Ten ways to improve inventory management

July 06, 2011 WSJ.com

By Pratap Mukharji, Sam Israelit, Francois Faelli, Thierry Catfolis and Raymond Tsang
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This article originally appeared on WSJ.com's CFO Journal (may require
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CFOs and other senior executives already know the importance of inventory
management. And yet even the most attentive managers often find it difficult to
get it right. In our work with clients, we've found that decision makers often rely
on external benchmarks that seldom deliver expected insights. And they make
operating assumptions that send them down the wrong path. Two of the classic
misconceptions: improving the accuracy of sales forecasts is the best way to
reduce inventory and beefing up customer service requires keeping more
inventory on hand. The fact is, both assumptions can lead to inventory gluts or
shortages.
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As most executives know, getting the right levels is vital since it not only controls
costs but also serves as a barometer of a company's overall health. We've found
that best in class supply organizations are able to improve inventory levels by
between 20 percent and 50 percent by employing sophisticated analytical tools,
resulting in savings for years.
We typically ask clients 10 questions that take the pulse of a company's inventory
health. They are designed to assess the effectiveness of inventory reduction
processes as well as the sophistication and breadth of those efforts.

Taking an Inventory Pulse Check

1) Are you able to break down your operating inventory into the three major
categories when reporting levelssafety, replenishment and excess or
obsolete stock?

This breakdown makes it easier to make sound decisions about appropriate
levels for each of these three areas. It helps determine the minimum safety stock
needed to provide an insurance policy against supply chain problems either from
manufacturing glitches or distribution uncertainties so that customers get what
they ordered. It's useful for pinpointing the amount of inventory required to
replenish deliveries every two weeks. And it helps companies find ways to avoid
a backlog of excess or obsolete inventory.

2) Is your company using the most effective method to calculate your
safety stock levels?

Are you using statistical formulas that incorporate the accuracy of sales
forecasts, required production lead times, manufacturing schedule adherence
and service-level data for each SKU?
Or are you using a simple rule of thumb such as "all products made in factory
ABC need 15 days of safety stock."
The problem with the rule-of-thumb approach is that typically it's based on
products with the most uncertain delivery histories. Efficient operations use a
standard statistical formula that looks at historical data for individual products.

3) Do you recalculate safety stock levels on a regular basis to ensure they
are up to date?

Supply-savvy operations update their calculations about every three to six
months to ensure that decisions are based on the most accurate information.

4) Who decides key inventory-related policy such as striking the right
balance between customer service and cost-effective product inventory
levels?

Many decisions about inventory levels are strategically important. So instead of
relying solely on the supply organization to decide, executives need to have a
major say in the fundamental issues that impact inventory management
everything from determining the right breadth and complexity of product offerings
to optimal plant and distribution footprints.

5) Who determines the optimal frequency for producing or ordering
products?

A cross-functional team or
Only production planning or sourcing managers?
Several factors impact effective inventory planning. For example, marketing
campaigns can play a role alongside sourcing. So a cross-functional team should
set production and ordering schedules. Production alone determines lot sizes,
usually based solely on minimizing production costs. By weighing all factors and
using a sales and operations planning process (S&OP), cross-functional teams
often reduce the company's replenishment stock by 50 percent and ensure that
the right products are available for big promotions.

6) How do you determine the frequency for ordering and inventory
production if it's not set solely by factories or the supply organization?

Ideally, there are two factors: companies should consider calculations that
minimize the overall cost such as inventory and changeover costs. They also
should base frequency on negotiations between the different parties involved and
factor in upcoming events such as promotions and uncertainties like bad
weather.

7) Is the optimal order or production frequency calculated on a regular
basis as part of a continuous improvement process?

Once you've reduced inventories, you'll have to put new processes in place to
lower them even more over time. We use an analytical tool that highlights the
biggest levers for continually reducing inventory. For example, instead of working
to improve sales forecast accuracy from 70 percent to just 75 percent,
establishing a team that's focused on reducing lead times from Asian suppliers
may have more impact.

8) Do you have regular visibility into excess and obsolete stock, and is it
linked to targeted action plans to sell off or reduce this inventory?

Typically, excess and obsolete stock stems from ineffective sales forecasting,
planning or using a business model that fails to factor in product complexity and
life cycles correctly. Inventory leaders establish processes to determine why
excesses are being created and then develop a plan of action to sell it off. In
some instances, the fear of the write-off has led to a large buildup over time of
obsolete inventory.

9) Do you perform root-cause analyses on excess and obsolete stock and
know how they are linked to action plans that curb more excesses from
being created?

Companies with efficient inventory management create two task forces with
linked action plans. The first task force identifies the root causes and determines
ways to reduce the creation of new excess and obsolete stock. The second
focuses on ways to sell off the stock more effectively. It provides the sales team
with a list of top excess or obsolete products to push to ensure that they're
discounting specified excess products.

10) Do you apply the above practices to all parts of your inventory (finished
goods, raw material, works in process and spare parts) and in all
organizational entities?

One of the most common mistakes made by supply organizations is looking at
only a small subset of all inventorythe finished goods sitting in major
warehouseseven though raw materials, works in process, spare parts and
even goods in retail stores can make up 50 percent of the total. As a result, they
miss potential savings. An organizational map of all inventories will help better
prioritize ways to reduce inventories. And all the inventory techniques we've
discussed apply.
After answering all 10 questions, right or wrong, the diagnosis of your inventory
health sets your company up for significant opportunities to improve expense and
asset effectiveness and creates potential for capturing missed top-line sales.
Often ignored, inventory pulse checks can be a huge lever to improve the
financial health of a company.




