Over the past few decades, inventory optimization has moved from a theoretical context to more of a practical tool implementation that improves corporate profitability.
Inventory management is applicable to every economic industry, due to its underlying dependancy on demand and supply variability which is common across every business model.
As we all know that with growing businesses, we should have an efficient, effective, and innovative inventory management technique system, which will not only keep track of our growing stock requirements, but also maintain the high rate of warehouses used to store these inventories. Some studies show that almost half (46 percent) of small businesses don’t use inventory control techniques at all and manage their inventory using spreadsheets and documents, which can be quite inefficient for a growing industry.
Today brands are expected to sell quickly across multiple channels at the same time constantly innovate for the highly competitive retail marketplace. Many businesses try to keep a lot of stocks and spare parts in the warehouses to create quick turnaround time for on time delivery, but in most of the cases these models fail to generate profit for businesses due to high rate of maintenance cost for these inventory storage. We as business owners need to implement various techniques which can help in stock optimization and avoid unnecessary expenditure which will improve overall business revenue for the company.
Let’s discuss more on the inventory optimization techniques to reduce the maintenance cost for the stock.
What is Inventory Optimization?
Inventory optimization is an approach to understand and quantify the uncertainties involved in the demand and supply chain across multi-level supply scenario.
Inventory optimization has become very crucial in the past few years due to its increased usage in improving business revenue. Today it is considered a core competency at both mid cap and large scale industries. The core competence of this methodology is to reduce the working capital invested on the inventories without damaging service levels.
In short, inventory optimization scientifically determines the minimum stock requirements across the entire supply cycle without disturbing the demand supply chain of the organization.
The main functionalities of inventory optimization system are as follows:-
- Maintaining the minimum cost of average on-hand(stock level) inventory.
- Achieving the highest desired rate for the inventories.
- Least reorder frequency.
- A clear understanding of the company’s inventory performance using inventory management software.
Key elements of Inventory optimization
Optimizing your inventory means that you are determined exactly how much you need to order for each single SKU and when you order it, it will be able to serve your customers. Inventory optimization will take the seasonality, supplier lead times, campaigns into account. Key elements for optimizing your inventory are:
- Demand Forecasting – There are several ways to forecast demand including last period’s demand from your sales. Each and every product has a life cycle. When the product is first introduced in the market it won’t have any demand at all. From there it will have a positive move to the trend in the market where the demand is constantly growing until it becomes stable and fast-moving. From there it might become irregular and then move into the negative trend where demand is falling. To accurately forecast the product, you need to know the life cycle and how they move through the product life cycle. Campaigns and promotions are great tools for marketers but headache for the purchasers and planners.
- Inventory policies – The next step to determine is inventory policy, which means determining which products to keep in stock and how much to keep the stock. If there are sudden demand peaks, you must have a safety stock to cover it. If you have more than one warehouse, it should optimize your inventory to be distributed to your locations in the right quantities at the right place and at the right time.
- Replenishment – This is to calculate the points of reordering, order quantities, and turn them into the actual orders. A few things you need to optimize the purchase is:
- Supplier reliability: This has a big effect on the stock availability and service levels. If some of your product has a long lead time of several months, your customers will expect fast deliveries.
- Goods in transit: If you are placing any order, it’s just knowing about what’s currently in the stock to order the quantity. You also need to know what you currently have in transit and on the way to your warehouse.
Read More – Efficient Inventory Management System
What is an inventory management technique?
As we know, Inventory management is the process of tracking every stock which comes in and goes out of a warehouse starting from manufacturing till the final product delivery. There are many inventory management techniques and softwares which have many efficient ways of controlling our company’s stock and improving overall business revenue. However, choosing these correct techniques or the stock control software is very crucial for maintaining a proper balance between out of stock and over stock situations to optimize ROI for the company.
Efficient Management and inventory tools like SalesBabuCRM, provides a complete package from managing business processes to inventory management for every business model. SalesBabuCRM provides an inventory management system , which is far more robust than the old-school spreadsheet system. Using these advanced techniques in the software, we can monitor how much inventory we have at any given time across all your sales channels while utilizing reporting capabilities that provide insights into your business and customers.
Identifying the missing links between your business investment and the missing or excess inventory usage, will be the best way to improve your business revenue. SalesbabuCRM helps to identify the reason behind missing or lost inventory which is the most critical aspect of your brand’s success.
Let’s discuss a few inventory management techniques that can assist your brand’s efficiency and accuracy.
