The All-New AIM: Intelligent Forecasting + Inventory Planning

Three trusted strategies to better manage supply chain inventory risk

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Inventory supply chains operate under tremendous risk of disruption from a myriad of seen and unseen threats, which if left unchallenged and untreated can cripple business operations and lead to staggering financial losses. Process managers are confronted with a considerable host of challenges, which need to be managed in order to ensure business vitality and longevity. These challenges include: supply chain delays, demand forecast inaccuracies, breakdown in communications, damage to facilities and inventory through environmental disasters or criminal activity, currency fluctuations as well as overall inefficient inventory management and overstock and under stock issues.

The level of preparedness coupled with the technical and strategic capacity to confront, adapt and overcome disruptions as they arise is what determines the extent of damage a business is likely to suffer in the event of a catastrophe.

Avoiding, managing and mitigating these risks can be a highly challenging and complex task. A business looking for optimal strategies to manage its inventory supply chain risks would be well advised to identify and implement some of the key strategies employed by successful inventory driven operations.

Most supply chains operate in a dynamic and quickly changing environment with a host of interdependent variables constantly at play. The key to growth and success when operating an inventory driven business in such an environment is having the ability and resources to identify areas of weakness and loss within the supply chain and to develop effective mitigation strategies to prevent against losses.

Strategy 1 – Gather the Essential Data

In order for a business to be able identify what the major risks to its supply chain are and develop an effective strategy to defend against them, it is vital to start out with an accurate and informed appreciation of the status of the supply chain.

Only once inventory levels are known, and sales as well as replenishment cycles clearly identifiable, can the business gain a comprehensive appreciation of how its supply chain is performing.

In order to identify areas of weakness and loss, inventory managers need access to real-time data on inventory through every node in the supply chain. Every single item of inventory moving into, through and from the supply chain needs to be accountable, traceable and trackable in real time.

Areas of surplus or dangerously low stock levels can then be identified and measures put in place to either liquidate stock and free up working capital or re-negotiate supply arrangements and structures to ensure optimal replenishment order cycles based off far more accurate demand forecasts.

It is vital the business invests in an integrated inventory management software solution that will allow it to gather all the essential data related to its supply chain and thereby enable thorough and detailed appreciation of the facts on the ground. These include: inventory levels, supplier issues, areas indicating high instances of criminal activity etc.

Only once these facts are identified can an effective risk management strategy be developed.

Strategy 2 – Develop a plan

The effectiveness of any risk mitigation plan hinges upon two major components: Access to accurate, real-time supply chain data from source to point of sale, and an understanding of the main areas of risk to the supply chain itself.

Understanding and identifying the major areas of risk to inventory

The three main areas of inventory risk remain the value of the inventory, the rate of obsolescence and fluctuations in supply and demand.

When a business, through inefficient and ineffective inventory control, finds itself in a situation where it is holding excess inventory of a high value and a high obsolescence rate, it places itself in a position to suffer a two-punch knockout combo.

Should market prices drop, the value of the inventory on hold will also drop. If that inventory is above optimum level then the business is forced to suffer increased holding and operating costs, the loss of working capital and also devalued goods to market. All three factors exert considerable influence on the profitability of a business in a negative way.

The opportunity cost of not being able to carry out a product recall is another critical risk.

Strategy 3 – Implement a strategic and systems-centric solution

Three of the most trusted risk mitigation strategies include pooling inventory into fewer locations to ensure lower inventory levels and more accurate forecasting. By pooling inventory into fewer locations it becomes easier to manage and control.

Another valued risk management strategy involves eliminating excess variety amongst components or products. Typically, the greater the variety of inventory required the higher the risks involved in managing that inventory become. In the case of a clothing company for example, inventory can be manufactured and stored in uniform, base colors and only once orders are received can the products be dyed or colored to satisfy demand. This strategy is also referred to as variety postponement.

Supplier selection is another key variable in mitigating the risk associated with moving inventory along the supply chain at optimal levels. Ideally, a supplier should be highly responsive and adaptable to tailor production with demand. An integrated inventory management software solution that enables system-centric collaboration between a business and its suppliers is ideal to ensure optimal inventory efficiency from source to sale.

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Melanie - Unleashed Software

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.

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