We look at inventory optimisation, with five tips to help you to reduce your inventory levels.
Excess inventory can be a real problem for some companies, pushing costs up and overall efficiency down. Being able to understand the real cost of managing inventory will help in assisting organisations to implement an effective inventory policy, along with dynamic inventory management disciplines.
Five ways in which you can reduce inventory holdings are as follows:
- Reduce lead timesThis can be done in different ways. It could be useful to look at your lead times in separate stages in order to identify where time can be saved. There may be lengthy lead times in the ordering process and so it may be worth reviewing how your company orders from its suppliers. Is stock ordered at the same time each month? Are there system limitations that don’t allow stock to be ordered when needed? Is there any way these limitations can be solved, for example by updating technology. Furthermore the supplier side of lead times may also present some inefficiencies. Therefore it is important to work with suppliers in order to help them reduce their own lead times, potentially looking at ways to forecast and map out future demand so that they also have the resources in place to cope with fluctuations in your company’s demand. Finally the transportation stage. This simply involves looking at more efficient ways to transport your goods, whether that be by a different mode altogether or by increasing loading factors so that the time taken to get the goods to the final consumer is reduced.
- Improve forecastingDemand forecasting is key to inventory optimisation. If your company can successfully plot fluctuations in demand then there is less need for safety stock which ties up resources. Look at using simple methods, supported by historic data of demand. This way it means employees aren’t complicated by systems that could cause poor planning of orders. It is also important to use demand data instead of sales data where possible. The mistake made by some businesses is that they use sales data which doesn’t take into account lost sales, i.e. orders that could not be fulfilled for a number of reasons. It is all about making your forecasting accurate and understandable for all working within the business so that current and future demand can be understood.
- Prioritise stock/eliminating obsolete stockThis may seem quite simple but isn’t always done effectively. Prioritising stock simply means look at the items that are selling in high quantities and look at the ones that are more obsolete. The business can then more accurately order stock to meet demand, meaning less storage space is being used up by obsolete stock. By reducing the volume of obsolete stock in storage, you are able to maximise space for the products that you know will turnover quickly and therefore don’t tie up large amounts of space.
- Review suppliers regularlyThis is important as it allows you to look at your suppliers and see where they individually have inefficiencies that are impacting on the performance of your business. Then by communicating with them, problems are more easily ironed out and service levels are likely to increase. If you are experiencing poor service from one supplier then it may be wise looking at others in order to reduce stock delays. By introducing another supplier it is not only able to spread the risk, but also may encourage your original and current ones to improve their service as they are now in direct competition. By working with multiple suppliers there is less risk of deliveries not being made and thus less need for safety stock to be held.
- Understand how much to orderThe decision of how much to order is based on 3 key factors:Customer demand
The cost of placing an order
Many organisations order stock based on quantity discounts with little thought to inventory optimisation. This is appropriate in some circumstances, such as for discount retail operations with high throughputs and agile logistics infrastructure.
For many other operations the trade-off of inventory holding costs, transport costs, ordering costs, stock obsolescence and price degradation need to be considered against any quantity discount. All of these cost factors need to be placed in the context of the customer demand.
It is possible to calculate the economic order quantity (EOQ) but the key when doing so is to make sure you have factored in all the relevant costs and have a solid understanding of the demand.