The biggest challenge of inventory control is getting the balance right, to meet the challenge of matching supply volumes to customer demand and with any good enterprise or activity, it usually pays to start with the basics.
Inventory optimisation basics
There are many different inventory control techniques out there, knowing what to stock and the right quantities to hold is an important first step, but once you have your inventory on-hand, there are a few basic but critical factors that will optimise your inventory control:
- Having well-organised location names
- Location clearly labelled so they are unambiguous and easy to read
- Unique, short and unmistakable numbers for inventory items
- Standardised and consistent units of measure
- An accurate beginning counts of all inventory stock
- Software to track inventory activity in real time
- Robust inventory control policies
- Trained and informed staff
Inventory control challenges
The common inventory challenge for most companies is calculating the correct quantities of the right stock to have available to meet consumer demand and overstocking has its own challenges.
Buffer stocks are a complex problem because stockouts can be damaging to a company’s profitability. On the other hand, excess inventory stock adds to overhead costs and takes up valuable space. Additionally, the amount of inventory held has a major impact on available cashflow. With working capital at a premium, it’s important for companies to keep inventory levels as low possible and have that inventory turning over as quickly as possible.
As businesses expand into multiple sales channels their traditional supply chain tools aren’t keeping pace with the digital eCommerce landscape. Segmented supply chain processes are also an issue because they lack inventory visibility across all channels.
At the same time, planning frequencies are transitioning from longer timeframes to shorter term and often daily activities. The number of managed stock locations has also increased from multi-locations and distribution centres to an overwhelming number of points of sale, largely due to a global eCommerce economy.
Optimising inventory control
Companies have achieved financial gains by employing inventory optimisation, reducing inventory levels and achieving greater higher service levels.
An integrated high-performing supply chain will generate more revenue growth than industry counterparts. The key to achieving integration through the supply chain is through technology and software systems, implementing optimised inventory management software that provides clear inventory visibility across all channels. Two systems of inventory optimisation are the single-echelon (single-tier) and the multi-echelon (multiple-tier) concepts.
Single-echelon inventory control
In simple terms, single-echelon inventory control focuses on inventory management for an individual unit of your supply chain while multi-echelon inventory control has a more holistic approach to inventory optimisation that focuses on inventory levels across the entire supply chain network.
A sequential single-echelon approach forecasts demand and determines inventory requirements separately for each echelon. SMEs naturally operate on a single-echelon model, especially if they only have one distribution centre at the centre of their fulfilment system.
Multi-echelon inventory control
In contrast, multi-echelon inventory optimisation (MEIO) looks at inventory levels holistically across the whole network while considering the impact of inventories at any given level. Determining the correct levels of inventory based on demand variability at the various points and lead time, delays and service level performance at the higher echelons. Multi-echelon inventory optimisation fosters integrated operability between all layers of your supply chain and distribution network.
MEIO helps to refine safety stock levels across the entire supply chain, accounting for all the interdependencies between each stage. It also examines the variables that can lead to excess inventory, including demand uncertainty, supply volatility and lengthy lead times.
Inventory optimisation has proven to provide competitive value through the reduction safety stock, freeing-up of working capital and improving customer service levels. MEIO exemplifies a state-of-the-art approach to inventory optimisation throughout the supply chain, from end to end.
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.