The world’s leading firms use inventory management practices to generate cash flow; in fact, they use the supply chain to increase their revenue and run ahead of competition, which has resulted in their stock price being higher than competition (CSCO Insights, 2011 p.1). During the recession, companies cut inventories to achieve corporate sustainability and survival; yet, nowadays, with economy on the incline, companies also need to face a number of additional problems that reduce inventory (CSCO Insights, 2011 p.1-2). It is, therefore, very important to manage and streamline inventory levels to make the supply chain as efficient as possible. This might prove difficult as distribution channels grow larger and more complex while customer service demands are grow (Metersky & Kilgore.) This makes managing inventory a particularly complex problem and may have to be handled with the right solution that may require some innovative thinking. The reason that solutions are often complex is that proper inventory management depends on a number of factors that include but are not limited to demand and variability in demand, manufacturing capabilities, customer demands, transportation, service levels desired, lead times and variability in lead times (Shelfplus.) This large array of variables that need to be considered to create accurate cycles makes managing inventory very difficult and not to mention the uncertain and unpredictable variables like weather effects and natural disasters that can make the whole model worthless in an instant. Inventory is also a company health indicator to the stakeholders and appears on quarterly and monthly financials and is a very big part of it, so there is all the more incentive to manage it properly and make sure it is as efficient as possible.
Getting the right levels of inventory is important to control costs as well as serve as an indicator for the company's overall health (Mukharji & Israelit.) It is wrong to assume that improving the accuracy of sales forecasts is the best way of reducing inventory and also some companies operate under the myth that good customer service requires keeping more inventory on hand. It is important to properly gauge the current levels of inventory and how suitable it is for the current state of the company. This means that a company should be able to break down its operating inventory into the three major categories of safety, replenishment and excess of obsolete stock when reporting the levels (Mukharji & Israelit.)
In this era of complex statistical modeling, it is important to pick the right method to calculate the safety stock levels. This will mean using the formula that best incorporates the sales forecasts, production lead times, manufacturing schedule and service-level data, keeping in mind the accuracy of each of these methods (Mukharji & Israelit.) When Nike faced a problem with their inventory management in the early 2000s, they implemented a software that helped to predict which products they would sell the most and they could adjust their supply chain to reflect these shifts in demand quickly. They did this with historical sales data on each product and market growth estimates which would be used to create a demand forecast that is specific to each group of products. This demand forecast would then be used to calculate the right inventory levels, what levels to ask for replenishments and lead times and all of this was done with some very specific statistical modeling by the updated software they put in place (Ordoro.)
This means that safety stock levels should be checked frequently and kept up to date. The team that handles inventory levels and manages production and order schedules should also contain members from all functions in the company. This will mean that they can better gauge the effects external factors like marketing campaigns driving sales and can work together to set production and ordering schedules. Taking factors from all functions into account and using a sales and operations planning process will mean that the teams can help to reduce the replenishment stock and when products are needed for promotions and the like, they will be available (Mukharji & Israelit.)
Executives should also get involved in issues that affect inventory and decisions should not be left to the supply organizations. Minimizing costs such as inventory and changeover costs and this can be done by making sales forecasts more accurate and calculating optimal order and production frequencies more regularly and also creating teams that will help reduce lead times.
Ineffective sales forecasting can also lead to excess or obsolete stock and therefore can be a real source of inefficiency in the company while product complexity and life cycles should also be used properly in planning a business model. The teams need to work to revise order cycles by understanding warehouse processes like labor, transportation and inventory costs while reducing setup times and costs and understanding the costs of holding inventory. Booker, the largest wholesale food operator in the UK worked with Nestle to help Nestle reduce wastage in their inventory. Nestle was using a collaborative forecasting model for a long time but Booker made the decision to move Nestle to a vendor managed Inventory so that they would get more accurate levels for production and ordering. This was done to reduce inventory, improve availability and minimizing waste. They worked together to decide the resources, times and commitments needed for each step of the chain and worked to understand each other better by positioning a full time Nestle resource to work within Booker to understand their processes. This meant that they could gain the insight into marketing tools like promotion forecasts that allowed them to collaborate on tasks and reports with constant communication between the two companies (IGD.) Most importantly, these techniques should be used on all inventory and not just a small set to ensure that the whole supply chain is as effective as possible (Mukharji & Israelit.)
Increasing demands for customer service also means that inventory management and deployment needs to be made more agile and efficient in addressing these concerns (Metersky & Kilgore.) This will mean more collaboration and integration between all the divisions and use of a shared inventory. Retailer Target deals with their customer demands in this way and takes orders from all its divisions and fills them from a shared inventory (Metersky & Kilgore.) This allows for fewer chances of inaccuracies in reports. Centralizing the inventory will mean that order quantities can be reduced and safety stock can also be reduced as the number of facilities is reduced. However, it is important to properly analyze the customer requirements and make sure a centralized inventory can properly handle the demands that were being handled before. If not, lowering service levels might also be an option but doing so requires an intricate understanding of the customer so that the services that they prioritize are not cut but the more superfluous ones they could do without are (Shelflife.) On the other hand, Buy.com uses a virtual business models and lets their physical distribution be handled by their partners (Metersky & Kilgore.) While many manufacturers are looking to cut away distributors and retailers, this has posed a peculiar problem as the multiple pools of inventory that come from the growing complexity of channels has caused inventory turns to fall. This too will mean that a more rigorous and regular schedule of reporting and forecasting is needed to make sure costs are avoided wherever they can be. Companies need to work on using their data to break down attributes and data for each product and their predicted sales and continuously keep changing strategies to fit the state of the market using the right predictive models. This will mean that the companies can remain agile in terms of their inventory and reduce their inventory to keep products from being wasted or going obsolete.
These strategies outlined above ask for some very important things. It is important to remain agile and react to changes in the market in as close to real time as possible. This can be done with accurate forecasting and using this forecasting to maintain the right levels in the inventory and greater involvement from all parts of a company to better predict the needs in terms of inventory. Inventory management is difficult to get absolutely right but not impossible and with commitment from all functions, the levels could be kept at the most optimal. This will mean a great reduction in costs and will ensure that very little is wasted.
References
-, J. (n.d.). Nike's Inventory Management Solution. Ordoro Blog. Retrieved December 3, 2013, from https://www.ordoro.com/blog/2012/01/24/nikes-inventory-management-solution/
LaMacchia, C. (n.d.), Ten Ways to Reduce Inventory, While Maintaining or Improving Service. ShelfPlus Automated Storage. Retrieved December 3, 2013, from: http://www.shelfplus.com/material-handling-hotline/ten-ways-to-reduce-inventory/
Metersky, J., & Kilgore, J. (n.d.), How to improve your INVENTORY DEPLOYMENT. Chainanalytics. Retrieved December 4, 2013, from http://www.chainalytics.com/wp-content/uploads/2011/02/2004-10-How-To-Improve-Your-Inventory-Deployment-SCMR-Mike-Kilgore-and-Jeff-Metersky.pdf
Mukharji, P., & Israelit, S. (n.d.), Ten ways to improve inventory management. WSJ.com CFO's Journal. Retrieved December 3, 2013, from: http://www.bain.com/publications/articles/ten-ways-to-improve-your-inventory-management-wsj.aspx
