Streamlining Inventory Management: Strategies for Optimal Control and Efficiency
The challenge of getting the right amount of inventory at the right place, at the right price is a long-standing issue. However, contemporary pressures such as e-commerce, globalization, and relationships between global trading partners have brought about a number of new inventory issues. Shifting all inventory from one system to another can be extremely challenging.
Where are my products? a question that every retailer is thinking about. Since a lot of things come into play when calculating how much inventory is available in warehouses, these questions are hard to answer.
Inventory management is like a balancing act— Too much inventory leads to overspending on storage and risking expiring dates, while too little means fewer sales. Finding the right balance is hard. Customers expect more and more. A business's success depends on inventory management strategies to get the right product to the right place in a short time. This included providing an understanding of how much inventory is available, ordering items in-store, and delivering items within one or two days.
Inventory Management Challenges and Solutions
Inventory Audit and Reconciliation
Limited real-time inventory visibility contradictions and errors, and manual and drawn-out inventory counting procedures are a challenge in determining the underlying reasons for disparities and inadequate use of resources during audits.
Solution: Automated inventory tracking systems with advanced analytics and real-time updates remove visibility issues and reduce errors. During audits, technology-driven inventory counting techniques and root cause analysis tools help improve efficiency and maximize resource utilization.
Keeping Track of Inventory in Real-Time
When it comes to selling goods to customers and having the right amount of inventory available, mutations are important to take into account. You don't want to risk inventory damage or overselling. Having the right amount of products available and making the difference between selling your products and getting the sale compared to your competitor is an important first step to having real-time insight into inventory levels.
Inventory management often involves manually updating inventory levels and locations in spreadsheets. Even though this might work for smaller companies, when multiple warehouses and sales channels are involved, working with spreadsheets becomes impossible.
Solution: Having a view of inventory levels in real time is the first solution. This is achieved through real-time connections between warehouses (where inventory is stored) and sales channels (where it is sold). This is the reason why endpoints for inventory management, such as warehouse management systems, and endpoints for sales channels, such as POS systems and online retailers, must be connected.
Distressed Inventory & Overselling
Distressed inventory is a second well-known issue in inventory management. Distressed inventory consists of goods that have reached the point where they can be sold for the normal price. Expiry dates of new products and out-of-season or out-of-fashion items are examples. Once inventory cannot be sold anymore, it may turn into dead inventory. In any case, distressed inventory results in revenue loss. Products end up being discarded, sold at a reduced price, or taking up valuable storage space.
Solution: Always keep ideal inventory levels in place to avoid overselling or distressed inventory. As previously mentioned, it is almost impossible to accurately calculate these numbers using manual calculation. It allows for the calculation of each product's optimal inventory levels by using statistics like historical sales and current sales trends.
Additionally, business intelligence tools allow for the purchase of additional inventory prior to its depletion and oversold. It allows you to use Business Intelligence skills to determine when to buy more inventory or set certain purchase limits for products.
Customers Expect Inventory Visibility
Customers make decisions by searching for different product information, like price and availability. They want to be sure that the product they are about to order is available and will be delivered to them within a certain timeframe, or that it is available for pick-up at a nearby store. These are things that people do in the digital age. As a result, it is crucial that the inventory information they are seeking is always available.
Solution: Only when sales channels (POS, webshops, marketplaces) and inventory are connected, you can show how many products are available for purchase in your channels. It updates the inventory in real time and keeps track of orders across channels. This means that all sales channels, both online and offline, must be connected to the inventory management system.
Why is Inventory management important?
Inventory should be closely managed because it is a big investment of company cash. Inventory plays a crucial role in operational functions, and it serves as a replacement for time in being able to meet customer demands.
When it comes to distribution, having inventory in a nearby warehouse allows the distributor to deliver the products to the customer very fast. Instead of asking the customer to wait until the product is manufactured, finished goods inventory allows shipment on the same day in manufacturing.
When a make-to-order product is ordered, production can begin immediately with raw materials and parts. To make the most of your company's investment and to ensure that the inventory you need is available when you need it, it is important to manage such a critical resource.
Inventory management has two basic parts: understanding what you have and managing acquisition. For having the inventory you need to satisfy customers and prevent shortages, knowing how much inventory you have and managing replenishment is important.
Good inventory management improves customer service, satisfaction, overall inventory investment, disruption, expediting, backorders and lost business.
