8 July 2022 Inventory Management and Business Profitability. Inventory management is directly related to your company’s profitability. Unused stock means immobilized money and even more: the wealthy face losses, whether due to obsolescence or damage. On the other hand, lack of stock means a loss of sales, which also affects the company’s revenue. Excess Inventory: Problems and Solutions From the perspective of excess or inactive inventory, the following problems can be cited: Limited storage space Additional costs with renting new warehouses or increasing storage area Increased risk of obsolescence and product loss if the item has an expiration date Need to frequently run promotions to try to sell inactive stock, which can compromise profitability Higher labor costs to manage the high volume of stored items Lack of Inventory: Problems and Solutions Lost sales, both in e-commerce (product not available) and physical stores (empty shelves) Impact on sales targets Risk of contractual violations in supplying certain partners Negative customer experience, which may permanently leave the company Those who manage inventory do not want products to accumulate in the storage area. Those who sell do not want to miss opportunities to serve the customer well. So, what is the ideal path? Finding the perfect balance between supply and demand. Strategies to Achieve the Balance between Supply and Demand 1 – Improve Data Collection Successful supply chain companies are those that have all the information at their fingertips, with always up-to-date data. This means they know where the stock is located, the number of items at each address, how long each supplier takes to send a new shipment, what the delivery times are for the customer, etc. Without this data, managers cannot adequately measure their inventory levels and may inevitably stock more than necessary. 2 – Understand Customer Demand You need to know your customer very well, answering questions like: what are their preferences and why? Where do they prefer to shop? How much can they pay? Additionally, it is important to have a good understanding of the cultural and environmental factors that influence their behavior. To discover this information, you need to analyze your historical data, checking all information, whether it is the products with the highest and lowest yield, the store or channel that sells the most (if your company is omnichannel), what has been a trend, seasonality, etc. The frequency with which you need to access and review this data will depend on the type of business. 3 – Calculate Order Points With all historical data, analysis, and forecasts, you will be able to calculate the ideal order point for each product. This is the right time to replenish a certain item, i.e., the minimum stock level. To calculate, just use the formula: Order point = safety stock + (average consumption x supplier lead time) 4 – Optimize Order and Replenishment Frequency If you maintain the ideal replenishment frequency of stock, you will certainly be able to reduce it without compromising customer service. To do this, you should start by checking whether the supplier’s delivery times are accurate or not. Your team should work to monitor the supplier’s On Time In Full (OTIF) performance. Additionally, it is important to evaluate the accuracy of forecasts at the SKU level and predict losses. Knowing the demands and minimum stocks of each product, you will be able to define the ideal replacement frequency, which will give you greater predictability. 5 – Increase Production Speed or Reduce Supplier Delivery Times If your company can produce goods faster (in the case of industries) or receive them more quickly from a manufacturer (in the case of retail, wholesale, and e-commerce), you will be able to meet demands with less stock. For example, if it takes a month to make a product, inventory levels must cover at least four weeks of demand. If it takes only a day to produce it, two days’ supply stock levels will adequately cover the demand. 6 – Think Before Making Large Purchases Often companies choose to purchase large quantities of raw materials or finished products to receive a discount from the supplier. However, storage costs may exceed the discounts obtained at the time of purchase. Therefore, it is essential to evaluate whether it is worth making a larger purchase. The ideal is to maintain stock levels sufficient to meet demand, without excess. 7 – Conduct Cyclical Inventories and Have Good Quality Control Conduct periodic counts to maintain high accuracy, which, consequently, increases inventory reliability. It is also important to have adequate quality control practices. Establish everything that needs to be analyzed during inspections, determining procedures to qualify or disqualify a product. Conducting cyclical inventories and good quality control prevents losses that damage inventory management and cause various losses. 8 – Invest in Management Software Imagine applying all the previous strategies in a manual operation. It would be enormous work, wouldn’t it? That’s why you can’t do without specialized software for warehouse management, the WMS system. By using the WMS integrated with your ERP and sales system, you will have all the information about your stock and movements in the palm of your hand. The WMS provides real-time data and transforms this information into intelligent reports, essential for conducting analyses and making decisions. Additionally, the system helps with stock rotation and replenishment, issuing notifications when stock reaches the minimum level. Another advantage is that WMS will support you in conducting cyclical inventories and quality control, automating these activities and integrating them into the operational routine. With the system, you will have a great ally to optimize management and maintain the perfect balance between supply and demand. 9 – Know Your Supply Chain to Develop Good Contingency Plans Finally, an important tip: you need to know your supply chain. What are the strengths and weaknesses? If you thoroughly understand your chain, you will be able, for example, to develop a good contingency plan in case of unforeseen demands. It is necessary to understand, quantify, and minimize the risk of disruption. Companies can more easily minimize internal risk; however, a solid management strategy can also help reduce external risk. And this is where business intelligence comes into play. You need to stay updated on everything that could impact your supply chain. Take an analytical stance, instead of just following market news. How to Optimize Inventory and Ensure the Balance Between Demand and Supply Deagor WMS per ecommerce può aiutarti!