Is your business still following manual processes to manage your inventory, leading to errors in recording stock levels? Or do you find yourself constantly missing sales opportunities because of understocking or overstocking? These are signs that you need to optimize your inventory management.
Inventory management is the process of efficiently overseeing the constant flow of units into and out of an existing inventory. Proper management aims to avoid losing sales due to out-of-stock items or excessive resources from overstocking inventory.
For any business that deals with physical products, inventory management is a crucial component of operations. According to research, inventory distortion is estimated to have cost businesses globally a staggering US$1.8 trillion in 2020. Poor inventory management directly impacts sales, profits, and customer satisfaction. Optimizing inventory should be a high priority for most product-based businesses.
What is Inventory Management?
Across the globe, around 34% of businesses still face issues like out-of-stock products and delayed deliveries. The reason? Poor management of inventory.
Inventory management refers to the process of ordering, storing, picking and packing and using a company’s inventory. This includes managing raw materials, components and finished products, as well as the warehousing and processing of such items.
Managing inventory involves balancing the costs of inventory with the benefits of inventory. Companies aim to minimize inventory costs while still maximizing the ability to meet customer demand. Proper inventory management is a key component of supply chain management.
At its core, inventory management works to answer several questions:
- What items do we need to keep in stock to meet customer demand?
- How much safety stock should we keep on hand?
- When should we order more?
- How much do we order to avoid shortages?
- How can we accurately forecast demand?
Why is Inventory Management Important?
Inventory management is crucial for any business that manufactures, buys, or sells products. In fact, it has been shown that by reducing stockouts and overstocks, businesses can achieve a 10% decrease in inventory costs.
If you are wondering why is inventory management important, here are some benefits that it provides:
1. Reduces costs
Keeping excess inventory ties up money unnecessarily. Optimizing inventory levels reduces storage, handling, insurance, and tax costs. Effective inventory management also reduces waste, theft, and spoilage.
2. Improves cash flow
Reducing excess inventory improves cash flow. Less money is tied up in inventory, so there is more available operating capital.
3. Boosts sales
Keeping optimal inventory levels avoids lost sales from stockouts and results in better customer service. Customers can purchase what they want when they want it.
4. Increases efficiency
With tight control of inventory, processes become more streamlined. Less time is spent tracking down items or counting inventory.
5. Enhances supply chain
Good coordination with suppliers helps match inventory arrivals to demand. This reduces uncertainty and improves planning.
In contrast, poor inventory management causes many problems including:
1. Lost sales
Stockouts from inadequate inventory levels cause missed sales opportunities. Customers may go elsewhere.
2. Reduced customer satisfaction
Customers get frustrated when a desired item is out of stock. Their loyalty to the company diminishes.
3. Excess inventory costs
Storage, insurance, taxes, and other costs increase. Excess inventory can lead to higher losses from damage or expiration.
4. Lower productivity
Workers spend more time searching for stock and correcting inventory record errors.
5. Increased waste
Oversupply and inadequate inventory monitoring can result in more spoilage and obsolete items.
What is Inventory Management Optimization?
Optimizing inventory management refers to strategies and best practices designed to improve all aspects of inventory control and logistics within a business. The goal is to enhance efficiency, cut costs, improve customer service, and boost profits by ensuring inventory levels are aligned with actual demand.
At its core, optimization of inventory management involves balancing the costs of holding inventory with costs related to stockouts or shortages.
There are some key considerations for optimizing inventory:
- Achieving the right amount of safety stock to meet demand while minimizing excess inventory. Safety stock acts as a buffer for variation in demand.
- Improving forecasting methods to better predict future inventory needs and align supply with projected sales.
- Streamlining replenishment processes to quickly and accurately move inventory from suppliers to fulfillment locations.
- Utilizing inventory management software and analytics to gain visibility into inventory health metrics and trends.
- Ensuring inventory is allocated and positioned strategically geographically to enable quick order fulfillment.
- Leveraging inventory management best practices like ABC analysis, just-in-time inventory management, drop shipping, and demand-driven inventory planning.
4 Best Practices for Optimising Inventory Management
To optimize your inventory management, focus on these key best practices:
1. Demand Planning
- Analyse historical sales data to anticipate consumer demand. Look for trends, seasons, and other patterns.
- Segment products into categories like high-demand, steady-sellers, and slow-movers. Forecast and stock inventory differently for each category.
- Build safety stock into projections to avoid stockouts from inaccurate demand planning.