Strategies for Inventory Management
Maintaining records
Without a detailed record of your inventory, effective inventory management is almost impossible. Based on what you know is in stock, you make promises to your customers by accepting orders and quoting ship dates. You may not be able to keep your promises if the reality is different from the records, which will lead to unhappy customers and loss of business.
The inventory tracking system, whether software, spreadsheet, or manual, depends on accurate transaction reporting. Inventory movement must be promptly and accurately reported to the tracking system.
You can automate some data collection, mostly by scanning bar codes. Most inventory software will create bar-coded lists and labels, work with scanners, and control the data collection process. Automated data collection is not only faster because it doesn't need to be keyed into the inventory records, but it also eliminates many errors that come with manual processes.
Planning beforehand
Manufacturers use a method called Material Requirements Planning (MRP) to determine how much of each material and component item is required and when to finish the master production schedule. Distribution Requirement Planning (DRP) is a similar approach that distributors can employ.
Both methods rely on demand forecasting (sales) and working backwards through the distribution network (DRP) or bill of materials (MRP) to arrange replenishment orders with quantities and start/due dates. This helps reduce inventory supply while avoiding shortages. Both methods require good predictions and accurate data, including inventory record accuracy.
While some businesses find other strategies more advantageous for their specific markets, the point is that while inventory is costly, shortages can be deadly for a company. Simple management techniques like order point may not provide you with the combination of low inventory and high availability you need. Inventory management, planning, and optimization systems give you a lot of tools to be proactive in managing inventory in plants, warehouses, and throughout the supply chain.
Focus
Any inventory planning and control strategy aims to prevent shortages while reducing the inventory volume. Having more inventory is the easy way to reduce or avoid shortages. Inventory reduction increases the risk of shortages. Because variability is a third factor, this relationship can be altered. As mentioned in the previous section, safety stock is the standard method of compensating for variation that includes fluctuations in demand, also known as forecast error, and other unforeseen changes in supply or demand, including inventory accuracy errors.
Minimizing Lead Times and Lot Sizes for Improved Inventory Management
Inventory would not be required if the lead time was zero. Because variability is time-sensitive, you will need more inventory and safety stock when the lead time is longer. Weekly variation is more likely than one day. Also, forecasts are more accurate in the near term than in the longer term. Replenishment planning is concerned with the replenishment lead time. Replenishment quantities can be reduced with a shorter lead time, which means less inventory is brought in at a time and used up more quickly. As a result, the overall inventory level can be reduced.
The general concept of economic order quantity, also known as EOQ, is usually used to determine the replenishment lot size. EOQ covers both carrying costs (fixed costs related to making or purchasing an item, regardless of quantity) and ordering costs.
The Core Rules of Inventory Management
Satisfying Demand with Adequate Inventory Levels
This rule comes from the first issue you might have with your inventory, which is whether items are in low stock or out of stock. You should never be in this position if you want your business to prosper. Companies would simply issue a backorder while they purchased or made more items when inventory ran out. Customers would then just wait for the item to be back in stock.
However, as a result of the promises made by Amazon.com and other major online retailers, today's consumer is accustomed to a higher level of service. Order processing within 24 hours, prompt shipping, and cheap, fast delivery are all part of this higher standard. Consumers with these expectations don't like backorders.
Say No to Overstocking!
Going Out of Stock is a bad thing when trying to find ideal inventory levels—it causes backorders, which stop transactions and leaves customers unhappy. Management increases acquisitions to build an inventory “cushion” in response to persistent low or out-of-stock levels. Having a lot of inventory indicates that you have capital tied up and not available for other purposes.
However, overstocking also has hidden costs. Extra inventory means extra warehousing, which wouldn't be necessary if your business had more realistic inventory levels. Extra inventory could also result in a change in demand, which means that inventory must be sold at a high discount.
Know well your inventory
Having the right inventory level is often not the main issue. Knowing your exact inventory level and its state is the main issue. There are many issues when you have inaccurate stock-level information. Imagine having just the right amount of products for a certain SKU given demand, but your team is using old data to predict that your inventory will fall short of demand in a month. Commence the process of acquiring additional inventory in order to make up the difference. You will now have excess stock and overstock.
Warehouse fluctuates between Overstock and Out of Stock situations. While non-moving items occupy floor space, fast-moving items never seem to be available, resulting in congested warehouse floors and unnecessary delays.
Inventory Management Techniques
A company will use different inventory management techniques based on the product or business being analyzed. Just-in-time (JIT) manufacturing, materials requirement planning (MRP), economic order quantity (EOQ), and days sales of inventory (DSI) are some management techniques. Although there are other options, these are the four most common methods for inventory analysis.
