The risks associated with not having enough stock are not being able to fulfil customer orders, poor customer satisfaction and having to implement costly emergency replenishment procedures. On the other hand, the costs of holding large amounts of stock to meet demand fluctuations can have a serious impact on cash flow.
Most businesses create a “buffer” of stock that results in inventory levels being well above where they need to be for 80 or 90 per cent of the time. This means liquidity is badly affected – something that most companies can ill afford now.
The ability to minimise stock while maximising its availability is the holy grail of inventory management. Remember that the most expensive material is the one that is not available when you need it – but the second most expensive is the one in stock that you don’t need. So what should you do?
A blanket reduction approach can expose problems such as running out of stock, which affects customer service. It can also incur additional costs through expensive short-term solutions. Companies need to be able to find out which stock is in excess through more efficient forecasting, order planning and management of information.
They need to create forecasting systems based on historical sales. This method may not suit every business, but for most it is a good place to start. Additional information should then be layered on top to provide a better picture of likely demand.
Consider this scenario: an electronics manufacturer promises availability for all its listed components to its customers, who rely on the fact that the supplies will be available the next day. Each year this manufacturer deals with more than a million orders, and from this 70,000 different parts have to be bought from 600 sub-contractors.
The size of this operation demonstrates the need for an efficient forecasting process. Determining optimum safe stock levels also releases cash tied up in stock.
The next hurdle is to manage order planning and ensure that you work smarter. Stock replenishment should not only meet the required safety stock level, but also consider lead times and prices of alternative suppliers, batch sizes, shelf life considerations, minimum and maximum ordering constraints, storage costs and delivery frequency.
In essence, efficiency can be greatly increased through more reliable inventory plans. More proactive planning and less fire-fighting lead to a direct impact on the bottom line, as emergency solutions are not the cheapest.
Strategic planning of inventory is supported by accurate information. By implementing a system that asks the right questions businesses can improve efficiency, reduce stock, and squeeze more out of their supply chain – meaning lower risk to the all-important customer service level.
Cathy Humphreys is UK country manager at INFORM
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