1. Stock auditing
Usually, inventory management fails is many organizations due to unorganised product labels, tagging, and other inventory detail management. Softwares like SalesBabuCRM provides a cloud based centralised database which will have clear details on every raw material, purchased goods, the location of each item and other information on each and every product. This will help to locate and track every item in a systematic manner. Manual tagging and human errors are considerably reduced with these organised methods of tracking every inventory in the warehouse.
Regular auditing of these products and raw material are very critical for material rotation and avoiding wastage by wear out and outdated stock.
Apart from automated inventory management, we need to have a systematic technique of auditing our stock level from time-to-time to understand our stock health level.
- Physical inventory auditing is comparison of the numbers that your operations team has speculated and the ones that are on-hand at the end of each year.
- Cycle counting is a great way to close the gap between what inventory we actually have and what our brand thinks it has. This auditing is usually done in a few months interval.
- Spot checking is done throughout the year with surprise visits to check the stock upkeep and avoid any theft and misuse.
2. Preparation of Inventory Budgets
Budgets are the basis of the inventory management in many organizations which deals with a huge amount of stock purchases. These budgets should be created well advance to understand the amount in hand for stock procurement and stock adjustments from past purchases.
The sales budget provides the basis of the production plans, followed by which the adjustments of the stocks are made with the already available stock in hand. Also, the value of the product in the future and current rate both should be considered while creating these budgets for a better revenue planning.
Once the budget is created and divided for every department, it should be communicated to every stakeholder clearly to regulate the actual purchase commitments from each team.
Also, periodic check on these budgets should be verified with the current procurement state to understand any diversion from the initial plans.
3. Just-in-time inventory
Just-in-time inventory technique allows companies to decrease the amount of inventory in their warehouses by keeping a low stock of various product and replenishing it as needed. These stocks are ordered and refilled just before the “out-of-stock” and are usually done for companies which need delivery a few days in a week.
Just-in-time inventory helps to keep the pricey warehouse maintenance and upkeep cost to as low as possible by avoiding any extra stock storage.
Cloud-based inventory management systems like SalesbabuCRM, give your team the opportunity to have clear and precise visibility of your required inventory at anytime, anywhere, which will help to optimise operational cost and make informed business decisions for inventory requirements.
4. ABC analysis:
Every item in a warehouse has its own value and wear and tear state. Hence, to maintain these different items we should have a specific way to deal with different level of care needed for various varieties of products in stock.
An effective controlled exercise over materials is done through – A.B.C. (Always Better Control) method of inventory management.
Under this method, every material is classified into three categories in accordance with their respective values.
- Group ‘A’ constitutes costly items which are around 10 to 20% of the total items, but may account for around 50% of the total value of the stocks. A great amount of care is taken for these items to maintain their health and preservation.
- Group ‘B’ consists of items which constitutes around 20 to 30% of the store items and contribute about 30% of the total value of the stocks. A reasonable amount of care is taken for these items.
- The last category constitutes the 70 to 80% of the items is covered costing about 20% of the total value. A regular upkeep is maintained for these items.
This selective value approach ensures a considerable reduction in the storage expenses and acts as a great help in preserving costliest items with utmost care.
5. Demand Forecasting
Demand forecasting is a technique to understand the trend of demand and supply chain and make more informed decision on the required stock levels in the warehouse.
Demand forecasting capabilities should include:
- An appropriate forecasting algorithm should be selected as per your business model and requirements.
- Every stock item should be considered separately as per its overall value and customer popularity.
- Clipping and filtering techniques of the metrics and analysis generated through inventory management software for managing and understanding abnormal data trends.
- Capabilities to understand the expected future events or trends and maintain the stock levels appropriately.
6. Organisation’s Planning Process
Strategic, tactical and executional planning is the key to a successful business model. Starting with organisation plans at the strategic level such as – where products will be manufactured, which raw materials will be required to fulfill the manufacturing process, which locations will store inventory and other like vendor supply chain and target customer service levels and more.
These details are then used to develop plans at a tactical level – how much of each product do we build, when and how much safety stock will be needed. Finally, these plans go to execution with ERP management processes.
We need to plan and organise our techniques based on each of these phases and create better policies and involve management tools which can be helpful in each stage for a better performance.
In less than a decade, inventory optimization techniques have emerged as a proven technology shift to considerably reduce total inventory requirements while maintaining or improving customer experience level. With these numerous advantages of tracking and maintaining out stock levels, inventory optimization is now recognized as a core competency which is very critical for improving business performance and revenue generation.