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The inventory advisor

Apr 6, 2020

Is inventory the foundation of your business?

Inventory to a supply chain company is like water in Maslow’s hierarchy of needs. Without water, we can’t survive, without inventory, as a supplier, you have no business. This should clearly indicate that the management of inventory is of utmost importance and should be treated as such, but is it? If you are not able to match your demand with supply, you are at risk of either understocking or overstocking, both of which have costly consequences.

Even though the management of inventory is of such importance, we still see companies using inadequate tools and technologies and not giving their inventory replenishments the focus it needs. We have listed a few useful tips to guide you in your journey towards successful inventory management.

Break down divisional silos

Traditionally, there was very little collaboration between the operations division and other divisions, such as finance, marketing, and sales. However, Operations touch every aspect of a business and should be more involved with the other functions within a company. If there are clear and concise communications, not only will the Supply Chain Manager benefit, but all the divisional managers will have a much clearer and holistic view of the entire business. Ensure divisional collaboration.

Break down technology silos

It’s virtually impossible to run a streamlined business using a multitude of different technologies and solutions. Companies that are still using legacy systems will not be able to keep up from a competitive viewpoint as they won’t be able to make use of all the exciting new and improved technologies such as IoT, AI, and machine learning. From a financial perspective, you may not be able to upgrade all your systems and tech right now, but you should at least have a digital transformation policy mapped out with clear goals to take your business forward.

Educate your staff

All employees from your receptionist to your admin, sales, marketing etc. must understand how the oversupply or undersupply of inventory affects the performance of the business, their division, and ultimately the bottom line.

Understand how oversupply can affect your business

Having to much stock may be your guarantee to 100% customer satisfaction, but its a waste of capital. Not only do you have money that is tied up in inventory that could be used to grow other areas of your business, but there are also other additional costs associated with excess stock:   

  1. The cost of the actual item
  2. Transportation costs to get your inventory to your warehouse
  3. The cost of warehouse space, including rent, utilities, property taxes, and insurance
  4. The cost of safety equipment, such as fire suppression equipment
  5. The cost of warehouse equipment, such as conveyor belts, trolleys, forklifts, and pallet jacks
  6. The cost of labor and security in your warehouse
  7. The cost of loss via obsolescence
  8. The cost of loss via deterioration, expiration, and breakage
  9. The cost of a lost opportunity in having your cash tied up in unsold inventory

Understand how stock-outs can affect your business

Stocking out of items not only leads to the loss of future sales, but your existing customers may well jump ship and go to an alternate supplier if they can’t get their orders from you. Customer loyalty isn’t what it used to be. 

Useful points to consider when looking at stock-outs: 

  1. Build better relationships and communication strategies with your customers.  
  2. Formulate a stock-out procedure
  • Determine if there is a stock-out, as your data may not be accurate unless you are running an Inventory Management solution
  • Communicate with your client and see if they are prepared to wait
  • If waiting is not an option — consider your best and most cost-effective way to resolve the stock out:
    • Can you source from a branch?
    • Can you expedite an existing order? 
    • Can you bring in the products via air freight? 
    • Can you order from an alternate supplier? Or even a competitor?

Organize and classify your inventory

Depending on the type of business you are in, and the type of inventory you hold will determine the criteria you use to classify your items. By classifying your inventory, you can focus on the items that are critical to the success of your business. Depending on your business you may need to use more than 1 criterion to get an accurate analysis

The ABC analysis is a criterion used and is commonly based on the value of your items. A = highest value, B = medium value and C = least value. However, using this analysis in isolation has its downfalls. Overlaying it with a 2nd criterion, for example, one that measures your sales velocity HML where H = high, M = Medium and L = low will make your inventory classifications that much more precise. 

As soon as your items are classified, you can set up your inventory policies, such as your replenishment cycles and target fill rates. Adding in your supplier performance and forecast data, you can effectively manage your inventory replenishments more accurately and efficiently.

Using a spreadsheet to plan your inventory replenishment is a bit like using a fork to eat your soup. Why would you do that if there is a better option? If the success of your business is dependent on inventory, shouldn’t it be managed using tools that have been designed for that purpose? Don’t let the health of your inventory take a back to seat in your business when, in fact, it is the driver.