Almost all businesses depend on well-managed inventory for success. If a business has the wrong inventory or not enough stock, it would be hard to say that its inventory management is in a healthy state. Defining ‘healthy inventory’ is imprecise and will differ depending on the individual requirements and goals of a business. Generally speaking, healthy inventory primarily means holding enough stock to service the business while keeping stale and excess stock levels low. However, having good processes for decision making, extracting the maximum value from inventory data and operating an efficient inventory management function are also relevant metrics of the health of a business’ inventory management function.
What does it mean to hold the right inventory?
Holding the ‘right’ inventory is not an exact science, but involves having enough of the right stock to meet customer demand. Having a lot of stock is not valuable if that stock is stale, and stocking popular products adds little value if there is not enough to satisfy demand. More specifically, holding the right inventory means holding a reasonable amount of safety stock and replenishment stock and limiting (or better yet, minimising) excess and stale inventory.
Holding enough safety stock is crucial to avoid costly shortage, however it is difficult to forecast stocking requirements with perfect accuracy all of the time. Naturally, holding too much is not ideal either as a large buffer of safety stock could become stale or suffer from shrinkage. Having a good handle on stock for replenishment is crucial in order to replace inventory, which has been sold, and keep the inventory system in equilibrium.
Excess stock should ideally represent a very small part of overall inventory levels. This is stock that is selling poorly and, because it is held for longer, incurs higher carrying and holding costs than other products. Rather than obsessing over the inevitable inaccuracy of forward looking forecasting, healthy inventory management involves monitoring poor performing and overstocked items and keeping this stock moving as much as possible.
What framework guides inventory decision making?
High performing businesses use all of the data available to them to monitor and manage stock levels and inventory metrics. This can involve analysing historic demand to plan for seasonal changes or spikes, looking at the inventory turnover ratio to identify poor performing products, or keeping a close eye on various cost data to properly understand the true cost of a particular product. Ideally, inventory managers will have well-developed frameworks to guide decisions made using inventory data. An example is the presumption that any item with an inventory turnover ratio below a certain threshold over a certain period of time should be discontinued. These aren’t hard and fast rules, but are indicative of a systematic approach to decision making.
Is inventory management itself efficient?
Like any area of a business, a major indicator of health is whether the inventory function is delivering an efficient service using appropriate resources. In some cases, such as where finance and inventory teams are using complex spreadsheets, the business would be wise to invest in a better inventory management platform, freeing up staff time to add value in other ways.