Five Suggestions for Practical Inventory Management
Recently, a colleague recounted a new consulting job he had undertaken a few years back. The client was struggling to make a large enough profit, which was threatening to derail their business expansion plan. This revolved around moving to a larger facility as they had outgrown their existing warehouse. The client perceived the problem as a lack of sales and wanted my colleague to look at ways they could increase revenue in order to fund the expansion.
The real problem, however, was inventory. The client had a warehouse full of old stock that had been sitting unwanted for years, and there wasn’t enough room to accommodate the inventory that they were selling.
Problem easily solved, right? Just get rid of the old stock and create plenty of room for the inventory that sells, thereby eliminating the need to move to a larger, more expensive facility. Well, it wasn’t that easy. When deciding what to get rid of, the most common mindset within the business seemed to be, “Hey, let’s hold onto that – I might sell it one day.”
What is the right inventory level for your business?
If you left it to your sales team to decide on the optimal amount of inventory for your business, it would in many cases be as much as possible of every stock item in every location at all times, just in case they win that big order that needs to be delivered tomorrow. If left to the finance team, it would be as little as possible of as few stock items as possible in the fewest possible locations, with the thinking being, “Let’s not pay the supplier until we have sold the stock and have the money in the bank.” So how do you find the right level of inventory for your business, and then maintain it? Here are a few suggestions.
1 Spring clean
Review all items that have a low stock turn and look to get rid of them. At worst, you free up shelf space and the resources to maintain that inventory, and at best you can sell the items to a liquidator or similar and free up some money for purchasing fast-moving stock in higher demand.
2 Apply ABC ratings
Categorize your inventory. Your fast-moving, high–margin items will be As; Bs will be fast moving with lower margins; Cs are steady sellers with high margins, and so on down to the Es which are the slow movers with low margin. Once you have done this, make sure you always have enough As and look to get rid of your Es.
Next, think about your strategies for each category and use common sense. For example, if you were looking to run a promotion it would obviously be unwise to do it on your A category stock as you don’t have trouble selling it, and it already makes you good money. It would make far more sense to run the promotion on, say, a C item where you could get an uptick in sales by offering an appealing discount.
3 Use a Pareto chart
This is all about the 80/20 rule. That is, 80% of your business comes from only 20% of your inventory, and then 20% of your customers and 20% of your suppliers. For your business, it may be a different ratio, but make sure you have identified the inventory items (products), the customers and the suppliers who sit in that group, and therefore are of most value to you, and make sure you act accordingly. For example, if you found yourself running low on an inventory item and you didn’t have enough to satisfy all orders, make sure that you at least satisfy your best customers. For your best inventory items, make sure you have an alternative supplier or two as you can’t afford to be out of stock. Having an effective supplier scorecard program in place will help with this.
It is a simple process to run a Pareto chart across your products, customers and suppliers and it will provide great insight into what to focus on to improve inventory and your overall business operations.
4 Stick to the facts
Most transactional systems like an ERP solution allow you to set up measures like safety stock, economic order quantity, supplier lead time, etc. However, these are usually done on a set–and–forget basis and often it is someone’s best guess at the time. Over time you should gather the actual data (facts), then use your supply chain analytics platform to analyze that data and use it to refine the processes. You will be amazed at the savings you will make based on much more informed decision-making.
5 Use supply chain analytics for greater insight
During a proof–of–concept presentation, a Logility customer was looking at supplier delivery times and concentrating on the suppliers who were making late deliveries. We suggested taking a look at suppliers who were delivering early, to which the customer replied, “Why would I be concerned with early supply?” We indicated that four of their largest suppliers were early delivering stock – often weeks early – for orders of large volume (both physical size and quantity). These were readily available commodity items that were not only filling up our customer’s warehouse, but significantly impacting cash flow. The penny dropped – the CFO promptly excused himself from the meeting as he said he had four important phone calls to make.
A good supply chain analytics platform will help you to quickly and easily identify these sorts of issues and opportunities, and support you to make the changes that will deliver rapid returns.
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