Few would claim inventory management is the fun part of running a business. But even fewer successful business managers would deny it is essential. Inventory costs money. And old inventory is often hard to move.
So, if you spend too much on inventory, you could damage your cash flow and end up with too much stock – which you then also need to spend money warehousing!
Yet it is also dangerous to be too conservative with inventory. If you run out of popular items, you could lose sales, profit, and quite possibly the confidence of your customers.
These are just a few of the pitfalls of poor inventory management. Fortunately, there are tried and tested methods to help you get it right.
Here are five essential inventory management tips to get you started.
1. Understand the behaviour of your product or part range
One size does not fit all when it comes to inventory.
Across your product or part range, different items always have different demand patterns. If you segment your range into groups based on demand, you can set an inventory policy that fits the behaviour of each group. This can significantly reduce your risk of having too much, or too little, inventory. If you are short on time, focus your attention on the high cost items. Even a simple ABC analysis can have a huge impact.
2. Spend time on your demand forecast
You can never produce a totally accurate forecast. However, striving for accuracy in forecasting future demand will increase your chance of having the right level of inventory at the right time.
Use the segmentation created in Tip 1 to focus your attention on the parts that matter most – for example, items that sell in the highest volume or generate the biggest value.
3. Create a clear inventory policy
Having a clear set of inventory management rules will help everyone in your business to manage inventory well. Start by using your segmentation and forecast accuracy assessment to understand the risk of stock-out, or over stocking, and determine your approach and settings.
There is no standard approach, as each business has its own dynamics. However, some useful examples are shown below:
Make sure involved with inventory understands your policies and goals. This includes everyone who orders materials, or influences production quantities.
4. Beware of unintended consequences
Always consider the wider impact when changing your inventory management approach.
For example, increasing the frequency of supply on a high value item to reduce the inventory holding could impact:
The supplier – Can they manage the new requirement? Do they need time to plan for the change?
Material handling – Can they cope with the increase in deliveries?
Other impacts to consider when setting or changing the inventory policy include:
Service – Will the change improve the current service levels?
Manufacturing – Are you asking them to decrease or increase their production runs?
Storage – Does the current level of storage support the policy?
Resource – Are you changing the amount of work in any area?
Finance – Is there an impact on cash flow?
5. Keep checking your policy and settings
Finally, remember that your business is dynamic.
Check often that your settings are producing the expected results, especially for high-value or high-risk items. Review your policy and analyses regularly to recognise when settings need tweaking or changing. And if you change your policy, make sure you communicate it to everyone who needs to know.
Hexagon works with businesses on supply chain and business improvement. We utilise class-leading analytics and business intelligence, to quickly understand your challenges. We then provide implementation and ongoing support, to deliver the results we have identified are possible. We are passionate about helping you to succeed.
Sue Willis is Managing Director of our Strategy & Operations Business. Find out more about our senior team.
