If you manage a product-based business, then you likely see inventory investments as a necessary evil needed to satisfy customer service requirements, maximize revenue, and keep the lights on. Managing your business agility is one of the keys to success.
When managed correctly, inventory is your greatest strategic and competitive asset. The question is how to implement a sustainable and effective inventory management strategy that not only adapts to changing business dynamics, but also promotes continuous improvement.
In this article we discuss the challenges of managing inventory today, and provide 5 essential tips to for retailers, wholesalers, and manufacturers looking to increase profitability, maximize cash flow, and improve supply chain business agility.
Inventory Management and Control are Crucial
Studies show that effective “inventory management and control are crucial to a firm because mismanagement of inventory threatens a firm’s viability.” Too much inventory consumes physical space, creates financial burden, and increases the possibility of damage, spoilage, and loss.
Yet, too little inventory often disrupts manufacturing operations and increases the likelihood of poor customer service. Effective inventory management is, therefore, a balancing act between these two extremes.
Unfortunately, 43% of American small businesses don’t track inventory, or do so using a manual system. Though various inventory management software programs are available for small businesses, there is no “silver bullet” solution. Thus, industry experts now recommend a methodical, evolutionary approach to inventory management, and optimization.
How to Balance Service, Cost, and Capital
Inventory management priorities vary between organizations based on functional performance metrics and incentives.
- Commercially-Focused Teams – Tend to focus on service, and prefer an abundance of inventory close to the customer.
- Financially-Focused Teams – Tend to focus on working capital as a lever to fund business investments and prefer minimal inventory.
- Operationally-Focused Teams – Tend to be held accountable for costs and seek to manage inventory efficiently. Prefer to buy inventory in large quantities to maximize economies of scale or reduce inventory to minimize warehousing costs.
The challenge, and key to success in most cases, is navigating these differing priorities and establishing a sustainable balance between service, cost, and capital. Though any dimension can be improved in a relatively short time frame, dramatic actions (e.g., extreme reduction of inventory levels) often lead to an erosion of customer service and sales, and an increase in replenishment and fulfillment expediting costs.
Thus, a different mindset and approach are required to balance all three dimensions. Like a three-legged stool, the objective is to keep the seat level through balancing service, cost and capital.
Five-Step to Approach to Achieve Inventory Agility
Retailers, manufacturers, and wholesale distributors are fond of best practice solutions that are technically correct, but are of little particle use. As a result, these investments can be lost as employees revert to legacy processes that they understand.
As with most best practice solutions, it’s critical to plan and manage inventory based on data-driven analytics and decision support tools. In other words, you need to manage your inventory based on fact driven analysis, rather than a set of best practice processes found on the internet.
The most effective approach is to leverage simple concepts, and interactive analysis to better understand the rationale behind the inventory targets, and the unique characteristics of your business that have the greatest impact on inventory productivity.
Determine Your Baseline
Use a commonly-accepted equation to calculate inventory targets based on current attributes of demand and supply for each item-location combination. This baseline will help you establish targets for the business based on current capabilities.
Compare Historical Performance to Baseline
Compare historical performance to the newly established baseline to quantify opportunities to reduce inventory investment and/or increase service. Then modify inventory management and control metrics to “right-size” inventory investments and align with calculated targets.
Consider the Effects of Fluctuating Supply and Demand
Evaluate the effects of changing demand and supply attributes (e.g., lead time reductions, supply reliability improvements, and replenishment frequency increases) to identify key leverage points, improve inventory productivity, and quantify potential benefits.
The next logical task is often the most difficult, but it’s necessary to reduce the number of items sold, and the number of stocking locations. Many items may not justify their inventory investments and should be evaluated for potential elimination.
Pro Tip: Consolidating inventory into fewer stock locations can help reduce overall investment. For more on this topic we recommend you read Managing Inventory Across Multiple Locations.
Evaluate Service Level Goals
Different inventory items do not have equal strategic value to a company, and therefore should not have the same service level goals. Evaluate current service level goals by segmenting products and differentiating objectives for prioritized customers.
This is done by determining the point at which the cost of a high service level exceeds the benefit of an incremental sale is key to inventory productivity for each item.
Agile Inventory Management is Vital to Business Success
The importance of optimizing inventory investments can not be overstated. The challenge is to determine how to achieve and sustain the balance of service, cost and capital.
Contact Flowspace today to try our inventory management software that streamlines the above approach and better accommodates fluctuating supply and demand throughout peak seasons and volatile market conditions. Request more information to see how Flowspace can help you with your business agility.