inventory model, such as the newsvendor model or the (Q,R) model.

3 Apply optimization and simulation techniques

The third step to improve inventory models is to apply optimization and simulation techniques to find the optimal or near-optimal solutions and to evaluate the performance and sensitivity of your inventory model. Optimization techniques can help you find the best values for your decision variables, such as order quantity, reorder point, safety stock, etc., that maximize or minimize your objective function, such as total cost, profit, service level, etc., subject to your constraints, such as capacity, budget, demand, etc. Simulation techniques can help you test and compare different scenarios and policies, such as demand patterns, lead times, costs, etc., and measure their impact on your inventory system. Optimization and simulation techniques can be implemented using software tools, such as Excel, R, Python, MATLAB, etc.

4 Incorporate feedback and learning mechanisms

The fourth step to improve inventory models is to incorporate feedback and learning mechanisms to update and adjust your inventory model based on the actual performance and data of your inventory system. Feedback and learning mechanisms can help you monitor and measure the accuracy and effectiveness of your inventory model, identify the sources of errors and deviations, and improve your forecasts and parameters. For example, you can use historical data and statistical methods to estimate the demand distribution and parameters, such as mean, standard deviation, etc., and update them periodically. You can also use control charts and performance indicators to track and evaluate the inventory level, service level, fill rate, etc., and adjust your order quantity, reorder point, safety stock, etc., accordingly.

5 Consider the human and organizational factors

The fifth step to improve inventory models is to consider the human and organizational factors that affect the implementation and adoption of your inventory model. Human and organizational factors can include the skills, knowledge, attitudes, behaviors, incentives, and culture of the people and groups involved in the inventory system, such as managers, employees, suppliers, customers, etc. These factors can influence the quality and availability of the data, the communication and coordination of the information, the compliance and alignment of the policies, and the trust and acceptance of the decisions. Therefore, you should consider the human and organizational factors when designing, developing, and deploying your inventory model, and provide adequate training, support, and feedback to the stakeholders.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?