Too much stock results in unnecessary costs. Equally, too little in stock can lead to lost sales. In this article, we explore the 5 fundamentals to attain the optimal level of inventory at the lowest possible cost.
How competitive is your inventory strategy?
Customer purchasing behaviour changes constantly. Assortments evolve. Demand patterns fluctuate. And your supply is never stable.
Such changes make it vital to adjust inventory levels to ensure they align with the market conditions. In turbulent business environments, it’s important to regularly stop and reassess the processes that should deliver cost-effective inventory management:
- Does your inventory get the strategic awareness it deserves?
- Do you know which items need to be stocked?
- Do you know how much of each item you need to stock to avoid stockouts and lost sales?
- Do you have solid principles in place to keep your inventory in check?
To ensure your inventory delivers tangible competitive advantages, these are questions you cannot afford to ignore. However, by using intelligent software, such as Slimstock’s supply chain optimisation platform, Slim4, you can stay one step ahead.
What are the fundamentals of cost-effective inventory management?
The basis of ‘good’ inventory management is all about ensuring that the right goods are available in the right quantity, with the right inventory turnover. However, with a conscious focus on the following 5 areas, you can build more cost-effective inventory management processes:
1) Demand Forecasting
2) Master Data
3) Software Support
4) Human Competencies
5) Relationship Management.
Reliable forecasts are important to create a trustworthy basis for all decisions around assortments, purchasing volume, and safety stocks. Historical data is often used together with knowledge about inventory turnovers, current order levels, and expectations for future sales.
Here it is important to ask whether the existing forecasting processes are up to date. More importantly, is the quality of the forecast satisfactory. Often with modest efforts, opportunities to improve can be quickly be identified.
A companies’ business processes are only as good as the data they are built on. Poor data will lead to poor decision making. And poor decisions often result in costly excess, crippling stockouts & angry customers.
The question is: How often is your inventory master data re-evaluated? Are you confident that you have the right lead times in the system? Are your suppliers’ minimum order quantities up to date? Are your service levels rules & safety stock levels appropriate?
Cost-effective inventory management typically requires a lot of data & many algorithms. However, many businesses struggle with ‘spreadsheet fascists’ who strive to deliver decision-relevant information through very manual processes. As a consequence, many businesses simply lack the transparency to manage inventory effectively.
To make good inventory decisions, inventory processes should be supported by the right tools. By seamlessly integrating with a company’s ERP system, software tools such as Slim4 can help optimise inventory; improving customer service and attaining cost reductions in the process.
Humans play a pivotal role in cost-effective inventory management. It is important to create a common overview and understanding of the inventory workflows. Therefore, everyone involved must receive sufficient training.
More importantly, it’s essential that supply chain roles and responsibilities are clearly defined. For example: Who ‘owns’ the Masterdata? Who is responsible for ensuring the forecasts are accurate? Who ultimately determines the service level?
Without the right knowledge and accountability, the entire inventory management process could be hindered by errors & inefficiencies.
The last area that contributes to cost-effective inventory management comes down to how well supplier relations are managed. No chain is stronger than the weakest link. Therefore, communication and information sharing is crucial to make effective decisions. As well as to take corrective actions where supply fails to align with demand.
Kick-start your inventory optimisation journey
To ensure cost-effective inventory management, these five initiatives should not be viewed as exhaustive. They are suggestions of where you can start. The hope is that these key areas can initiate discussions about the inventory’s role and function with an eye to clarify where and to what extent there is a need or opportunity for improvement.