- Collaborate with suppliers to align production and delivery with demand forecasts.
2. Inventory Tracking
- Maintain real-time visibility into current inventory levels across locations. Identify where you have excess stock or risk a stockout.
- Track inventory accuracy to ensure actual counts match the numbers in your system. Conduct regular cycle counts.
- Monitor key metrics like days of supply, turnover rate, and inventory performance.
3. Data Analysis
- Look for insights in your inventory data to optimize stock levels. Analyse consumption patterns, lead times, seasonality, and other trends.
- Identify your most profitable and popular products to prioritize inventory investments. Avoid overstocking slow-moving items.
- Review analytics regularly rather than relying on gut instinct. Let data guide your forecasting and decision-making.
4. Forecasting
- Create a formal inventory forecasting process with input from finance, sales, marketing and operations.
- Develop robust forecasting models using historical data and predictive analytics tools. Continuously refine projections.
- Collaborate across business units to align on a single forecast number. Compare projections to actuals and adjust models accordingly.
Best Techniques for Optimising Inventory Management
To optimize your inventory management, you can employ several techniques:
1. ABC Analysis
ABC analysis divides inventory into three categories – A, B, and C – based on the value to the business.
- The items are very important, represent the highest annual consumption value, and require tight control. Make sure to have sufficient stock of A items.
- B items are important but less tightly controlled. Monitor their levels periodically.
- C items are less important, represent low annual consumption value, and require minimal monitoring. Keep limited stock or use drop shipping.
Prioritise managing A products, as they account for a large percentage of overall business value. Devote less resources to tracking C items.
2. Just-in-Time Inventory
With just-in-time inventory management, you receive goods from suppliers as they’re needed to fulfill orders, rather than keeping excess stock. This reduces storage costs but requires careful coordination with manufacturers to avoid stockouts.
Use just-in-time techniques for products with steady demand. Forecasts need accurately based on historical data, current orders, and market conditions. Maintain open communication with suppliers.
3. Dropshipping
With dropshipping, a supplier ships products directly to customers, so you don’t have to physically store inventory. This saves on warehousing costs.
Identify reliable suppliers to handle shipping. Ensure they can meet delivery timelines. Offer variety by partnering with multiple drop shippers. Automate order forwarding and tracking. Dropshipping works well for niche items or variable demand.
Read Also: Everything you need to Know about Smart Warehousing
Challenges in Optimising Inventory Management
Here are some of the most common obstacles that companies face when trying to optimize their inventory management processes:
1. Inaccurate Demand Forecasting
One of the biggest challenges is inaccurate demand forecasting. If you don’t have a strong understanding of future demand for your products, it’s almost impossible to optimize your inventory levels. Forecasting errors lead to excess stock of some items and stock-outs of other items. Improving demand forecasting requires collecting historical sales data, identifying trends and patterns, and applying statistical modeling techniques. It takes time and expertise to master demand forecasting.
2. Poor Data Quality
Bad data leads to bad decisions. If your inventory data is incomplete, incorrect, or out-of-date, you can’t get an accurate picture of what products you have on hand. Data errors force businesses to hold excess safety stock or experience more stock-outs. Investing in inventory management software and conducting regular inventory counts can improve data quality. However, it requires diligent, ongoing effort to maintain high standards.
3. High Inventory Costs
Holding too much inventory leads to high carrying costs like warehousing fees, spoilage and obsolescence. But stock-outs also cost money through lost sales and customers. Balancing these costs and minimizing total inventory costs is tricky. Businesses often focus too much on holding down carrying costs without considering the costs of stock-outs. Approaching inventory optimization from a total cost perspective provides a more accurate view of tradeoffs.
Wrapping Up
Inventory management optimization is crucial for businesses to maximize profits, minimize costs, and provide the best service to customers. By implementing best practices, businesses can achieve substantial benefits.
How an external fulfillment partner like ShipTop can significantly improve inventory management through leveraging economies of scale, streamlining processes, and providing visibility through advanced reporting.
ShipTop’s team of experts can handle all aspects of inventory, from forecasting demand to inventory tracking and replenishment. We utilize advanced technology an proprietary solutions to provide accurate logistics data, ensuring you have optimal inventory levels.
Optimized inventory takes time, effort, and investment, but the rewards are manifold. With the right practices and partners, businesses can transform the efficiency and profitability of their supply chain operations.
Contact ShipTop today to learn how we can optimize your inventory management.