Inventory management is especially important for manufacturers and retailers. For manufacturers, the objective is to reduce both the total amount of inventory and the length of time that items stay in inventory. For retailers, the objective is to maintain inventory that matches demand and to reduce the incidence of stock-outs or goods that remain in storage for too long.
Using KPI measurements of individual inventory items rather than aggregates to provide more useful, specific measurements and other inventory analysis data gathered through stock management software programs, it is possible to identify ways of improving the flow of inputs and outputs.
There are several inventory management strategies that organizations can use to maintain optimal inventory levels while ensuring that customer needs are met. These strategies include:
1. Improving data collection
In international supply chains, it is essential that organizations know where inventory is, the lead times for products to reach customers, and the amounts and lead times of raw materials reaching production plants. Without this information, organizations cannot adequately gauge their inventory levels and will inevitably gather too much safety stock.
To manage inventory and identify where cuts can be made, organizations should establish a regular counting system, such as cycle counts, in which all inventory is monitored and compared to other information coming in from the supply chain.
2. Reducing lead times
The longer an organization’s lead time, the more inventory it must have in its system. Organizations can investigate faster ways of getting products to customers, whether by using more efficient transport systems or by locating production plants closer to main customer hubs. The costs involved with inventory storage are so substantial that the additional expenses associated with more expensive transportation options might be justified.
3. Increasing production speed
An organization must have enough inventory to meet customer demand. If it can produce goods faster or receive them faster from a manufacturer, it can meet the same level of demand with less inventory.
For example, if it takes one month to make a product, inventory levels must cover at least four weeks’ worth of demand. If it only takes one day to make a product, inventory levels of two days’ supply will adequately cover demand and leave a small buffer zone.
4. Avoiding economies of scale
Many organizations purchase vast amounts of raw materials or components because it is cheaper to buy in bulk. However, purchasing bulk supplies can cost much more in inventory storage costs than it saves in purchasing price. Organizations should purchase only what is needed to meet the level of customer demand. This is an aspect of just-in-time inventory, however, the industry sector and the product type must be considered.
5. Using hedge inventory
Hedging is a form of inventory buildup used as insurance against a potential adverse effect, such as a labour strike or a supply interruption. Because hedging involves speculation and is based on forecasts of events that might not happen, the risks and potential costs are very high. However, it can sometimes help organizations remain profitable when adverse conditions do occur.
6. Basing inventory management on market demand
Forecasts are necessary to help manage inventory, but they are really only educated guesses. Forecasts for months or even a year ahead are very likely to be inaccurate. Organizations should pair forecasts with market demand to decide when to replenish finished goods. This will keep inventory levels aligned with the amounts that customers are actually purchasing.
7. Using partnerships
Organizations can also reduce inventory levels by working with supplier partnerships. Many of these strategies require a high level of trust between both the supplying and buying organizations in the partnership and shared online information systems that both partners can use to access essential information, such as product shipping information.
8. Having a quick response
A quick response helps balance consumer demands with the needs of a retailer to minimize inventory. Suppliers who collaborate with retailers have access to the point-of-sales data generated at checkouts. Retailers are still responsible for ordering supplies, but suppliers are able to manage inventory and reduce lead times because they can develop more accurate demand forecasts. This enables suppliers to co-ordinate shipments that match closely to customer demand.
Quick response strategies have been especially useful for grocery retailers that traditionally have a fast and high turnover with low profit margins. This strategy provides the following benefits:
- Inventory levels in stores can be lower.
- All goods can be tracked.
- Waste is reduced because deliveries from suppliers are matched to sales.
For strategies to succeed, foreign suppliers must be willing to work closely with their customers to find inventory management solutions. Some of these strategies can also be part of contractual negotiations during procurement processes. Buyers need to ensure that they take into consideration the factors that impact global sourcing, such as shipping times and costs, and are realistic about lead times when managing inventory.