There are few things more critical to the success of businesses across multiple industry verticals than a robust and well-rounded inventory management process. The issue and dilemma with inventory control is that it’s tough to know where to even start in the first place. With inventory management, there can be dozens of moving pieces. It’s made even more complicated by the fact that there’s no one right way to manage inventory. Tom Craig, President LTD Management, Pennsylvania, USA, and a regular contributor to Global Supply Chain, provides a set of universal guidelines that one can tweak and improve efficiencies and maintain a high level of organisation in the system. Successful inventory management is the result of rock-solid data analysis asserts Tom Craig in this landmark contribution—Editor.
Do you have inventory problems? Are you inventory-rich and out-of-stock at the same time?
The Reality and the Problem: Speed is the new competition and is an explicit and implicit requirement of retailing and manufacturing in today’s reality. It applies to both B2C/D2C and B2B and across industries. Customers want their orders and products faster. They want perfect orders-complete orders delivered on time. Or store replenishment’s should be delivered complete and on time. In a time of growing customer power, failure is not an option.
You know that not having needed products in stock is not new. These incidents were more tolerated until e-commerce and its order delivery velocity—and customer expectations changed. No substitutions, no delays, no exceptions. Yet many companies, especially midsize, struggle to achieve the perfect order customer metric—perhaps the best company metric for growth and success. This happens for holidays, promotions, and everyday sales. It happens when getting products made and delivered. Trade wars and recessions bring external confusion to the underlying issue. How are you doing with all this disruption?
Scope of Inventory
The situation about inventory can be broader and more involved than you may imagine. For starters, having too much inventory (often not needed or not really saleable items) while also being out of stock (of needed products) is not without costs. How are you doing here as to having too much inventory and being out of stock? Have you asked about your days of inventory or inventory turns? Are you satisfied with your turns? Include finished goods, raw materials, components, and other items used for production and sales in that inventory. They all mean money spent. In calculating turns or days of inventory, also include inventory in transit. That can be a significant number and should not be excluded. Otherwise, there can be an understatement of your inventory investment—and its opportunity cost. Ask yourself if you have too much inventory. Are you inventory-rich? Inventory rich means working capital tied up that could be used for other purposes.
Imagine the opportunity cost. Think about what else you could do with that money tied up in inventory that is sitting in the warehouse instead of turning into sales and cash. You should see if there is a correlation between your inventory turns and operating margin. Remember too that a lot of inventory sits in storage. No sales are made. No cash is created. Here money is tied up as it gathers dust.
Basically, it comes down to this. Products are supposed to flow, not sit. From a lean view, this is waste. Moving inventory more quickly is important to the new speed reality and to good financial practice. The problems with inventory velocity, too much inventory, and out of stock are more than finished goods. They include components, raw materials, assemblies, and other items. Out of stock here and rushes to meet customer orders can cause firefighting and the extra expenses of expediting. Do you firefight? Why? What are you doing about it?
Hidden also is your warehouse cost impact. That extra inventory takes up warehouse space. If an outside provider is being used, those pallets and cases are on the invoice. If at the company warehouse, there is the extra cost and lost productivity to pick items and orders because of additional time travel costs—to do it. Being out of stock means extra outlays, lost sales or delays in order completion and being paid. You know this. Add in the expediting expenses. So less money hits the P&L or more money is tied up in the balance sheet.
The above is not the only impact. There is the timeliness of when products are received versus when they are needed to sell. This involves inventory revenue yield maximisation.
Revenue Yield Maximisation:
This is an inventory impact that you may overlook. Timing comes into play with yield maximization. Revenue yield management is often associated with the airline and hotel industries where reservation-based companies attempt to maximise revenue from fixed supply or capacity, seats on a flight or rooms in a hotel. It recognises that the price or revenue creating the ability of the item in supply decreases with time. Yield management is applicable your supply chain inventory is viewed as the supply whose revenue yield is to be maximised. Inventory is key to success for manufacturers and retailers.
Having the right inventory is also difficult and challenging. Insufficient inventory means lost sales opportunities. Too much inventory means markdowns-and reduced profits—to sell it. You work on thin margins especially feel such pain. Furthermore, constant discounting may be an indication that change is needed. Many items enjoy a short shelf life relative to demand and the price your customers are willing to pay. Sales promotions, discounts, and markdowns are almost common practices to draw customers. Firms that are in dynamic, volatile businesses especially know the impact of short product life cycles and pricing decisions on the bottom line.
Old practices with moving inventory through supply chains are running into the realities of time compression and doing it faster. The analytics approach can determine an ‘optimal’ markdown(s). However, this is somewhat of an after-the-fact approach. It does not address the dynamics of doing business. Additionally, it does not address the underlying problem of demand planning and uncertainty and how to mitigate it. The length of the inbound supply chains has increased significantly with global sourcing. Longer chains mean longer times to produce and deliver products from suppliers. That length adds to the likelihood of your having increased buffer inventories.
First off, let us get this out of the way. There are no quick fixes and easy answers. These problems did not happen overnight. Neither does the answer. Central to your improving inventory problems—out of stock, too much inventory, tied up working capital, improving revenue yield maximisation, reduced expediting, and additional warehouse costs are creating inventory velocity. The trick is what to do and how to do it.
The movement and handling of inventory involve supply chain management. More exactly, with the new business reality and disruption, there is the new supply chain management (SCM). Inventory acceleration is the new supply chain management and its speed.
The structure of the new supply chain management, thanks to what Amazon successfully has done and is doing and that is spreading across industries, not just e-commerce, has three parts:
- Make supply chain management strategic
- Weaponise it
- Build end-to-end SCM velocity
There are supply chain elements that are essential to what is happening and what must be done.