Inventory management is a key challenge for any company that manages a stock of products or raw materials. Inventory is essential to meet customer demand and maintain operational efficiency, but it can also be expensive. Excess stock can lead to unnecessary working capital expenses and the risk of not selling products, while shortages can negatively impact customer satisfaction and profitability.
Inventory management with mathematical programming
Companies have increasingly turned to mathematical optimization as a tool to improve inventory management . Mathematical optimization involves using algorithms and mathematical models to find optimal solutions to complex planning and resource allocation problems, including stock management.
Inventory management mathematical models can be used to determine the optimal amount of stock to hold at all times throughout the supply chain , with the goal of minimizing total inventory costs while ensuring customer satisfaction. These models take into account multiple variables and restrictions, such as multi-level stock, customer demand, supplier delivery times, storage and order costs, etc.
Predictive models can also be used to complement and improve optimization models in inventory management. These models use data analysis techniques such as machine learning to study customers’ historical buying patterns and predict future demand with reasonable accuracy , allowing companies to anticipate, adjust inventory levels, and plan orders more effectively.
The combination of mathematical optimization models and predictive models can provide an even more effective inventory management strategy.
Benefits and key points to consider
Companies that are applying mathematical optimization to improve inventory management are significantly reducing costs and improving service. For example, a study published in the International Journal of Production Economics exposes the case of a consumer products company in Europe that managed to optimize its inventory and reduce its costs by 30%. Another example is the case explained in the Computers & Industrial Engineering magazine, in which an electronics manufacturing company in Asia used a mathematical optimization model to reduce its inventory costs by 10% and improve its customer service rate by 5%. Percentages that in large companies can mean millions of dollars in cost savings and improved profitability.
When applying this type of technology, several things must be taken into account. First of all, it is important to have specialists who can carry out a thorough analysis of the problem and adjust the models as necessary to guarantee their applicability and success in the specific situation of the company .
On the other hand, optimal stock management should not be seen as a static and isolated process, but integrated into a broader and more strategic approach to supply chain management. Inventory optimization should be considered in conjunction with other supply chain activities, such as production planning, demand management, and supplier management, to ensure the efficiency and effectiveness of the supply chain as a whole . Although a company can start by applying one model for inventory and gradually progress to include other models, the possible future connection between the different solutions must always be considered.
It is clear that the application of mathematical optimization techniques in inventory management can be an effective strategy to improve operational efficiency, reduce inventory costs and improve customer satisfaction. The companies that have adopted this strategy have obtained significant results, and that is why more and more companies are applying it.
Arjen Heeres has extensive experience in leading multinational companies specializing in planning and AI solutions. Regarded as one of the most respected executives in the optimization and advanced analytics software industry.
Arjen co-founded Quintiq, a leading software company in the field of resource optimization and supply chain planning. During his 15 years as COO at Quintiq, he led the company’s global expansion and was responsible for the commercialization of its advanced planning solutions.
In 2014 Quintiq was acquired by Dassault Systems, a world leader in the software development industry. At that time, Quintiq had over 800 employees, more than 400 customers and was present in 13 countries in Europe, the Americas, Asia and Oceania. As CEO of DECIDE, Arjen leads the expansion phase of the company, taking it to the next level of growth and development both internationally and in the Spanish domestic market.