This article was updated in March 2023 to reflect current trends, statistics, and new information.
Almost all businesses depend on a well-managed inventory system 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.
Here, we explore what inventory health really means and dive into a few strategies for maintaining a happy and healthy inventory.
What is inventory health?
Inventory health refers to how closely a business’s stock on hand levels meet the requirements of current customer demand without creating waste. In other words, a healthy inventory is one that has sufficient stock to complete all customer orders, but not so much that you end up with excess stock and storage space issues.
What does it mean to hold the right inventory?
Holding the ‘right’ inventory 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.
The consequences of poor inventory health include:
- Lack of income
- Extra storage costs
- Extra overhead/running costs
- Capital tied up in excess stock harms cash flow
- Unable to meet customer demand
- Time waste
- Unhappy staff
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.
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.
5 methods for measuring and improving inventory health
Measuring the health of your inventory can be a difficult task, even for experienced inventory managers, though there is some collective wisdom that you can meaningfully apply, if you follow some basic lines of thought.
Let’s take a closer look at some of the basic guidelines and see how you can measure the health of your stock practices and management.
1. Inventory management software – First off the block
While some traditional and non-automated management systems can be done manually, there is little benefit – even for small businesses – to not adopt stock management software.
With huge advances being made in Software-as-a-Service (SaaS) solutions, the old barriers of upfront expense and ongoing IT labor costs are largely being overcome. What this means for small and start-up businesses is access to industry-leading software at an affordable subscription. Shared infrastructure and costs translates to a more open market where businesses of any size can find solutions appropriate for their stock management requirements.
2. Inventory optimization – The Holy Grail
One of the best ways any business can be sure of inventory health is through the use of inventory optimization techniques. Like every tool, these are dependent on some good management and utilization.
Ideally, there will be someone in your business who can take ownership of using, understanding and monitoring the techniques involved. In most cases some tweaking will be required to get it just right. This is especially true for businesses with a large and complex supply chain or breadth of inventory.
Optimization can include everything from setting individual safety stock requirements to adopting lean inventory practices. As a general guide, any technique or approach that can reduce waste – like unnecessary costs – and maximize production, service and profitability can be considered optimization.
3. Inventory control – Getting the balance just right
Stock is often one of a business’s biggest ongoing expenses. The act of purchasing and storage alone can carry a significant investment of capital. The last thing any business wants is to end up with excess or obsolete stock. That being said, the other extreme spells lost sales and incomplete orders.
Getting the balance just right is a crucial step towards inventory health.
In a perfect world, a business would only ever have just enough stock to fulfil their orders and sales. The practice of using ‘lean’ inventory techniques requires a certain amount of foresight and automation. Indeed, the best lean practices are so attuned to the stock processes of a business that parts or products will be ordered at just the right time to arrive for sale or manufacture.
4. Real-time visibility – Seeing inside your inventory processes
The ability to see every part of your stock process in real time is another key step towards achieving and maintaining stock health.
Staying in control of the stock-balancing act requires some skill and a whole lot of intelligent automation. The best stock management systems – including SaaS platforms – offer a variety of ways to utilize real-time visibility.
How you use the software or what features you will require will of course depend on what your business does, though it pays to look for software that offers as much visibility as possible. This is especially important for manufacturers that need as much control as possible over every node and process within their supply chain.
5. Doing regular spot-checks
A great approach to maintaining inventory health is to perform regular spot-checks. The scope of what’s looked at – like optimization success, safety stock levels, spoilage etc. – is up to the business, managers and inventory specialists. Over time the trouble areas will become obvious and you’ll be in a good position to adjust or correct them.