All C-Level and high level executives know the significance of inventory management in the supply chain, yet many of the most experienced and focused managers fail to get the job done. Perhaps it’s because stakeholders adhere to industry or other external standards that don’t deliver expected results or head down the wrong road with assumptions about supply chain operations. Typically, these decision makers rely on two misconceptions:
1. That accuracy of sales forecasting needs to improve to reduce inventory; or,
2. Customer service requires keeping more inventory in stock.
In reality, both of these ideas are nothing more than guesses that can result in excess inventory or shortfalls. Getting it right is critical to controlling hidden costs, and it’s also a measure of a company’s financial condition. There are many factors that you can look at to judge your enterprise’s inventory management successes, so take a look at a few to determine where you can improve your efforts.
1. Break down your inventory into three major operating categories.
The key classifications of stock are:
Dividing your inventory makes it easier to effect sound decision-making about how to handle each group. You’ll know the minimum safety inventory you need to respond to supply chain emergencies so customers get what they ordered despite any glitches. It also simplifies the process of replenishing regular orders on an ongoing basis, while ridding the warehouse of obsolete stock that’s become backlogged.
2. Make sure executives have some say over inventory management.
It’s true that you rely on your front line for decisions on inventory levels, but depending solely upon your supply chain managers to make strategically significant judgment calls is a mistake. Executives need to be involved in the fundamentals, including balancing customer service and maintaining efficient inventory levels.
3. Assess your ordering process regularly to seek out areas for improvement.
If you’re not looking at your optimal order and production frequency on a monthly or quarterly basis, your inventory levels will grow over time. It’s necessary to implement new processes from time to time as part of a continuous improvement process.
4. Handle excess inventory often and have an action plan for dealing with it.
There are many reasons for stock build-up, including inaccurate sales forecasting, incorrect product life cycles and supply chain inefficiencies. You need a targeted inventory management plan that identifies when excess is created and offers an exit strategy for selling or reducing it. There may be external pressure to avoid write-offs that affect your balance sheet, but there's a higher cost for storing surplus stock.
5. Figure out the root cause of excess stock.
Any action plan for dealing with surplus inventory should include identifying the source and figuring out ways to avoid the problem. One idea is to provide the sales team with a list of the goods you’re trying to move, and incentivizing them to sell these items off at a discount.
6. Look at all your inventory when developing a stock management plan.
You can’t just assess a subset of your entire inventory when trying to improve your management efforts, as all types and all organizational entities affect your bottom line. The raw materials, unfinished products and spare parts should be included in your strategy as well if you want to avoid hidden costs of storage.
7. Put the right team in charge of ordering and production schedules.
You want a cross functional team spearheading your inventory planning, so they can weigh all factors involved. You'll have in place a better plan for replenishment stock and ensure the right inventory is available.