Advanced Inventory Optimization Software On the Rise

Jan. 1, 2006
The worldwide market for Advanced Inventory Optimization (AIO) software/services is expected to grow at a compound annual growth rate greather than 12%

The worldwide market for Advanced Inventory Optimization (AIO) software/services is expected to grow at a compound annual growth rate greather than 12% over the next five years. The market was $99 million in 2005 and is forecasted to reach US$ 180 million in 2010, according to a new study by the ARC Advisory Group (Dedham, Mass.), Advanced Inventory Optimization Worldwide Outlook: Market Analysis and Forecast through 2010.

"Traditional software markets sell software licenses," says Steve Banker, the service director for supply-chain management at ARC. "However, in this market, knowledge-based outsourcing and software as a service will be key growth drivers."

AIO solutions are a type of supply chain planning (SCP) solution. However, the optimization is different from that found in traditional SCP systems that contain a single stage inventory calculator which is designed to determine inventory targets for a single node in the supply chain at a time, ARC reports. Single echelon solutions are suboptimal because they do not take a holistic approach to network inventory optimization. Rather than calculating safety stocks for a single supply chain node, AIO solutions simultaneously calculate where and how much inventory should be held across a network of locations at which inventories could be held.

Because it is complex, and difficult to use, Banker says "this type of solution is not well served by a traditional software license and service model." Consequently, for the AIO market, ARC is projecting much faster growth from so-called knowledge-based outsourcing, or the software-as-a-service model.

Knowledge-based outsourcing involves outsourcing all or some portion of a planner's function to an outside party. As opposed to traditional business process outsourcing, such as outsourcing repetitive tasks to a call center in India, knowledge based outsourcing involves outsourcing a function that requires knowledgeable and skilled workers. The software itself is designed to be used by planners who are analytical, and who have the pertinent product and company domain expertise.

In the software-as-a-service model, the software is leased rather than purchased outright by the user. This can be a potent sales tool for applications with high return on investment such as AIO.

"When I asked one company how long their pay-back period was following implementation, they said they had received full payback prior to the implementation,” reports Banker. When asked how that could be, they explained that the AIO supplier came in and entered their data into the software to do an analysis of potential savings. Once the "bake off" was done, the supplier hosted the solution and provided inventory targets while the implementation began. Twelve weeks later the implementation was complete, but the solution was already paid for prior to the company's version of the software going live.

Source: ARC Advisory Group.