Inventory management is a balancing act with pressure from all sides: finance demands minimum stock levels to limit working capital, production and operations must ensure that there is enough raw material and components on hand. At the customer end, salespeople want guarantees that there is an uninterrupted flow of finished goods. There is often a mismatch between raw material supply and the manufacturing process, or between the manufacturing process and the flow of finished goods.
Inventory must be in the right quantity, right quality, in the right place and at the right time. Too much stock means money tied up and piles of waste, too little means lost revenue and frustration. Many companies rely on manual methods to estimate inventory levels that are not based on any fact. “Rule of thumb” measures, such as “four week’s supplies” are often based on historical experience or perception rather than accurate calculation.
Without a clear inventory policy, agreed by operations, finance and sales, it is difficult to find the balance between being out-of-stock and having excess inventory.
Why optimise?
The aim of optimising inventory levels is to meet customer service requirements at the lowest cost. The goal of demand planning (forecasting) is to strike a balance between having sufficient inventory levels to meet customer needs without overstocking.
When sales targets are used as input to calculate the number of finished goods required, there may be a problem when there is an unexpected rise in sales.
Safety stock levels are designed to cope with unplanned fluctuations, based on the defined service level a company wants to achieve, e.g., 99% availability. Finding the right balance between enough safety stock and limiting the money tied up in working capital is as much art as science.
The SCCG Inventory Optimisation Consultants present 5 strategies useful to improve inventory management:
- Better data collection. It is vital to know where your inventory is – at which sites, at suppliers and in transit. Without this knowledge, too much safety stock may be held. Inventory levels should be monitored using a regular counting system such as cycle counts.
- Shorten lead times. Shorter lead times mean less inventory is required. Investigate ways of speeding up the flow of purchases and delivery times.
- Speed up production. Manufacturing or distributing more quickly means meeting customer demand with less inventory.
- Avoid bulk buying. Avoid economies of scale. It costs more in storage costs than it saves in discounts and often leads to dead stock.
- Build key supplier partnerships. A vendor managed inventory solution is an option -inventory holding costs can be shared.
Using the right technology
Without optimising, inventory companies will be overpaying and underperforming. A key factor in inventory optimisation is having the right technology in place. Modern methodologies have been devised to optimise inventory levels considering working capital, equipment utilisation and customer service criteria. Inputs include capturing variables such as lead times, manufacturing frequency, batch size, and procurement policies to calculate the most efficient inventory levels.
Visibility means knowing what has happened, what is happening now, what is going to or is likely to happen, and what possible alternatives exist. Real-time data visibility across multiple locations results in reduced inventories, fewer stock-outs, and improved service levels. Where there are thousands of SKUs, without a structured methodology and powerful analytical tools, inventory management becomes an impossible task. The lack of a digitised tracking solution can make it difficult to make informed decisions on optimal stocking levels. Determining optimum inventory levels to manage omnichannel requirements requires complex calculations.
Depending on the size of the company, the complexity of the supply chain and the range of functions offered, the return on investment needs to be carefully evaluated before selecting a software solution. There is no ‘one-size-fits-all solution so your consultant and solution provider must understand the specific needs of your company, operation and your perspective.
A suitable solution will result in the reduction of obsolete stock, stock with short lead times, and stock held to maintain operations for a specific time frame, as well as reduced costs and less money tied up in inventory.
Optimising inventory is key to an efficient supply chain
The Supply Chain Consulting Group Inventory Optimisation Consultants can review your company’s supply chain performance, by analysing the size of your company, the industry sector and the design of the internal supply chain. We can then identify the right strategy and select the right technology to help you optimise your inventory.
