Peak Policy and Next Generation (PNG™) Inventory Models

Using Risk Management to Optimize Inventory

PNG™ is a suite of tools for inventory control of items with highly variable demand. The tool combines the capabilities of two of LMI's advanced inventory optimization models—Peak Policy and Next Generation (NextGen). Peak Policy optimizes inventory levels for items with infrequent, intermittent demand, while NextGen handles items with more frequent demand. Assignment logic, based on demand frequency, automatically routes items to the appropriate model. PNG™ improves forecasting accuracy while balancing the risks associated with the various dimensions of inventory performance, such as inventory value, customer service, and procurement workload.
 

Avoid Investing in the Wrong Items

The unstable demand patterns for many items makes them inherently unforecastable and results in large forecasting errors. Much like the flip of a coin, the processes that are generating the demand defy prediction. Buyers using traditional methods to forecast items with intermittent, unstable demand patterns frequently end up with the wrong items on the shelf. Due to such forecasting errors, enterprises experience overinvestment in some items, shortages for others, and excessive and unstable buyer workload. Safety stock and order quantity computations lose key information in the data, compounding these problems.

Reduce Inventory, Improve Customer Service, Lower Workload

Setting inventory levels directly based on demand transactions rather than on artificial statistical models improves forecasting accuracy and results in significant benefits. PNG™ helps planners make integrated decisions and tradeoffs that for items with volatile, intermittent demand:

• Reduce inventory investment without degrading customer service;
• Improve customer service without increasing inventory investment;
• Lower the number of procurement actions.

Rigorous testing of PNG™ against the best-known inventory approaches shows that for items with volatile demand the tools can:

• Reduce inventory investment up to 15 percent;
• Reduce procurement workload up to 50 percent;
• Reduce customer wait time 20–30 percent.