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The inventory advisor

Dec 10, 2019


Balancing internal and external supply chain risks.

There is more to an Inventory planner’s function than to manage the fine line between overstocking and understocking. There is an ongoing challenge to control other risk factors, both external and internal, to the business. These factors should be top of mind for your Inventory planner in order for them to run an efficient warehouse.

The more your Inventory planner understands these factors, the better they can manage them. External factors are largely beyond our control, but being able to identify them enables you to at least have some plan in place that will lower the risk.

Let’s dive into some of these internal and external supply chain dynamics.

Financial

Borrowing money from a financial institution to finance your inventory is an external factor. Be mindful of the economy, and make sure to watch those interest rates. Remember that the payment of an installment loan isn’t linked to the sales you make, whereas an equity loan will not require any payments until you’ve made some profits. You need to ensure that you factor in the cost of borrowing the money. Tax write-offs are internal factors that always come into play, especially when you prepare for your financial year-end. A few other internal financial factors include the cost of your warehouse operations as well as your transport costs – while the costs of fuel are an external factor that you have no control over.

Economic Factors

Sales and customer service are internal factors that are in your complete control. Economic downturns, politics, and competition are external factors that you have no control. But, by understanding your consumer buying habits and being able to forecast buyer behavior by keeping a close eye on seasonality and trends through your internal systems and platforms such as social media, you may well be one step ahead in terms of your stock holding and demand forecasting.

Employees

Although you employ people to manage and oversee your inventory, they are usually not as vested in the business as you are. So to this end, they are seen as an external factor. You cant control whether they remain in your employ, but you can reward your high performers and those that are important to the management of your warehouse and supply chain in an attempt to keep them. 

Suppliers

Although sourcing and utilizing supplies is an internal decision, it can also be an external factor that is difficult to manage. Your product may be rather specialized, meaning you could be limited to choice in terms of the number of suppliers available. If the supplier pool is small and mostly inadequate, make sure you understand your lead times and add in some extra buffer time. Also, ensure you have a backup supplier that you can call on should the need arise. You cannot control your supplier’s business but you can ensure that they meet your selection criteria and required service levels.

Natural or man-made disasters

Natural or man-made disasters are important external factors in your supply chain, and these could have a significant impact on your business even if your primary location is relatively safe from such incidents. Implementing disaster contingency plans is an internal measure that can help you avoid potential losses and extra expenses that many companies cannot afford. Supply chain disruptions can occur from extreme weather, natural disasters, failing infrastructure, and more. Again, consider your location and your risk factors and check what contingency plans you should have in place in case a disaster impacts your business. 

Commodities

Commodities prices continually fluctuate beyond your control, which makes this a clear example of an external factor. Keep an eye on the costs of key inputs for your business that regularly shift. From an internal perspective, you can shop around for cheaper suppliers, but make sure that you don’t forsake quality when replacing suppliers.

Product recalls

Product recalls from suppliers are an external factor, and an ill-timed recall can have significant repercussions on the profitability and reputation of your business. One way to lessen your risk is to conduct a thorough investigation into the quality of your supplier’s products before you embark on a business relationship with them by checking on their history. Make sure that you have a product recall policy in place to make this unfortunate possibility a little less disastrous.

In summary, your internal factors are known entities that you can control; it’s those external factors that tend to throw you curveballs. While you can’t have a plan in place for every potential scenario, it is advisable to draw up a list of external factors and how these could impact your business. Ensure that you revisit the list regularly to update and make sure that you have all the policies, processes, and procedures in place to help mitigate the fallout.