As more companies wrestle with maintaining just the right amount of inventory across the supply chain, they're turning to software for help. Specifically, they're investing in inventory optimization solutions, applications designed to help users calibrate stocking levels to their precise needs. Nearly a quarter of the respondents to a recent DC VELOCITY survey said they planned to buy inventory optimization (IO) software in 2013, making IO software second only to warehouse management systems on the list of proposed purchases. That's a notable change from past surveys, when transportation management software typically claimed the number-two spot on the list.

What's behind the surge of interest in software for inventory optimization? "A combination of tight capital requiring maximum utilization of inventory assets and the need of retailers and wholesalers to satisfy needs across multiple buying channels from inventory at every source point," says Eddie Capel, chief executive officer of Manhattan Associates, one of the many providers of this type of software. "Companies need to optimize inventory."

In fact, a host of companies across an array of industries have begun deploying software to manage inventory held at multiple points in the supply chain. Players in the high-tech, consumer packaged goods, pharmaceutical, and industrial manufacturing sectors are all starting to install this type of solution, says Gartner Research Director Tim Payne. "Inventory optimization tools are not really industry-specific, so they can be used in most verticals," says Payne. "The main distinction between the different tools is whether they can do just finished goods or can go back into manufacturing and consider 'WIP' [work in process] and 'RMS' [raw material supply] as well."

What's also helping sales along is that the applications have matured and now have a proven track record of operational benefits. "A few years ago, inventory optimization was still considered an 'early adopter' technology used by only a few leading-edge companies," says Patrick Smith, managing director North America at the ToolsGroup, which develops this kind of software. "The technology has become easy to use, install, and maintain, with a commensurate [drop in the] total cost of ownership." In addition to ToolsGroup and Manhattan, other well-known providers of this software include Barloworld, IBM, Logility, SAP, SmartOps, and TCLogic.

Another reason for the increased interest is that companies are taking a more holistic view of supply chain inventory, and today's solutions can support that approach. Most software packages out there are "multiechelon," meaning they look at inventory levels across all stocking locations.

Indeed, this ability to calculate optimal inventory levels across the entire supply chain is the main driver of the increased interest, according to ARC Advisory Group analyst Steve Banker. He notes that historically, stock-level calculations were done for a specific location—say, the amount of finished goods to hold at a particular DC. But optimization packages today can calculate inventory needs throughout the supply chain, helping users determine how much stock to hold at the factory, at the regional DCs, and at the central DC. "When a simultaneous multiechelon solution is done, you end up carrying less inventory across the network," he says.

Along with inventory reductions across the network, this software can improve fill rates in the DC by more closely matching supply with demand. "One rough rule of thumb is that a company can reduce stock-outs by about half," says ToolGroup's Smith.

As for the future, at least one analyst—Payne—expects to see some convergence between inventory software and demand sensing solutions, which use point-of-sale information to develop forecasts. Payne says vendors in both areas are working on the ultimate solution—an application that uses demand as the basis for inventory calculations and location deployment. "What will happen more is that demand sensing and IO will converge—at least in the short-term horizon," predicts Payne.