Grow Your Business With
These Inventory Management Techniques And
TradeGecko



The way you control your inventory impacts your supply chain greatly and
could result in a make or break for your business. In very basic terms,
inventory management refers to the control over the flow of products and
services in and out of a company.

The Pains Of Not Having A Plan In Place

If stock levels and inventory are not properly managed, this could very well
hinder cash flow, chalk up holding costs, time and labour wastage, inefficiency
in supply chain and sales cycles, disappointed customers, and lost sales.
Inventory management affects your bottomline directly and should any part of
the process go wrong, a nightmare awaits.

Inventory management is an intrinsic part of your business that you definitely
dont want to mess around with. The following are some common inventory
management techniques deployed by organisations and youd probably
require a mix of different tactics for the best approach for your business.
Common Inventory
Management Techniques

Just In Time

The Just In Time (JIT) method works to lessen the volume of inventory that a
business has on hand. It is considered a risky technique because you only
purchase inventory a few days before it is needed for distribution or sale so
that the items arrive just in time for use. JIT helps organisations save on
inventory holding costs by keeping stock levels low, and eliminates situations
where deadstock sit on shelves for months on end.

You need to conduct thorough research into customer buying habits, seasonal
demand, and source for reliable suppliers and channels of transportation
before implementing JIT into your business operations to minimise risks and
screw ups.

ABC Analysis

Based on the Pareto Principle (also known as the 80-20 rule stating that 80%
of the overall consumption value is based on only 20% of the total items),
ABC analysis is a popular technique for dividing on-hand inventory into three
categories: A, B, and C, based on annual consumption unit, inventory value,
and cost significance.

A: Items of high value (70%) and small in number (10%)
B: Items of moderate value (20%) and moderate in number (20%)
C: Items of small value (10%) and large in number (70%)

*the values and number of items of each category are expressed as a
percentage of the total

The trick is to manage each category separately and as required, as not every
category needs the same amount of attention and effort. ABC Analysis allows
for the prioritisation in terms of managing different goods and inventory, where
selective control and allocation of funds and human resources is deployed.

For instance, A Items should be eyeballed constantly and put under special
and tight inventory control because the need for reordering will be more
frequent and continuous. On the other hand, items in Category C require
minimum attention and can be kept under simple observation, employing a
rather hands-off approach.

Dropshipping

This inventory management technique eliminates the cost of holding inventory
altogether. When you have a dropshipping agreement, you can directly
transfer customer orders and shipment details to your manufacturer or
wholesaler, who then ships the goods directly to your customers. Thus you do
not have to keep goods in stock, get to save on upfront inventory costs, and
benefit from a positive cash flow cycle.

Cross-docking

A technique similar to dropshipping where both methods rule out the need for
warehouses or labour costs and risks involved with inventory handling, cross-
docking is a practice where incoming semi-trailer trucks or railroad cars
unload materials directly onto outbound trucks, trailers, or rail cars with little or
no storage in between.

Essentially, it means you move goods from one transport vehicle directly onto
another with minimal or no warehousing. You might need staging areas where
inbound items are sorted and stored until the outbound shipment is complete
and ready to ship though. Also, you will require an extensive fleet and network
of transport vehicles for cross-docking to work.

Bulk Shipments

This method banks on the notion that it is almost always cheaper to purchase
and ship goods in bulk, so you plan to reorder products and replenish your
inventory less frequently than you usually would. Bulk shipping is one of the
predominant inventory management techniques in the industry, which can be
applied for goods with high customer demand.

The downside to bulk shipping is that you will need to lay out extra money on
warehousing the inventory, which will most likely be offset by the amount of
money saved from purchasing products in huge volumes and selling them off
fast.


TradeGecko Powers Up Your Inventory Management
Techniques

Now, the hard truth is, you can use any inventory management technique to
control your inventory, but without a good software solution to optimise your
strategy, youre fighting an uphill battle.

The TradeGecko online inventory management software ensures that you go
into battled well prepared because we recognise the financial impact of
inventory management techniques.

Full Transparency On Your Inventory

Our system gives you full visibility and transparency on stock levels to track
and monitor inventory, and automatically prompts you to reorder products
when the reorder point is reached. It is a software solution that improves your
inventory system regardless of your chosen inventory management
techniques.

No More Spreadsheets

Our Cloud-based software also gets rid of hassles and time and labour
wastage associated with spreadsheets. All your data and information is stored
in the Cloud, and processes are automated with TradeGecko. We epitomise
the phrase Less Chaos, More Control. Say goodbye to manual work and
hours of labouring over spreadsheets. We cut down the time needed to track
your inventory on a daily basis drastically. our open API allows for easy
customisation of our software to meet your specific needs.

Accurate Reporting Function

What is the point of charging ahead with your inventory management
techniques without checking on results and effectiveness of the tactic? The
system generates intelligence reports on your inventory activities so you can
make business decisions with precision and better insight. It also gives you
accountability for processes and movements of your inventory.

Boost Efficiency & Productivity

Our inventory management system comes packed with features and functions
that enhance value in your inventory by reducing costs, improving flexibility,
and freeing up more time so you can focus on other important aspects of your
business. Striking the best balance between having too little and too much
inventory will be a breeze. It sounds impossible now, but the TradeGecko
software will make operations and managing inventory the best (and easiest)
part of your day.

We Value-add By Being Your Business Partner

The best inventory management techniques and system maximise value,
exposure, and profit of your inventory while minimising cost and expenditure.
On top of overseeing your stock levels and inventory management
techniques, the TradeGecko team also get into the nuances of your business
and come in as a partner to make it more awesome!
For more information, have a read here on how you can power up your
inventory management techniques with TradeGecko.