Inventory management is an essential element of supply chain operations. Excess inventory ties up profits and incurs storage costs. Stockouts deprive the company of revenue and cause long-lasting reputational damage.
Finding the right balance of inventory is a complex and challenging prospect for supply chain managers. This is especially true as stock levels can fluctuate in response to market risk, unpredictable customer demand, and logistics disruptions on the other side of the world. Managed correctly, however, and a right-sized inventory is a source of cost-containment, resilience, and agility.
Here are our top five best practices when managing inventory in the supply chain.
1. Leverage data to forecast demand
A key element of making sure you have enough raw materials, goods, and finished products when and where you need them is predicting end-user demand. Consumer demand is especially difficult to predict in 2024, as economic pressures and the waning effects of the pandemic push and pull companies and individuals in conflicting directions.
Traditional inventory management and ERP systems don’t provide the necessary flexibility and digital tools to simulate options and test forecasting models. Investing in next generation tools will allow you to match inventory with a nuanced, detailed understanding of customer demand.
2. “Lean” into the just-in-time model
While resilience has increased in importance over the last few years, there is still a place for just-in-time methodology in the modern supply chain. Procuring late stage components later in the production stage, for example, can reduce the amount of time (and money) spend holding materials in warehouses.
Just-in-time may be able to reduce costs and smooth operations, but it still carries risk. Accurate demand forecasting and risk assessment are key to reducing the safety margins on your inventory management process.
3. Accurately assess macro and micro risk
Being able to identify, assess, and predict disruptions to your supply chain is key to inventory management. Both macro-risks stemming from large scale disruptions (like the COVID-19 pandemic, or the war in Ukraine, for example), and micro-risks like regional weather events, single-supplier issues, and other more localised disruptions need to be tracked, anticipated, and predicted as best as possible.
4. Use tiered inventory management analysis
By dividing your inventory into different tiers, you can approach managing different classes of inventory differently. Your highest tier items represent the 20% highest value items your organisation handles. Prioritise their availability and maintain a stock buffer in case of disruption that interrupts your ability to procure more.
Next, your middle tier items (representing about 40% of your stock) should be managed regularly, but may require less safety stock. This is an area where just-in-time methodology can net the biggest rewards with the least risk. Lastly, your bottom 40% of stock should only require semi-regular evaluation. These materials move less frequently and a disruption in supply won’t immediately create serious pain points for the organisation.
By using a tiered inventory management approach, you can more effectively prioritise your procurement process, as well as reduce time and resources spent monitoring low-value stock.
5. Standardise your processes
Lastly, a high degree of standardisation across your inventory management processes is an important way to create the necessary predictability and visibility throughout your organisation.
Introducing processes like cycle counting, day of sale inventory, economic order quantity, and a reorder point can significantly optimise usage, minimise waste, reduce costs, and prevent disruption.
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