TechniqueDescriptionBenefitsDrawbacksJust-in-Time (JIT)Inventory is ordered and received only as needed for production or sales.Reduces holding costs and waste.Risk of stockouts due to supply chain issues.Materials Requirement Planning (MRP)Uses sales forecasts to determine material needs and timing.Helps plan inventory levels and reduce shortages.Requires accurate sales forecasts.Economic Order Quantity (EOQ)Calculates the optimal order size to minimize total inventory costs.Balances ordering and holding costs.Assumes constant demand and cost.Days Sales of Inventory (DSI)Measures the average number of days it takes to sell inventory.Provides insight into inventory turnover rates.Can vary with seasonal demand changes.
Just-in-Time Management (JIT)
Japan had this manufacturing model in the 1960s and 1970s. The most significant contribution to its development was made by Toyota Motor (TM). By keeping only the inventory they need to make and sell goods, this method allows businesses to save a lot of money and reduce waste. As a result of this method, storage and insurance costs are reduced, as well as the cost of liquidating or discarding overstock.
Materials Requirement Planning (MRP)
This inventory management technique is based on sales forecasts, so manufacturers must have accurate sales records to accurately plan inventory needs and promptly inform materials suppliers of those needs. Chartered Institute of Procurement and Supply How to Do Effective Material Requirements Planning.
For instance, a ski manufacturer could use an MRP inventory system to make sure that materials like plastic, fibreglass, wood, and aluminium are in stock based on anticipated orders. Manufacturers can't fulfil orders because they can't accurately forecast sales and plan inventory acquisitions.
Economic Order Quantity (EOQ)
In inventory management, this model works by determining how many units a company should add to its inventory with each batch order. This allows the company to reduce the total cost of inventory while maintaining consumer demand intact. The model includes holding and setup costs as inventory costs.
Days Sales of Inventory (DSI)
This financial ratio shows the average number of days that it takes for a company to turn its inventory, including work in progress, into sales. DSI, which can be interpreted in a number of ways, is also known as the average age of inventory, days inventory outstanding (DIO), days inventory (DII), days inventory sales, or days inventory.
Inventory Management Software
Establishing a successful business requires knowledge of what is in stock. Whether your customers shop in your store or online, the best inventory management software makes transactions easy in real time. However, the requirements of a restaurant or retail store are not the same as those of a small manufacturing plant, so it is essential to pick the right tools for your business.
Use inventory software for two important purposes: tracking multiple items or selling on multiple platforms. Cloud-based tools can save time and give you full control over ordering shipping, and fulfilment processes.
Some retail outlets and restaurants may have a POS system in place. However, manufacturers require software to monitor the assembly side, while e-commerce stores must keep all channels updated with real-time inventory.
Companies often use data stored in databases to get information that helps them make decisions. Today, databases are a critical component of the business architecture model. Companies can use economic-mathematical methods to calculate goods stocks and estimate their investment attractiveness thanks to database technology. It highlights how vital database technology is for today's business information systems. Database technology helps management make decisions by providing information for assessment, analysis, planning, and control.
"Frozen" stock asset turnover increases with good inventory management. Necessary resources will always be available and easy to get to. Which will prevent losing potential customers. Information Systems Supply Chain Management (SCM), as well as warehouse management modules (Inventory Management Systems), contain serious mathematical apparatus designated for inventory management optimization. Small businesses, on the other hand, prefer to use cheap but effective software like Microsoft Office. Today, the issue of reducing the cost of small businesses is very relevant, and other researchers have considered it in a number of different areas.
Inventory management tools (IMT) are a crucial component of the organization's management. IMT could be divided into two parts. One of them includes mathematical models and techniques for planning the optimal stock size, finding the optimal reserve supply chain, and finding the optimal service in reserve.
Another includes an information system, which provides decision-making support with continuous registration data for goods accounting, stock calculation, and visualization results. Decision-making support is a critical component of IMT for businesses of any size. They offer query optimization, advanced user interfaces, and advanced technologies for data collection, integration, retrieval, and analysis. In this field, many OLAP tools are used.
Inventory Optimization
Stocking products helps companies around the world to supply their clients on time and provide a buffer against any unforeseen event. Planners can reduce production costs by producing longer batches because holding inventory separates the production process from the sales process. Inventory policies are just meant to accomplish a goal. The supply chain environment will also have to be considered. Setting the right objective will allow us to choose the best tradeoff between too much and too little inventory.
