Do you have the right people and inventory processes in place to align with your business goals?
Managing inventory is a collaborative process that has many moving components to consider. No one component can work in isolation from the others. Given the ongoing supply chain disruptions, if you can’t measure the key aspects of your inventory holding, you will struggle to grow your business.
According to Inbound Logistics, “63% of businesses don’t use technology to monitor supply chain performance. This results in a loss of productivity, increased customer complaints, and further financial losses.”
To improve inventory performance and take the guesswork out of placing optimal orders, you need to link your inventory objectives to your daily transactions.
Every business operates with limited working capital. This means that it’s essential that your inventory planners place optimal orders that align with your inventory objectives. And, you also need to be confident that this is what they are doing!
The solution is to ensure your inventory planners fully understand the inventory objectives of your business. In our experience, and we say this often to our customers, managing inventory is a collaborative process. Across your business, the various departments should understand and align with these objectives. You can’t expect to have a winning football team if half of your team trains separately from the others. There won’t be any alignment, and players won’t know how to execute the same strategy.
Is each order placed aligned with the business objectives?
All inventory management policy-related decisions must align with the business objectives and the model stock – as this will impact your recommended orders.
Let’s explore this a bit more:
Set realistic inventory objectives for your business
You need to set realistic inventory objectives, not just financial goals for your business. Ideally, your demand planning tool should have a strategic planning feature that allows your management and operational teams to simulate and provide a projection of how each scenario impacts the inventory into the future; for at least the next 12 and preferably 24 months.
While your model stock may tell you what the ideal or optimum inventory level is now, you need to understand how the inventory policy decisions will impact the business in the future.
By involving key team members in this process, they will understand and trust the model stock value required to achieve the desired customer fill rate.
From a tactical standpoint, your management and the operational team’s objective should align with every order placed – with each order taking you one step closer to the model stock.
Should the management team understand inventory management?
The quick answer is, yes!
Often, members of the management team do not understand the complexities of inventory management. Inventory is not just a number on a balance sheet and requires a lot more insight into what that number means.
If excess inventory is a problem in your business, the answer is not to limit the amount spent on monthly purchase orders. The excess stock can be a result of obsolete items in your inventory. Obsolete items should be written off or sold at a reduced price to remove these items quickly from your warehouse. If you adopt this blanket approach of reducing monthly purchase orders, the obsolete inventory would not be managed, and you would be at risk of stocking out on inventory that sells! – These are your bread and butter items.
Management should be aware of the supply and demand risks and factor these risks into the model stock so that over time your team can start to reduce risk by:
- On the supply side: you achieve this by collaborating with your suppliers, getting to know them better, and negotiating better lead times and more reliable supply.
- On the demand side: you achieve this by regularly talking to your customers and understanding their market to get more accurate forecasts from them.
You need to ensure you have the necessary amount of insurance against supply and demand risk through your safety stock. For optimum results, your safety stock should be uniquely set for each item based on an understanding of each item’s risk profile.
The model stock is the result of many interrelated factors. For example, the sales team would want to set the strategic objective, which they generally express as a target fill rate percentage. Your target fill rate is the percentage they would like to maintain to satisfy the customer. However, the working capital required to move from 90% to as high as possible, perhaps even at 100%, may not be affordable.
Using manual methods like spreadsheets to calculate all of these intricate steps can put your business at risk. We all know that spreadsheets are prone to human error, and mistakes can be costly!
The more your management team understands the intricacies of inventory management, the quicker you will benefit from adopting a more efficient, automated inventory planning tool in your business.
Get your forecasting right!
The goal of forecasting is to place an optimal order on a supplier, and your forecast is a key factor in determining the optimal recommended order quantity. The forecast must reflect the actual market demand as accurately as possible. If the market demand changes, the forecast should be adjusted accordingly. A stock-out, for example, may not be the result of poor forecasting. It may be a supply issue. Finding out the root cause so you can be proactive is vital. If your supplier is late, increasing the forecast is not going to solve the problem. This is where it becomes crucial to collaborate as a team and involve your sales and procurement departments.
Four tips to consider with forecasting:
- Don’t waste your time by reviewing every item’s forecast and trying to make them all perfect.
- Measure your performance so you can see how you’re doing and take corrective action to make it better.
- Use a measurement, like forecast risk, to set the safety stock: high-risk and complex items will have more safety stock.
- Use a good inventory sales forecasting tool with a dashboard that highlights exceptions, such as your top five items that are potentially stocking out.
Refining your inventory planning is a long-term process
Your business is just one link in the supply chain, and you don’t have any control over the other links. Your suppliers, for example, have their supply chain problems to resolve. If it were simple, all businesses would have an optimized supply chain!
Big take out: key components to managing your inventory effectively:
- You need the best available inventory management solution that accurately optimizes your inventory, help drive sales and increase your service levels.
- A supportive and collaborative management team.
- A well-trained inventory planning team that is collaborative and knows how to use the tool to produce extraordinary results.
