What is the difference between Inventory Management, Planning and Optimization?

I often get asked what the difference is between inventory management, planning and optimization.  It is an important question and one that needs to be answered and understood, especially when you are looking to purchase software to help you with your inventory.  There is, of course, some cross over, between the three (picture a Venn diagram), so I will provide some examples to best describe and highlight how they are each unique in their own way.

What is Inventory Management?

Inventory Management is often misused to describe inventory planning and inventory optimization.  Although, it does and should include some inventory planning, like a min/max type of inventory policy, it almost never includes inventory optimization.

Think of Inventory Management as the tracking and trace-ability of inventory through out the supply chain.  A good example would be RFID tracking.  Using bar coding to track and know where your inventory is in your network at any given time is the simplest and most unique way to differentiate that which Inventory Management does, but inventory planning and optimization do not.

What is Inventory Planning?

Inventory Planning is what most companies look for to understand their inventory position and to control their inventory levels and investment.  Inventory Planning in its simplest form is included with Inventory Management.  And, an optimal inventory plan will and should include Inventory Optimization.  So, they are intertwined and Inventory Planning sits in the middle.

Back to what exactly is Inventory Planning.  From a bottoms-up perspective (i.e., item by location), it is a proactive inventory policy that defines what your cycle stock and safety stock should be.  The policies are such that they can be forward looking to help you understand where your inventory investment will be.  A typical example is calculating policies by the number of days of forecast you should order and stock, respectively (e.g., days of supply).

From a top-down perspective, Inventory Planning is the forward looking investment in inventory spend.  This is generally performed at a product category level and deemed to be your open-to-buy budget and extremely popular among retailers where working at the item by location level can be cumbersome (especially in fashion).

What is Inventory Optimization?

Inventory Optimization can be viewed as a sophisticated inventory plan.  It takes on two forms, a bottoms-up inventory plan and a top-down inventory plan.

The top-down inventory plan, if optimized, can be referred to as network optimization.  It is the optimal inventory investment for all stocking locations and all items within a distribution network.  The bottoms-up plan if optimized is referred to as multi-echelon inventory optimization.  This is the item by location inventory plan for each item at every stocking location.  To be optimized at this level, safety stock is driven by a service level target and the cycle stock is derived by the trade-off in carrying and ordering costs.  

Reconciling both the bottoms-up and top-down plan is the key to optimizing the inventory investment. The end result being a forward-looking, time-phased replenishment plan that takes into consideration how wrong the forecast is, the variability in lead-time, your service level objectives, the costs of inventory,  and the budget and investment constraints of your business.

What make the most sense for you?

Each business has its unique needs and issues. If you are looking for Inventory Management, a warehouse management software will generally have the functionality you are looking for.  But, if you are looking to manage and control your inventory spend and investment so your inventory does not get out of control, I recommend starting with the simplest approach - a top-down software like open-to-buy planning.  Start with managing your sales objectives, your purchase orders, your profit and margin targets, and from there back into an inventory budget that you are comfortable with.  Translate that budget into a prioritized list of orders, hence balancing your financial goals with your assortment.

greg marmulak | founder | dash/APPLICATIONS
a software and inventory expert, greg has been living inventory optimization for the past 18 years, working with manufacturers, distributors, and retailers.

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