Inventory management and stock control can be a very difficult game to play let alone to actually win. It can be the thing that saves you money, time and increases your ability to meet customer demand; or, it can be the reason for companies having frequent stock-outs, having to purchase more stock expediently and at a premium, and constantly functioning under a great deal of stress. There are three predominant methods of stock control to consider which we shall look at in more depth.
Reactive, Proactive and Hybrid strategies
Reactive strategies are developed in response to events that have already occurred and so, by their very nature, they involve the company operating on the backfoot in response to an event.
Conversely, proactive business strategies occur when a company uses data to plan and implement a chain of events to capitalise on a perceived beneficial situation or to avoid a negative one.
A hybrid strategy is one that combines the two to maximise the benefit to the company. This can mean that a company plans a thoughtful response to a positive or negative event (proactive) to implement only if and when that event comes to pass (reactive). Now let us look at how these strategies correlate to stock control.
Reacting to demand
Reactive stock control is when a company lets customer demand drive sales. They essentially allow demand to be a trigger event that leads to a reaction of ordering stock to meet that demand. Now, before you write this process off as highly unplanned and detrimental to a business, it does have its merits in some instances.
Reactive inventory management can result in a much tighter demand to stock ratio where there is not a great deal of excess. This can be of benefit as stock that is housed, unused in a storeroom, chews through a lot of revenue in acquisition and storage costs which means the company can not utilise that cash in a more beneficial way. So, reducing this eventuality can result in savings. However, the downside is that, without the use of safety stock, a customer will be invariably left waiting for their order to be fulfilled, and this can cause dissatisfaction and reduced brand loyalty.
Another example of reactive stock control can be positive and in response to observed rather than perceived market trends. If a company notices a competitor is selling an item, colour palate or brand with success, or perhaps have developed a product to meet an emerging need, then they may well act quickly to secure some of the market for themselves by reactively creating or stocking the same or similar products. In this case, reactive stock control may have been the only feasible option and may be of enormous benefit as the company does not bear the risk of pioneering a product.
Proactive stock control
On the other hand, proactive stock control involves the act of planning inventory acquisition based on perceived market trends. How can these perceptions be informed and accurate? By using inventory management systems that are designed to feed sales data back into the planning process so that historical sales form the basis for future trend analysis and predictions. The proactive strategy can be utilised to optimise inventory through what is coined SIOP (Sales, Inventory and Operations Planning) which can include ensuring stock is available for demand when it arises, but also ensuring no stock orders are placed when it is perceived that demand will take a downward trajectory. Proactive stock control can essentially be used to avoid crises rather than simply to maximise on opportunities.
Combining both strategies
Despite proactive stock control seeming a clear winner, it can have cons associated which stem from the fact that we can never plan for 100% of events prior to them happening. Inevitably there will always be a small percentage of situations that are unforeseen and out of control, and with a proactive strategy, these events may result in excess stock and loss of revenue.
A drawback of reactive stock control is that acting perpetually on the backfoot results in undue stress and possibly paying more for inventory from last minute production orders. This is why the true winning strategy may, in fact, be a compilation of the two, where you use automated systems available to gain as much data as possible about historical sales and customer demand, company supply chain crises and successes to prime suppliers and formulate action plans that can be put into motion, should the triggers (positive or negative market fluctuations, customer demand, weather events etc) occur. In this manner, the company’s actions are still thoughtful and appropriate, while allowing the flexibility to change tack if unforeseen circumstances arise.
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.