Like water is to Maslow’s hierarchy of needs, so too is inventory to a company with a supply chain. Humans can’t survive without water, just as suppliers can’t survive without stock.
The effective management of your inventory underpins your success as a supply chain business. If you can’t get this basic yet critical function right, the rest of the steps in your supply chain hierarchy is sure to fail. The importance of managing your inventory replenishment should take center stage, not being able to match supply with demand, puts you at risk of either overstocking or understocking – leading to costly consequences.
Companies are starting to realize the importance of managing their inventory replenishment more productively, and yet we are still seeing companies using inadequate tools and technologies. We have identified some useful tips to guide you in your journey towards successful inventory management:
Don’t operate in divisional silos
The operational side of a business used to run as a division all of its own with little to no collaboration with other divisions such as finance, marketing, and sales. Today, supply chain operations touch every aspect of a business and are becoming more involved with other functions within the company. This allows not only the Supply Chain Manager but all the divisional managers to have a much clearer and holistic view of the entire business. Make sure that all divisions collaborate.
Don’t operate in technology silos
It isn’t easy to run a streamlined business using a multitude of different technologies. Older companies running legacy systems can’t make use of things like IoT, AI, and machine learning. If you are running legacy systems, you should at least have a digital transformation policy with clear goals mapped out to take your business forward.
Educate all employees
The oversupply or undersupply of inventory affects all aspects of a business, not only operations. All employees must understand how this affects a company’s performance, their division, and ultimately the bottom line.
Understand how oversupply can affect your business
Having too much stock may be your guarantee to 100% customer satisfaction, but it’s a waste of capital. Besides the fact that you have money tied up in stock that isn’t moving, which you could be using on other parts of the business, there are additional costs associated with excess stock:
- The cost of the actual item
- The cost of transportation to get your inventory to your warehouse
- The cost of the space in your warehouse to store your inventory, including rent, utilities, property taxes, and insurance
- The cost of safety equipment, such as fire suppression equipment
- The cost of warehouse equipment, such as conveyor belts, trolleys, forklifts, and pallet jacks
- The cost of labor and security in your warehouse
- The cost of loss via obsolescence
- The cost of loss via deterioration, expiration, and breakage
- The cost of a lost opportunity in having your cash tied up in unsold inventory
Understand how stock-outs can affect your business
Not having stock of certain items not only leads to the loss of future sales but if you can’t meet the demands of your existing customers, you are at risk of them jumping ship and going to an alternate supplier. Customers are not as loyal as they used to be. They want what they want, and they want it NOW.
Some useful points to consider when looking at stock-outs:
- Build better relationships and communication strategies with your customers.
- Formulate a stock-out procedure:
- First, determine if there is a stock-out, as your data may not be accurate unless you are running an Inventory Management solution
- Communicate with your client and see if they are prepared to wait
- If waiting is not an option – consider your best and most cost-effective way to resolve the stock out:
- Can you source from a branch?
- Can you expedite an existing order?
- Can you bring in the products via air freight?
- Can you order from an alternate supplier? Or even a competitor?
Organize and categorize your inventory
Classifying your inventory allows you to focus on those items that matter. Your type of business and type of inventory will determine which criteria you use to classify your stock. Your business may need more than 1 criterion to get a decent analysis.
The ABC analysis is a criterion used and is commonly based on the value of your items. A = highest value, B = medium value and C = least value. However, using this analysis in isolation has its downfalls. Overlaying it with a 2nd criterion, for example, one that measures your sales velocity HML where H = high, M = Medium and L = low will make your inventory classifications that much more precise.
Once your inventory has been classified, you can start to set up your inventory policies, such as replenishment cycles and target fill rates. By adding in your supplier performance insights and your forecast accuracy insights, you can effectively manage your inventory replenishments far more accurately and efficiently.
By trying to manage the complexities of proper inventory planning in the wrong tool, such as a spreadsheet for the sake of saving a few bucks, is something that should be reconsidered. Ask yourself one simple question: “Is inventory the lifeblood and sole purpose of my business?” If the answer is Yes, doesn’t it deserve to be treated as such? Don’t let your inventory health take a back seat when, in fact, it is the driver of your business. Every small company deserves the tools to compete in the market and by investing in the right tools, you will soon see and reap the benefits.