How to Understand Segmentation vs Inventory Optimization

Executive Summary

  • Supply chain segmentation is a method of inventory classification.
  • Supply chain segmentation is employed in niche supply chain vendors.

Introduction to Segmentation

Segmentation is a method of dividing the product location database. In this aricle you will learn how segmentation compares to inventory optimization.

What is Inventory Optimization

There are some problems in the inventory optimization space relating to what is being communicated to potential clients.

One issue relates to what is claimed to be inventory optimization and what is not.

This is because some vendors that perform product database segmentation, calling their solutions inventory optimization. This is a problem for the following reasons:

  1. Segmentation has many benefits, which happen to be different from inventory optimization. By calling the software inventory optimization, segmentation will not become known in its right.
  2. Buyers, already confused, will end up further confused.
  3. Segmentation is not the same thing as inventory optimization.

What is Supply Chain Segmentation?

Supply Chain Segmentation is a method of selecting portions of the product database and applying changes to its control parameters.

  • For instance, one could select all SKU-Locations or product locations that are above a certain number of inventory turns per year and apply on economic order quantity to them.
  • The ability of Supply Chain Segmentation is critical because it allows planners to more efficiently control their products, and because it is a very direct method of filtering and control.

Along with filtering capability comes an ability to report on the products within the planning system. By performing filtration on different characteristics, the planner can gain a better appreciation and understanding for their products overall. It can fulfill many of the master data maintenance of the planning system.

Supply Chain Segmentation Versus Classification of Inventory

Supply Chain Segmentation should not be confused with the classification of inventory. Classification of inventory places inventory into categories such as A, B, C. Supply Chain Segmentation is about the categorization of product locations for treating them differently with the application different inventory parameters (lot size, reorder point, etc.) and even different supply planning or forecasting methods.

How Is This Segmentation Different From Inventory Optimization?

Inventory optimization is the ability to derive stocking levels from service levels. The definition continues to be a problem regarding being understood by prospective buyers. There are some reasons for this. Several vendors have confused its meaning through directly hijacking the term to be trendy, while many consultants have overused the term, and in fact, do not know themselves the term’s actual definition.

The more flexible and abstract the setting of the service level is, the more powerful the inventory optimization software can be considered to be. The lowest level of inventory optimization is at the product location, and the highest is the customer. However, not every customer wants, needs or is capable of managing their service levels by the client. Thus MEIO software selection is only partially about the level of the service level specificity of the application.

Supply Chain Segmentation, on the other hand, is about parameter control functionality, and an entirely different category of software from inventory optimization. For instance, the ability to apply a particular inventory parameter to a segment of the product database should not even be on the list of selection criteria for inventory optimization. However, it would be central to the selection of segmentation software.

Discerning the Difference Between Inventory Optimization and Supply Chain Segmentation

It is important to have questions ready when interviewing different vendors. The questions below can help prospective clients to understand what type of software they are dealing with in this space.

  1. Is this product segmentation or inventory optimization software?
  2. Where can the service level be set in the application (i.e. product/location, customer, location)?
  3. What specifically is being optimized?

A Recommendation to Supply Chain Segmentation Vendors

If I were one of those vendors, I would change the message around the product to explain its benefits as a segmentation product, rather than an optimization product. (Do you really want to be competing in an area where you are not offering the declared functionality when your software is explicitly designed for something else?) Doing this would create a unique value proposition for the application and will also lead to more successful projects because the client need will better match the functionality offered. Using the term inventory optimization may work for a while to get business in the short-term, but it is ultimately not an effective strategy long-term.

Conclusion

The inventory optimization space is crowded, with everyone declaring they have inventory optimization. Among true inventory optimization vendors there are significant design approach differences that make them better or worse fits for different environments. However, the first step in an inventory optimization software selection is removing segmentation vendors. Segmentation software is still quite a value, but it is important to know what you are buying and what you can expect from your software purchases.

Remote Supply Planning Consulting

  • Interested in Our Supply Planning Research?

    The software space is controlled by vendors, consulting firms and IT analysts who often provide self-serving and incorrect advice at the top rates.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, contact us and we will be in touch.

Search Our Other Supply Planning Content

Brightwork Explorer for Service Level & Stock Management

Faster and More Straightforward Approach than Inventory Optimization

Inventory optimization started with a bang but failed to live up to the hype that was built up for it. Inventory optimization software is normally overly complex and while the idea is right, successes with inventory optimization are rare.

After seeing many failed inventory optimization projects we developed a simpler and less invasive way of modeling service levels and inventory. The Brightwork Explorer is free to access until it sees “serious usage” and is free for academics and students. Select the image below for more details.

References

MEIO Book

What is MEIO?

This book explains the emerging technology of inventory optimization and multi-echelon (MEIO) supply planning. The book takes a complex subject and effectively communicates what MEIO is about in plain English terms. This is the only book currently available that describes MEIO for practitioners, rather for mathematicians or academics.

The Interaction with Service Levels

The this book explains how inventory optimization allows the entire supply plan to be controlled with service levels, and how multi-echelon technology answers the question of where to locate inventory in the supply network.
This is the only book on inventory optimization and multi echelon planning which compares how different best of breed vendors apply MEIO technology to their products. It also explains why this technology is so important for supply planning and why companies should be actively investigating this method.
The book moves smoothly between concepts to screen shots and descriptions of how the screens are configured and used. This provides the reader with some of the most intriguing areas of functionality within a variety of applications.
Chapters
  • Chapter 1: Introduction
  • Chapter 2: Where Inventory Optimization and Multi-Echelon Planning
  • Fit within the Supply Chain Planning Footprint
  • Chapter 3: Inventory Optimization Explained
  • Chapter 4: Multi-Echelon Planning Explained
  • Chapter 5: How Inventory Optimization and Multi-Echelon Work
  • Together to Optimize the Supply Plan
  • Chapter 6: MEIO Versus Cost Optimization
  • Chapter 7: MEIO and Simulation
  • Chapter 8: MEIO and Service Level Agreements
  • Chapter 9: How MEIO is Different from APS and MRP/DRP
  • Chapter 10: Conclusion
  • References
  • Vendor Acknowledgements and Profiles
  • Author Profile
  • Abbreviations
  • Links in the Book
  • Appendix A: MEIO Visibility and Analytics
  • Appendix B: The History of Development of MEIO Versus MRP/DRP