The world is increasingly looking towards a more sustainable and eco-friendly future. There is also an increasing push for corporate sustainability in terms of sourcing, manufacturing, packaging, and distributing, meaning companies that lessen their environmental impact will gain a competitive edge. There have already been shifts in areas of manufacturing to incorporate a sustainable vision, including sustainable farming, management to limit use of water, using renewable energy, lowering fuel emissions from transportation, and lessening packaging.
What many companies are now noticing is that inventory control also drastically effects sustainability efforts and financial gains. The ways businesses handle excess inventory to account for their sustainability efforts is just as important in lessening their overall environmental impact.
How does inventory affect sustainability?
Holding excess stock not only ties up working capital, but it can also bring extra problems. Idle inventory can result in the spoilage of product, damaged goods, and increases the chance of theft. All of these have negative effects for business and promotes inefficiency within the supply chain. Approximately a quarter of all inventory is held as overhead stock, highlighting the funds tied up with insurance for increased demand.
Keeping inventory levels to a minimum comes with many environmental benefits. Less excess production helps to eliminate carbon emissions, reduce the water required to manufacture products, lowers transportation needs, and lessens the cost to store extra stock. There is a growing focus on the environmental footprint of raw materials and lessening the impact of this is important in reaching sustainability goals. By improving inventory control, idle stock can be kept at a minimum, meaning a faster cash turnaround for the business.
Demand volatility and forecasting
The main reason businesses hold extra stock is to ensure changing demand levels can be met. This demand volatility means manufacturers never know exactly how much stock to produce, and with customers demanding ready-to-deliver products when they order, there is pressure to carry extra stock as a sort of insurance policy to ensure sales and maintain brand image. Fortunately, demand volatility can be forecasted using appropriate technology, providing a general insight to how much stock may be required. This offers a sort of limitation to the insurance stock required, ultimately minimising the need for excess inventory.
A strategy to better deal with inventory control and bring awareness of the impact of excess stock is to assign accountability to different parts of manufacturing. Senior management teams should aim to communicate their efforts to minimise inventory to different people in the business, like engineers and salespeople. By educating engineers, for example, on how leftover parts consume working capital, or informing salespeople of the costs of overestimating in forecasts, they are more likely to pay attention to sustainability efforts. Promoting sustainability efforts to various members of a corporation increases the likeliness of change occurring.
A rising trend is to instil sales incentives around these efforts. Improving sales accuracy and accountability for how inventory is generated will enable salespeople to become more aware of the effects of their product. Some companies offer parts of bonuses based on how accurately sales can forecast SKU levels, which tend to remain relatively stable and be easy to forecast. Incentives that employees directly benefit from help to motivate and improve company morale, as well as offer improved performance rates. Similarly, allowing for transparent, real-time communication between planning and sales teams allows for the accuracy of forecasts to be realised.
Forecasting to understand needs
From an inventory control perspective, forecasting is an invaluable tool that offers insight into how the business will perform in the near future, and therefore has the potential to affect profitability. Forecasting can be used to understand and formulate strategies around what products or component requirements will be consistently inaccurate, and therefore can be planned for in advance. The chances are that not all component requirements will be at an inconsistent level, and therefore costs on excess purchases can be minimised with insight into what is purchased and what is actually utilised. Having open communication links with supply partners about what they notice about supply and demand, and informing them of expected lead times, inventory levels, and the accuracy of forecasts will allow for cooperation from both supplier and purchaser, ultimately increasing business success and limiting unsustainable waste.
As the world shifts towards an environmentally conservative view, manufacturing techniques must also shift to keep up. Excess inventory due to changing demand levels has been a constant issue in the manufacturing industry, and as a consequence excess inventory has been made and held as a sort of insurance policy. However, this has many negative impacts on both company profit and impact on the environment.
In an attempt to focus on a sustainable future, efforts surrounding demand forecasting, accountability for excess inventory, and insight into manufacturing needs and specific wastage is important for manufacturers to lessen costs. By focusing on inventory control and forecasting techniques, companies can plan their inventory requirements to minimise waste and increase sustainability efforts overall.
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.