Inventory is the lifeblood of your business. It needs to take center stage in all business decisions, it has to convert to cash at optimum speeds and prices, and it needs to be managed properly.
How can your business optimize inventory properly?
Optimizing your inventory means investing the right amount of capital into the right products that take present and future demand into account, and minimize the risk of excess stock or stock-outs. It sounds simple, but it’s tough to achieve and even tougher to maintain.
Here are six steps to inventory optimization:
- Step 1 – Item classification
- Step 2 – Safety stock
- Step 3 – Forecasts and ordering
- Step 4 – Access your inner core
- Step 5 – Action plans
- Step 6 – Technology and tools
Step 1: Item classification
Each item in your inventory holding needs to be broken down into manageable categories like obsolete, excess, and working stock. Once in these categories, they are classified even further as this classification will dictate how they will be treated when setting inventory policies.
At Netstock, we believe that you cannot classify inventory using sales value alone, so we introduced a second criterion that looks at sales velocity. An item may have a low value, but it may be used in many finished product assemblies or is a popular sales item, so the sales velocity will be high. This item won’t show to be important in a standard ABC (sales value), whereas it will in our matrix.
Using item classifications allows you to focus on critical issues within your inventory that need your immediate focus.
Step 2: Safety Stock
Safety stock is your inventory insurance policy. Setting safety stock levels should be done at the item level instead of a blanket percentage across all inventory. A one-size-fits-all approach that so many systems apply is not good enough, not anymore. It leaves lots of capital tied up and does not address the need for the items where this is desperately needed. If you are not sure how to calculate this correctly, read this article, which gives more insights.
Step 3: Forecasts and ordering
The primary reason for a demand forecast for a business that holds inventory is to enable smarter ordering decisions. Forecasts can become a lot more challenging in a seasonal business and for companies that keep adding new items to their inventory, or when there is market volatility.
Using a forecast engine to do the heavy lifting will help you achieve reliable levels of forecast accuracy. You still have the ability to intervene manually should you need to consider other insights, or you can use the recommendations provided by the engine.
Placing orders using the rule of thumb, i.e., ordering item A every three weeks, is not an efficient way to run your orders. Using statistical formulas that incorporate accurate sales forecasts, production or purchasing lead times, manufacturing schedules, and service-level data for each inventory item will result in more accurate orders every time.
Here we unpack some useful guidelines to use when forecasting your inventory.
Step 4: Leverage your resources
Companies often make the mistake of leaving it all up to the inventory planner or supply chain manager when it comes to tight and accurate inventory management. Although they need to make the ultimate decision, it’s important to involve other people in the organization. For example, your sales division is closer to customers and can shed more light on future sales. Your marketing department is on top of industry trends and can also provide valuable insights. Blend insights from different siloes to gain richer insights over your inventory.
To ensure that all role-players work together in your inventory’s best interest, read our article titled How many chefs are in your inventory kitchen, which provides useful tips.
Step 5: Action plans
Even if you follow the processes listed in this article, there will be times when you either stock-out or have excess inventory. There are guidelines to mitigate these risks – we’ve produced an in-depth eBook on the five hidden causes of excess inventory to help you. For suggestions on reducing inventory stock-outs, this article titled The major causes of stock-outs provides useful tips.
Inventory leakage can also cause substantial financial strain if it goes undetected, so taking physical stock counts of your inventory keeps your finger on the pulse and is one way to ensure a clean bill of health. In the same vein, obsolete or damaged inventory can also cause severe dis-ease in your business; here is an article that tackles this topic in more detail.
Step 6: Technology and tools
A common solution that companies choose to use is spreadsheets, and although spreadsheets are excellent for a lot of other purposes, managing optimal inventory levels is not one of them. We have produced an article highlighting the downfalls of spreadsheets and why you should rather look at fit for purpose solutions instead. Focus on a solution that’s customizable, capable and relevant to your business to minimize risk while maximizing efficiency.
Bad inventory management affects your customer service levels, staff morale and productivity, and your bottom line. Isn’t it worth spending the time and effort in getting it right? Can you afford to ignore this?
6 steps to inventory optimization as seen on My Broadband