Only if all relevant costs, including opportunity costs, are included in our model, then an inventory policy optimized for cost minimization will work. Inventory optimization is the process of making sure that the right amount of inventory is available to meet current and future demand. Companies can meet customer demand expectations and avoid costly inventory issues like overstocking, backorders, and stockouts by maintaining an ideal inventory level.
Businesses try to avoid bad inventory management effects like lost sales, manufacturing delays, lower revenue, and lost customers. However, companies face a number of difficulties in achieving ideal inventory levels, especially when other supply chain parties have supply chain issues.
Best Practices for warehouse management
INVEST IN A GOOD WAREHOUSE MANAGEMENT SYSTEM
Warehouse operations, including receiving, putaway, and replenishment, can be performed more efficiently with an effective warehouse management solution. Furthermore, it has the ability to connect to your ERP, TMS, and other systems in order to keep your inventory up-to-date, while making things more accurate, saving money, and satisfying your customers. The best-in-class approach to a WMS means that you have the best possible solution to meet warehouse requirements.
ELIMINATE PAPER PROCESSES AND MOVE TO REAL-TIME MOBILE WORKERS
Warehouse technology now allows data to be input directly into the WMS with mobile RF devices. As a result, data entry methods have been changed. When you convert handwritten data into electronic bits and bytes, you can avoid problems like readability issues, typing mistakes, and lost paperwork by scanning product barcodes and locations. Additionally, it maintains a more accurate, real-time inventory because, instead of waiting to see the data after it is entered manually into the system, mobile scanning devices update the information in the system right away.
IMPROVE ACCURACY AND PRODUCTIVITY
Automatically recording data can increase output and accuracy while reducing staff costs. Using real-time radio frequency identification tags and barcodes can speed up the process of getting products out of the dock and prevent human mistakes like counting and entering data into the tracking process.
REFINE RETURNS MANAGEMENT
Running a business requires returns. More than thirty per cent of all online orders are returned, and incorrect handling can have an impact on your bottom line. That is a good reason to improve your returns process. The WMS system must integrate with the return source, which is a customer service system, in order to record inventory disposition, including return-to-stock, damage, etc. Inventory returns must be handled efficiently and accurately.
Summary
Since a lot of things come into play when calculating how much inventory is available in warehouses, some questions are hard to answer. Inventory management is like a balancing act— Too much inventory leads to overspending on storage and risking expiring dates, while too little means fewer sales. Finding the right balance is hard. Customers expect more and more. Having the right amount of products available and making the difference between selling your products and getting the sale compared to your competitor is an important first step to having real-time insight into inventory levels.
Always keep ideal inventory levels in place to avoid overselling or distressed inventory. It allows for the calculation of each product's optimal inventory levels by using statistics like historical sales and current sales trends. Inventory plays a crucial role in operational functions, and it serves as a replacement for time in being able to meet customer demands.
When it comes to distribution, having inventory in a nearby warehouse allows the distributor to deliver the products to the customer very fast. To make the most of your company's investment and to ensure that the inventory you need is available when you need it, it is important to manage such a critical resource. Inventory management has two basic parts: understanding what you have and managing acquisition.
For having the inventory you need to satisfy customers and prevent shortages, knowing how much inventory you have and managing replenishment is important. Without a detailed record of your inventory, effective inventory management is almost impossible. Based on what you know is in stock, you make promises to your customers by accepting orders and quoting ship dates. Automated data collection is not only faster because it doesn't need to be keyed into the inventory records, but it also eliminates many errors that come with manual processes.Manufacturers use a method called Material Requirements Planning (MRP) to determine how much of each material and component item is required and when to finish the master production schedule.
Inventory would not be required if the lead time was zero. Because variability is time-sensitive, you will need more inventory and safety stock when the lead time is longer. Weekly variation is more likely than one day. This rule comes from the first issue you might have with your inventory, which is whether items are in low stock or out of stock. You should never be in this position if you want your business to prosper. Companies would simply issue a backorder while they purchased or made more items when inventory ran out.
Extra inventory means extra warehousing, which wouldn't be necessary if your business had more realistic inventory levels. Extra inventory could also result in a change in demand, which means that inventory must be sold at a high discount. Having the right inventory level is often not the main issue. Knowing your exact inventory level and its state is the main issue. There are many issues when you have inaccurate stock-level information. By keeping only the inventory they need to make and sell goods, this method allows businesses to save a lot of money and reduce waste. As a result of this method, storage and insurance costs are reduced, as well as the cost of liquidating or discarding overstock.
