Administrator at USM Supply Chain Consulting. Helping companies achieve higher profits with cost reduction and supply chain digitization.
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Inventories have a huge impact on your income statement and balance sheet. If it is not properly balanced against demand, it is difficult for consumer goods manufacturers to serve customers, which can lead to problems. For example, Nike’s difficulty in responding to supply chain and inflation issues created a stock surplus this had a negative impact on revenues. On the other hand, Revlon’s inability to meet demand due to low inventory, this led to the company filing for bankruptcy after 90 years in business.
Knowing how to optimize your inventory can help you ensure that your customer service is high without having to deal with additional costs and issues such as obsolete inventory, capital, handling, and maintenance. To get started, here are five key ways you can optimize your inventory and management processes.
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1. Increase your visibility
A clear understanding of stock status is fundamental. While management and finance may know how much inventory is being tracked in dollars, it’s important to drill down to the part number level and quantify inventory in both physical and monetary units.
In addition, inventory levels are meaningless as an isolated measure. For example, the ERP system can display 100 units of widget A and 1 million units of widget B. But it would not show that widget A’s inventory level is 10 times sales, while widget B’s level is not enough to meet demand. Knowing the relationship between demand and inventory levels is critical to understanding the situation.
A common visibility challenge is consolidating inventory across the company’s multiple locations and/or inventory across co-manufacturers and co-packers. It’s especially challenging because co-mans and co-packers use their own part numbers that must be referenced with the company’s. In these cases, it’s helpful to share inventory information in their colleagues’ spreadsheets or gain insight into their colleagues’ warehouse management system.
2. Focus on better responsiveness
Gartner defines supply chain planning as “the forward-looking process of coordinating assets to optimize the delivery of the goods, services and information from supplier to customer.” The ultimate goal of this process is to create a balance between supply and demand.
Responsiveness – how companies respond when changes in this balance occur – is the other side of the coin. Stock optimization enables companies to respond to this. For example, if demand is 15% higher than planned, a responsive supply chain may have an inventory buffer to meet all or part of the additional demand. On the other hand, if demand falls, a company with the right responsiveness will have defined outlets or strategies such as liquidation that it knows how to implement.
3. Provide a new product launch management process
According to The Nielsen IQ surveythe CPG industry launches an average of 30,000 new products each year. Such variety or large number of stock parts makes it more complex. Think about your closet. If you add more outfits each season without getting rid of your old clothes, you lose track of what you actually have. The lack of a set process for discontinuing old stock when new products hit the shelves creates unnecessary problems.
There are two ways your change manager can control when the old part number is retired and when the new part number goes live. One option is to choose to run a walk-through, using the old part number until stock runs out to minimize costs. In this case, it is essential to determine the expiration dates of your old part number before transitioning to the new one.
However, you may prefer to choose a hard transition date, where you choose a specific date to stop using the old part number, regardless of inventory levels. This is a popular option if there are regulatory issues with a product. If there is a hard transition date, change management will estimate liabilities taking into account the in-transit and on-hand inventory of the old part number, as well as any open purchase orders that cannot be canceled or changed.
4. Improve your demand forecasting
An input of the supply planning process is demand side forecasting. Demand forecasting, in which companies subtract consumption from expected incoming inventory, is extremely important for optimizing inventory. To improve demand forecasting and the overall planning process, collaboration across the business is essential. Cross-functional efforts of the sales, marketing, supply chain, procurement, finance, and change management teams can lead to better optimization.
5. Consider the total cost of ownership
The total cost of ownership concept takes into account all elements that can affect costs. For example, large discounts can entice the purchasing team to buy larger quantities. But this can lead to increased costs due to factors associated with increased inventory levels, such as potential obsolete inventory, warehousing or warehousing, and capital costs. Because inventory optimization translates to having the right amount of inventory when needed, cost of ownership tracking can help improve your product management.
For small-margin businesses, such as retailers, inventory levels can make or break their business. Having the right amount at the right time, or knowing how to react if not, is a big success factor. Inventory optimization is therefore vital for a healthy financial statement.
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