Inventory management processes can be continuously improved. Many businesses fail to adequately organise inventory in a way that will effectively reduce costs and improve efficiency. Below, we summarise some key factors which can improve inventory management.
Categorisation of operating inventory
In order to make well-rounded decisions regarding inventory level, it is vital that you organise operating inventory into categories. Helpful categories include safety inventory, replenishment inventory and excess inventory. Doing this will help you keep track of your inventory according to the type so that you can make the best decisions regarding the stock you have, the stock that needs replenishing and any obsolete inventory.
Calculating safety stock levels
To improve the way you manage inventory, it is vital that you use methods which help you to oversee the accuracy of sales forecasts, required production lead times, manufacturing schedule adherence and service-level data for each item.
A simple rule-of-thumb method which says, for example, that “all products made in factory ABC need 15 days of safety stock” can cause problems, because the delivery times for individual items are often uncertain and may vary widely. It is safer to use a formula that uses historical data for individual products.
It is also vital to recalculate safety stock levels on a regular basis so that your decisions are based on the most accurate information.
Inventory management policy
Decisions regarding inventory levels are a crucial variable in the success or failure of any firm. Therefore, managers must play an active role in shaping fundamental inventory-related issues. For example, issues like determining the right breadth and complexity of product offerings and optimal plant and distribution footprints should be managed carefully. These decisions should not be left for the supply organization to decide alone.
Similarly, issues such as the optimal frequency for producing or ordering products should not be left solely up to production planning or sourcing managers. Rather, a cross-functional team should set production and ordering schedules, which may help to reduce the company’s replenishment stock and ensure that the right products are available when needed.
Visibility of excess stock
Managers need to have full oversight of any obsolete stock, so that they can establish processes to determine why excesses are being created and then develop a plan of action to sell it off. Keeping track of superfluous inventory and tracking down the cause can help your business to prevent similar problems in future.
An efficient inventory management procedure involves identifying both the root cause of the excess stock and ways to sell any excess stock more effectively. Identifying the problem in order to correct it helps the sales team to identify excess or obsolete products to ensure that they are discounting specified excess products to reduce waste.
Consider all types of inventory
Many inventory management processes often fail to manage every type of inventory, choosing instead to focus primarily on finished goods. However, it is vital that the firm also assesses other inventories such as raw materials, works in process, spare parts and even goods in retail stores. These overlooked inventories can in fact make up to 50 percent of the total inventory, so managers will benefit from an organizational map of all inventories to better prioritize ways to reduce them.
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.