Problems with inventory always equate to business losses. This is why every business needs to be passionate about their inventory control. Optimizing supply chain efficiency, lowering operating costs, meeting customer service targets and boosting profitability are all achievable with the right inventory management techniques in play.
Businesses who feel that there are no inventory management issues in their supply chain are often the most susceptible to loss. Why? Because, as any experienced process manager will attest to, believing that you have no inventory problems is often a warning that problems do exist but you simply lack awareness of them. By employing effective inventory control techniques, businesses can identify areas of weakness and loss. This then provides them with the strategy and tools to put operational inventory controls in place.
Most businesses must select an inventory management technique, or unique blend of techniques, that best suits their particular needs. However, what ties all techniques together is the implementation of an integrated inventory management software solution such as Unleashed. Regardless of the technique your business chooses to employ, it if does not have the ability to track, trace and account for its inventory in real-time across each node in the supply chain, it will run into trouble.
1. JIT – Just in Time delivery
JIT (Just in Time delivery) is the preferred manufacturing and inventory management system of industry leading corporations like Dell Computer, Toyota and Harley Davidson Motorcycles. With its core objective being the reduction of all wastage in the supply chain of a business, JIT inventory management operates in such a way that inventory is only ordered and shipped as it is needed. This means that a business does not have to store inventory for manufacturing or service delivery to customers. As a result it removes all the risks and costs that holding inventory entails, including over stocked or under stocked inventory levels, and placing goods at risk of currency fluctuations.
With JIT delivery, businesses force themselves to operate a highly efficient supply chain which, if executed correctly, significantly lowers operating costs, minimizes or eliminates risk and raises productivity, quality and profitability.
JIT delivery typically leads to reductions in costs and improves efficiency and profit margins in the following key ways:
- Reduced inventory levels
- Lower labor costs
- Warehousing or factory space reduction
- WIP stock reduction
- Increased production and productivity
- Improved quality
- Substantial reductions in throughput times
- An increase in outbound shipments and a higher incidence of meeting customer service targets.
Despite this, it is notoriously challenging for a business to successfully implement or transition to a JIT inventory management model. This is why it is essential to ensure that your business has highly accurate and detailed information on customer buying patterns. Businesses also require the ability to forecast demand accurately, and most importantly of all, a network of highly reliable and capable suppliers and logistics providers who can guarantee that inventory will always be shipped and delivered in the exact quantity required at the exact time and place it is needed.
One error in a JIT supply chain can bring the entire system to a grinding halt. With JIT inventory management it is either executed perfectly or not at all.
2. ABC inventory analysis – harnessing the Pareto Principle for maximum inventory efficiency
Vilfredo Pareto is a name well known to most business professionals and inventory management specialists. He is the economist behind developing the Pareto Principle, or more contemporarily known as the 80/20 rule.
With regards to inventory, the 80/20 rule states that 80 percent of a business’s profits will be derived from just 20% of its inventory. The ABC inventory analysis technique builds upon this approach by classifying inventory into three tiers based on turnover rate, inventory value and cost significance.
A – Items that are high in value and small in quantity. This group requires the greatest amount of attention considering their value to the business. A class inventory typically makes up 70% of the total inventory value on the balance sheet, but only about 10% of the actual items being held on stock.
B – Items of moderate or average value and average quantity. Typically B class inventory accounts for roughly 20% of the total inventory value on the balance sheet and a 20% portion of actual inventory items on stock.
C – Items of low value or cost per unit but high quantity. Class C items are normally account for 10% of the total inventory value on the balance sheet, yet around 70% of inventory on stock.
This inventory control strategy enables the business to strategically allocate and direct funds, resources and labor toward more efficient inventory management. Class A items will require more scrutiny due to their higher turnover rate and cost compared with C class inventory. Despite this, it is unwise to take a lackadaisical approach to C class inventory.
3. The Outsourced Inventory Management Solution – Drop Shipping
Drop shipping is a popular solution for businesses that do not want to deal with the hassle of handling their own supply chain logistics. It is also useful for small businesses just getting started without the capital available to bulk order inventory, store it and handle shipping.
Drop shipping essentially allows a business, particularly online retailers, to focus their expertise, resources and capital on growing the marketing and sales platform of their operation while outsourcing the backend logistics – picking, packing and shipping – to customers.
There are a number of key benefits with this technique, as well as disadvantages, that must be weighed up carefully before implementation. Because the manufacturer or wholesaler handles all the inventory management, including storage, sorting, packing and shipping to customers, the business can (ideally) remain cash flow positive because it is not required to purchase and maintain its own inventory.
While drop shipping often appears at first glance to be a ‘fire and forget’ outsourcing solution for inventory control, it is a system that has a number of pitfalls. These include having an outside supplier (the drop shipper) being responsible for customer service, even though all accountability to customers with regards to late delivery, damaged goods, goods being out of stock etc. falls squarely on the shoulders of the online retailer.
Furthermore, while many wholesalers offer drop shipping as a service, businesses should not feel that this means they will be paying wholesale prices for goods. In retail, margins are everything and drop shipping can shrink margins considerably.
One last thing to keep in mind:
“Costs do not exist to be calculated. Costs exist to be reduced.”
– Taiichi Ohno
Businesses should carefully carry out a detailed appreciation of their own business model and the possible inventory management techniques open to them. However, one common denominator to any efficient inventory control operation is the implementation of a powerful inventory management software solution.
Cloud-based Software-as-a-Service (SaaS) with inventory management solutions in particular, are fast gaining traction amongst both small and large businesses. This is thanks to their ability to foster seamless supply chain integration with leading inventory management and accounting systems without requiring a large up-front investment of capital. While the techniques may vary, the ability to track, trace and account for inventory in real-time is a critical and constant component to any successful inventory driven business.
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Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.