As a general rule, inventory managers try and keep just enough stock on hand for their business’s ongoing needs. With the aim of reducing waste and unnecessary expenses, cutting down excess stock means guarding against obsolescence and the loss of investment, streamlining inventory control.
On the other side of this equation is the targeted holding of excess stock. When done intentionally (and not through poor management), this is done to guard against stock-outs, lost sales and unexpected or fluctuating demand.
The tug of war between too much and too little stock could be called the core workout of the daily inventory manager and forms one of the main ways that good inventory management can ensure profitability and optimization for businesses.
The blind and uninformed holding of excess stock usually isn’t a great approach as there will be little optimization and often significantly more waste and costs. This approach can easily spiral from a minor problem to a huge one if not addressed. When it comes to inventory management best practice, the best techniques are developed through intelligence and inquiry, usually with a fair amount of healthy trial and error along the way.
With this in mind, and to give some idea of the how and why, let’s take an inside look at the reasons for holding stock and how each approach is best utilized.
Insurance against increased demand
An inventory manager in any business should be constantly assessing and adjusting how much of each item needs to be on hand or in production at any given time to meet demands. Depending on the business’s depth of capital and business model, a business will also be doing everything possible to keep inventory investment as low as possible.
As demand can’t always be predicted, even with the best forecasting and industry knowledge, the use of safety or targeted excess stock is an essential tool. Most businesses will develop safety stock requirements for each product or part based on the previous year’s sales, so it certainly helps to have as much information and control as possible over each inventory item.
The use of holding stock in this targeted way can provide excellent insurance for increased demand, providing it’s used sensibly and in a planned manner.
Planning for seasonal changes
In some cases, businesses will know in advance that there is an increased or decreased demand during certain seasons. This is of course largely dependent on forecasting knowledge gained over previous years of production.
Toy companies will most likely produce more toys leading up to Christmas, a wine maker may know that their Gewürztraminer sells best in summer. The more information a business has on supply and demand the better, for it can be translated into meaningful and intuitive inventory control.
Like with most inventory control approaches and techniques, there is plenty of room to get it not quite right. Having a contingency plan for worst case scenarios can help steer a small problem away from becoming a big one.
Some suppliers will offer bulk buy or seasonal discounts to the businesses they supply to regularly. While bulk buying can sometimes backfire, for example with products that are prone to obsolescence or spoiling, some businesses will make use of this for items which can be safely stored without any increase in holding expenses or unreasonable risk of obsolescence.
Guarding against price increases
For some businesses, buying an excess of some stock in advance can help decrease future costs and increase profitability. While this may be less so for small businesses that can’t and won’t buy in bulk, a small saving over hundreds of items can equate to a significant profit for larger businesses.
Automation and inventory control
As a general rule, the use of safety stock or bulk buying requires the use of good inventory control software. The bigger the business, and the bigger the sprawl of complex inventory, the more essential it becomes. Automation and control that connects across the whole supply chain, and provides a framework for inventory techniques, is a huge step towards optimized inventory control.
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.